MMI - NYSE

Greetings, and welcome to Marcus & Millichap's Fourth Quarter and Year-End 2025 Earnings Conference Call. As a reminder, this call is being recorded. I will now turn the conference over to your host, Jacques Cornet. Thank you. You may begin.

Thank you, operator. Good morning, and welcome to Marcus & Millichap's Fourth Quarter and Year-End 2025 Earnings Conference Call. With us today are President and Chief Executive Officer, Hessam Nadji; and Chief Financial Officer, Steven DeGennaro. 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, 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 27, 2025. 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's my pleasure to turn the call over to CEO, Hessam Nadji.

Thank you, Jacques. Good morning, and welcome to our Fourth Quarter and Year-End 2025 Earnings Call. I'm pleased to report MMI's continued recovery from one of the most complex and prolonged market disruptions on record with 2025 revenue growth of 8.5% and adjusted EBITDA improving to $25 million compared to $9 million in 2024. The fourth quarter particularly showed the strength of our resolve and execution as we set out to beat the exceptional 2024 fourth quarter, which had been propelled by a significant drop in interest rates. Despite entering the fourth quarter of 2025, without the benefit of lower interest rates, I'm proud to report that we beat a tough comp by 2% on the top line and significantly improved profitability. We drove these results through elevated client outreach, tapping our extended lender network, and taking advantage of key market improvements despite the absence of lower interest rates. A larger-than-expected resurrection and closing of deals that had been delayed or canceled early in the quarter, and a lift in urgency among our private clients deciding to take advantage of bonus depreciation by year-end were key factors in the late-stage rally. Although the bonus depreciation provision of the new tax law does not phase out, its advantage became a stronger motivating factor in getting deals closed in the final period of the year. I'm also pleased to report that 2025 marked the strongest growth in our sales force in 7 years with nearly 100 net additions of brokerage and financing professionals. Various initiatives to combat the unusual pandemic and post-pandemic forces that have elevated our new agent dropout rate culminated in this critical return to growth. The additions include a steady cadre of experienced individuals and teams that continue to choose MMI as the ideal platform for taking their career to the next level. We are very encouraged by last year's hiring results and a strong candidate pipeline going into 2026. Throughout 2025, we maintained our market leadership position by transaction count completing nearly 9,000 transactions totaling over $50 billion in volume. This translates to more than 35 transactions per business day, reinforcing a consistent expansion of client relationships and enabling our team to move capital across markets and property types. Looking back, 3 key factors impacted our performance in 2025, all of which also bode well for the outlook in 2026. First, capital markets and investor sentiment improved, particularly in the second half of the year after recovering from the initial shock of Liberation Day. Despite a cautious federal reserve that lowered rates at a much slower pace than anticipated, lender spreads compressed by 75 to 100 basis points and loan-to-value ratios expanded. Many lenders have repaired balance sheets, restructured and are resolved a large portion of maturities and have more capacity as transaction volume has picked up. Second, momentum in our private client and middle market segments picked up last year as prices finally began to adjust and regional banks and credit unions became more active. MMI's $1 million to $20 million transaction count and revenue each grew 12% as we started to reestablish our traditional advantage in these segments. This part of the market not only comprises the vast majority of commercial property stock and transactions, but it is also poised for more activity as a narrowing bid-ask spread releases pent-up supply from sellers who previously were hanging on to assets. Third, our financing business continues a strong trajectory with revenue up 23% in 2025 after growing 26% in 2024. This solid pace is the result of our expanded cadre of experienced financing professionals and the team's ability to access over 420 separate lenders last year. Our team of nearly 100 finance professionals is interconnected through our proprietary technology, which is integrated with our expansive lender relationships. This tech-enabled combination secures the most optimal financing options available in the marketplace. MMCC and IPA Capital Markets closed over 1,600 transactions for a volume of nearly $12 billion, which includes a $2.3 billion portion placed with Fannie Mae and Freddie Mac primarily through our strategic alliance with M&T Bank. Agency financing has been one of the fastest-growing segments of our business. Thanks to the talent acquisition and rapidly growing collaboration we have managed to pull off between our finance professionals and our sales teams. The only segment that was off last year was our larger transactions valued at $20 million or more, which declined by 13%. This is primarily driven by a tough comparison to 2024 when our institutional segment led the recovery with a 28% revenue increase, including an 88% surge in the fourth quarter of 2024. Institutional apartment sales, which showed exceptional strength in 2024, eased as the acute flight to safety limited the buyer pool for lower-tier assets and secondary markets. While our IPA division is well positioned to continue expanding in the institutional arena, some volatility is to be expected as a number of metros grappled with oversupply. The ripple effect of high vacancies, particularly for multifamily in these metros is leading to a rise in underperforming assets that are not yet priced to clear the market. In summary, we're pleased with the significant improvement in the company's key metrics. However, we are laser-focused on driving further momentum in the pace of recovery and capturing the substantial growth runway ahead of us. We entered 2026 with greater clarity on the path to achieving this, thanks to a largely recalibrated marketplace and our unwavering conviction in our client value proposition. Building on that strengthening position, we remain disciplined in our approach to strategic investments while maintaining prudent cost controls. The investments we have made over the past several years in talent retention and acquisition, technology infrastructure and branding are beginning to show leverage as the revenue tide turns. As I've mentioned on previous calls, the expensing of capital investments has been an outsized drag on earnings since the start of the market disruption in 2023, given the hampered revenue production of the past few years. As market conditions and broker productivity improve, so will the production level of the talent pool we have retained and added to over the past several years. As a critical part of our technology strategy to leverage AI and drive efficiency, the company's centralized back office and marketing center called Brokerage Transaction Services or BTS is intensifying its reliance on third-party services at a lower cost, while we also begin to leverage various AI applications to our benefit. These efforts are concentrated in financial analysis, document generation, underwriting and lead scoring. All of these efforts are showing promising results, but need significant advancements in the AI capacity and the use of historical data mining for accuracy and scalability. We expect and fully embrace the opportunity that AI has opened for massive efficiency in virtually all aspects of property analysis, underwriting client targeting and outreach, an era of higher throughput at a much lower cost is emerging, and our goal is to lead this tremendous productivity gain over time. However, we do not expect AI to disintermediate the function of a value-added broker, given the expertise, building by building nuances and buyer seller relationships that ultimately drive the commercial real estate industry. In our view, the broker of the future will be armed with an array of additional analytics with more efficiency in a way that will help clients create value. At the same time, value-added offerings such as our auction services and loan sales division continued to gain traction, generating direct incremental revenue and increasing sales and financing opportunities through collaboration with our sales force. Looking ahead, we entered 2026 with greater optimism driven by several positive market fundamentals. Interest rates, while still elevated, have stabilized, which provides a more predictable valuation benchmark. Simply stated, values have to adjust to the new normal in the cost of debt, and they're doing so. The price corrections over the past 3 years, combined with a major pullback in new construction are creating compelling investment opportunities, especially on a replacement cost basis. Cap rates are up 85 to 110 basis points on average since 2022, and prices are down roughly 20% on average. This, combined with lower all-in interest rates driven largely by lower lender spreads should further bolster investor demand and capital flows in 2026. Despite expectations of a more accommodative federal reserve, inflation pressures and trade-related variables will likely limit the Fed's ability to significantly lower rates. While the labor market is slowing faster than expected, the incoming Fed chair will most likely face the same obstacles to lowering rates. Nevertheless, we expect last year's transaction market improvements to continue as time narrows the bid-ask spread and facilitates the sale of many delayed trades. 2026 is a milestone year for all of us at MMI as we celebrate the company's 55-year anniversary. Many aspects of the company's culture that retain and attract the best of the best in brokerage, financing, management and support functions, find their cornerstones in the company's founding principles that still drive us today. These include bringing efficiency and value, liquidity and certainty to an otherwise fragmented market, measuring our success by our clients' results, and creating long-term and rewarding careers for all team members at Marcus & Millichap. As we mark this important milestone, all eyes are on the future and our quest to lead in an ever-changing industry. Our multi-pronged growth strategy includes expanding our leadership in the private client market, further penetrating the institutional segment through IPA, and accelerating the scaling of our financing, auction, loan sales and client advisory services. Given our disciplined approach to acquisitions, recent attempts to acquire additional financing boutiques, appraisal and valuation firms and complementary adjunct businesses such as investment management and cost aggregation have not yet come to fruition. However, they will in time, as the company is committed to providing an array of additional services that align with our dominance in investment brokerage and financing. Our ultimate goal is to enhance our offerings to a client base we have come to know extremely well throughout the years. Powering this vision is MMI's stellar balance sheet with nearly $400 million in cash, reinforcing our ample purchasing power for strategic acquisitions, which we continue to pursue. Most recently, we have engaged in multiple large-scale explorations that would enable us to expand our financing business more rapidly. We're proud to have balanced strong liquidity and purchasing power with a consistent return of capital to shareholders with $47 million provided in dividends and share repurchases executed in 2025. As we look to the future, we are excited about a new real estate cycle and the vast opportunities ahead for expanding our market presence and revenue diversification to enhance long-term value. And with that, I will turn the call over to Steve for more details on our results. Steve?

Thank you, Hessam. Total revenue for the fourth quarter was $244 million, an increase of 2% compared to $240 million for the same period in the prior year. As Hessam mentioned, year-over-year comparisons in Q4 are against an exceptionally strong fourth quarter last year. For the full year, total revenue was $755 million, up 8.5% compared to $696 million last year. Breaking down revenue by segment, real estate brokerage commissions for the fourth quarter were $205 million, moderately exceeding last year's tough comp and accounting for 84% of quarterly revenue. We completed 1,902 brokerage transactions with a total volume of $11.8 billion for the quarter. While transaction dollar volume was lower by 4%, transaction deal count was up by more than 9% over last year, and the average commission rate was 1.7%. The relative increase in private client transactions contributed to a 7% decrease in the average fee per transaction given the higher mix of smaller deals. For the full year 2025, revenue from real estate brokerage commissions was $633 million compared to $590 million last year, an increase of 7%. We completed a total of 6,038 brokerage transactions, up 11%, with total volume of $35 billion, up 3.5% compared to prior year. For the year, average transaction size was $5.8 million compared to $6.2 million in the prior year, reflecting the pickup in private client activity. Within brokerage for the quarter, our core private client business accounted for 65% of brokerage revenue or $133 million up from 59% and $120 million in the same period last year. Private client transactions grew 13% in volume and 10% in transaction count. For the full year, Private Client contributed 64% of brokerage revenue or $406 million versus 62% and $366 million, an 11% increase in revenue year-over-year. For the fourth quarter, middle market and larger transaction segments together accounted for 31% of brokerage revenue at $65 million compared to 38% and $77 million last year. The year-over-year change in revenue is attributed to a decline in transactions and dollar volume in these segments of 8% and 14%, respectively, and is largely a result of fewer large transactions. Large transactions significantly outpaced the market last year, creating a very tough year-on-year comp. For the full year, middle market and larger transaction segments combined represented 32% of brokerage revenue or $200 million compared to 34% and $203 million last year. Revenue from our financing business was $33 million during the fourth quarter up 6% year-over-year from $31 million last year. The growth reflects an 8% increase in transaction volume totaling $3.7 billion across 507 financing transactions, which was a 19% increase year-over-year. The average origination fee was down nominally due to an increase in larger deals closed in the quarter. For the full year, financing revenue was $104 million, a 23% increase compared to last year. This growth was driven by a 33% rise in transaction count totaling $11.9 billion in volume, a notable increase of 31% year-over-year. Our overall performance reflects the continued momentum and progress and scaling of our finance platform and success in recruiting amended producers over the past several years. Other revenue, primarily from leasing, consulting and advisory fees was $5 million in the fourth quarter compared to $6 million in the same period last year. For the full year, other revenue totaled $19 million compared to $22 million in the prior year. Turning now to expenses. Total operating expenses for the fourth quarter were $229 million, a 2% decrease from last year on higher revenue, demonstrating our continued focus on operational efficiency. For the full year, operating expenses were $769 million, up 5.5% over 2024 though lower than our revenue growth rate of 8.5%. Cost of services for the quarter was $155 million or 63.3% of revenue compared to 63.2% last year. For the full year, cost of services totaled $470 million or 62.3% of revenue, up slightly from 62% last year. SG&A expense for the quarter was $71 million or 29% of revenue compared to $76 million in the same period last year, a decline of 7%. For the full year, SG&A totaled $286 million or 38% of revenue, an improvement compared to 40% of revenue in the prior year. Our ongoing expense discipline is aimed at enhancing operating efficiency and leverage and improving profitability. For the fourth quarter, net income was $13 million or $0.34 earnings per share. This compares to net income of $8.5 million or $0.22 per share in the prior year, a significant EPS improvement of 55% year-over-year. For the full year, net loss was $1.9 million or $0.05 per share, which, as a reminder, includes an $0.08 per share charge for a legal reserve we took in the third quarter. This compares to a net loss of $12.4 million or $0.32 per share in the prior year. The improvement in operating results in the year marks a meaningful inflection point, signaling renewed momentum across the business. Regarding the legal matter, we disclosed with Q3 earnings, there is no material update to report, and we remain fully committed to pursuing relief through the appeal process. Adjusted EBITDA for the fourth quarter was $25 million, up 39% compared to $18 million in the same period last year. Full year adjusted EBITDA was $25 million compared to $9 million in the prior year. Adjusted EBITDA for the full year would have been $4 million higher, if not for the legal reserve recorded in the third quarter which highlights the substantial progress in operating performance over the prior year. Moving to the balance sheet. We continue to be well capitalized with no debt and $398 million in cash, cash equivalents and marketable securities, a $17 million increase over last quarter. The growth in cash was achieved while also returning $29 million to shareholders during the quarter through a $10 million dividend paid in October and $19 million of share repurchases, underscoring the strength of our cash generation as well as our disciplined capital allocation approach. Earlier this week, we announced that our Board declared a semiannual dividend of $0.25 per share or approximately $10 million payable on April 3, 2026, to shareholders of record on March 13, 2026. During the year, we repurchased shares totaling $27 million at a weighted average price of $28.77 per share. Since inception of our dividend and share repurchase programs nearly 4 years ago, we have returned approximately $217 million in capital to shareholders. Looking ahead to 2026, we see several positive catalysts for our business, which Hessam summarized. First quarter revenue is expected to follow the usual seasonality trend and be sequentially lower than Q4. While we are encouraged by the prospect of continued momentum in the New Year, our cautiously optimistic outlook is tempered by ongoing macroeconomic and geopolitical uncertainties that could moderate the pace of transaction activity. Cost of services for the first quarter should follow the annual reset and be in the range of 60% 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 2025 and continued investments in technology and central services to support our sales producers. As for taxes, the effective tax rate for the quarter and the year is expected to be in the range of 50% to 60%. We remain committed to our balanced capital allocation strategy, which includes investing in technology and talent, pursuing strategic acquisitions and returning capital to shareholders. Our strong balance sheet provides us with significant flexibility to pursue these objectives while maintaining our competitive position. With that, operator, we can now open the call for Q&A.

[Operator Instructions] Our first question comes from the line of Blaine Heck with Wells Fargo.

Hessam, as you alluded to, the broker group has been under a lot of pressure this week, driven by concerns about AI displacement within the business and impacting the CRE sector more broadly. You talked about some of the changes that you guys have already made. But looking forward, I guess, which segments of your business could be impacted, whether that's certain deal sizes or business units? And do you think your focus on the Private Client Group gives you guys more or less protection from AI disruption?

Blaine, good to have you on the call. I was happen to be just on CNBC a few hours ago on this very topic because it's getting a lot of media attention, especially as it has impacted the Commercial Real Estate Services segment in the last 48 hours or so. And my view and I think that of many in the industry is that AI is here to stay. And there's almost countless ways that AI is going to improve the manual processes that are so labor intensive in our business, whether it's underwriting, data gathering, data parsing, document generation and really all the production-related components of our business, which is significant. If you think about the number of times a broker needs an asset analysis, a submarket analysis, a metro analysis even before a first meeting with a client, even before they've really gotten to know the client. The need to be educated in that first interaction itself creates a tremendous amount of labor. And we're excited about finding scalable ways for AI to make that process a lot more efficient and a lot less costly, frankly, so that we can reallocate capital to other ways that the company can advance forward and more R&D as well as improving our margins. That's a given. The big question mark is what happens in the second wave of AI? I believe right now, we're in the first wave of really this initial level of replacing a lot of manual tasks and labor-intensive tasks. The second wave is more interpretive in my view. And that's where the intelligence that would be expected from AI would start to have a gray area with the expertise and the personal experience and interpretation skill set of a good broker. In commercial real estate, trying to scale that interpretive capability of AI becomes a lot more challenging because the data is disorganized. You have to have micro historical data to feed to the AI that is not a cookie-cutter across various markets, not a cookie-cutter across various asset types. And therefore, the notion that even in ways that they -- for-sale housing market, the residential housing market, is far easier to commoditize in terms of analyzing or digitizing the valuation models or the buyer selling matches that you can do for the for-sale housing market are very hard to transfer over, I think, in a cookie-cutter fashion to commercial real estate. And one commentary I made on CNBC when I was on a few hours ago is that you can build the exact same asset, exact same size, features and characteristics and open for business on the exact same day across the street from each other. And 10 years later, from an investment perspective, those could be entirely different cap rates, entirely different NOIs based on the way that they're managed, the capital improvements and so on. So that's where the complexity of just how much interpretive power can be extracted from AI given its reliance on accurate historical data and the learning that the algorithms would have to do. To answer your question, I do believe that the notion of fee pressure because of the commoditization of the data is going to be out there for a while. I think every disruption that we can think of in the last 20 years which initially was perceived to threat intermediary value-add work and brokerage value-add work has actually helped the brokerage business. Think about it. This is deja vu for me being in the thick of the inception of the Internet and Marcus & Millichap really being on the forefront of embracing the Internet and embracing electronic portals because we thought it would actually enhance our value proposition and not destroy it. We were one of the founding investors in the LoopNet in the late '90s, for example. So this goes back a while for us. And we take it very seriously from the standpoint of evaluating the threat to our value proposition and at the same time, really focusing on the ways we can take advantage of it. You could argue, Blaine, that a single tenant net lease that is far easier to underwrite, I mean people say that, but even a single tenant net lease requires really good underwriting. By the way, you got -- you got to go look at the real estate. It's not really a bond, but closer to a bond than, let's say, a shopping center or an office building or even a multifamily rental building. And those easier to underwrite and more homogenous assets could get further down the road of being impacted by AI and requiring less of the broker touch. However, I go back to -- and this is another thing we discussed on air a few hours ago. I go back to the relationship component, the due diligence component and the art of keeping the buyer, the seller and the lender into a deal from a psychological perspective, the art of managing the vendors that are on the critical path of removing contingencies or the due diligence, I don't think robots are going to go around and do that anytime soon. So I really believe that we're headed for the next generation of reinventing the broker as we went through in the early 2000s because of the Internet and because of digitization of information availability, but I think it's going to make us better. And it's going to make the industry more selective and focus on the talent of the individual in their interpretive and people skills rather than commodity data gathering. Sorry for the long-winded answer, but I'm very passionate about this one.

No, that's very helpful perspective and well said. Shifting gears, you guys had very strong growth in broker count this quarter. I guess a few questions around that. First, was this something that you had visibility into given your recruitment efforts? Were you expecting that level of growth this quarter? Or was there something that drove kind of a surprise to the upside? Second, are there any specific specialties you targeted in that growth? You've been kind of hiring more experienced brokers that can handle larger transactions, but I kind of would have expected a larger average deal size this quarter if that was the case. And then just third, how should we think about your plans to grow headcount as we look forward into 2026?

Very important topic. As you know, and we have messaged multiple times, we've been under so much pressure because of the disruption created by the pandemic into our multi-decade tested system and really almost a unique feature of the company in the way that we have been successful in attracting new talent with no experience, training them, supporting them into becoming market leaders. That has driven the company for so long up until 2020. And that whole component of our system was badly disrupted because of the pandemic and then the market volatility that ensued just elevating the dropout rate of the individuals that we hired really from 2020 on. First on -- because the market was shut down and in-person training was not possible. And then because the market had such a huge run and then a big crash. So that volatility makes it very hard to train new people into the business. And we made a concerted effort over the last 3 years to increase the channels of bringing in talent, qualifying the talent. Not only have we increased the inflow of candidates. We've really upgraded the filtering of those candidates, whether it's campus recruiting, whether it's our internship program that we have more than doubled in size and organized with a very specific curriculum across the country. The expansion of the William A. Millichap Fellowship program, all of which have been very successful. We started those 3 years ago. So it takes time for all these kinds of initiatives to produce tangible results. Everything in the business has a bit of a lag time which is frustrating, but a reality. And we did have visibility to it going into 2025, senior management felt very strongly that the underpinnings had time to get laid and work, and it was time for us to expect better actual tangible results in 2025. It became a major focus for our local market leaders that run our offices and our division leaders, our Chief Revenue Officers and all the way to myself. So we began to build a stronger candidate pool and again, with tougher standards of bringing in talent. The experienced talent that joined in 2025 usually would face a bit of a transition from whatever brand they came from. We don't expect them to repeat their 3- or 4-year, 5-year average immediately when they get here. There's normally a 6- to 9-month transition time before they rebuild the pipeline with us. So that's probably why you were questioning whether that cadre of the new sales force additions would have already brought some business with them. I believe that we're going to see some of that in 2026 as a benefit of the experienced folks we hired in 2025. Going into the New Year, we are not letting up on any of the initiatives we put into place in order to produce the results we produced in 2025. Our expectations are very high going into the year just as they were in 2025. And if anything, our systems, the expansion of our recruiting team, which is under new leadership, are all going to help maintain the momentum.

Okay, great. Very comprehensive. Last question, you also mentioned continuing to explore strategic transactions. I wanted to see whether you think this latest market disruption and fear over AI displacement might bring about some opportunities for kind of lower cost acquisitions and how you're thinking about the risk reward of external growth given the current kind of concerns over disintermediation from AI. I guess, has anything changed with respect to your appetite for add-ons or maybe the profile of those potential expansion opportunities?

Nothing has deterred our strategy for attracting new talent, attracting boutiques and regional firms that I believe would thrive within the MMI platform. The introduction of AI as more of a business factor enhances that. It doesn't, in my mind, or as part of our strategy, diminish it at all. And I did want to really summarize for all of our shareholders and our analysts the attempts that we've made to diversify the platform going into 2022, 2023. And those include companies that we looked at in the appraisal valuation business, the cost aggregation business, even investment management was explored with a couple of opportunities that had come up. And the common theme that I've shared before was that going into '23, '24, there was so much near-term uncertainty. And there was some -- on our part in being able to forecast the first 2, 3 years of performance of an acquired target. And there was so much reliance in both the valuation and the terms of the target companies on guaranteed value upfront, that became the biggest obstacle that we felt very uncomfortable with and some of the deals that we looked at, given the near-term market uncertainty. As that fades and we really believe it has faded. And as I mentioned and Steve mentioned in his commentary, we're more optimistic about 2026 as the market gets closer and closer to an operating environment that we would consider fairly normal. Our confidence would be higher in that the first few years of an acquisition become somewhat more predictable than '23, '24 and '25 certainly were. And in retrospect, Blaine, I'll have to say that the decision to pass on the vast majority of those deals was the right thing to do. Knowing what has transpired and frankly tracking them and still being in touch and knowing how they fared. So I think we did our job in terms of being diligent with our shareholders' capital. But the desire to diversify this platform in a way that's value add to our existing sales force and the core customer base we've already gotten so close to is very much there, if anything, is even more energized as the market certainty and clarity returns.

Our next question comes from the line of Mitch Germain with Citizens.

Just following up on the M&A question. Is it just market uncertainty? Or has it also been a function of either price or a cultural fit that has prevented some of these transactions from getting over the finish line?

Mitch, I'll take that one, and Steve could add some comments as well. Really, all 3. Culture has been the least problematic because we already do a lot of due diligence upfront as to who we want to approach that we feel is like-minded and would have compatible cultures. We really haven't gotten too far down the road with a lot of targets that didn't have a good culture. There is only one I can think of meaningful size where we had to get to know them and get to know their culture, and that became in and of itself as well as a major gap in valuation expectations and in then terms, a big hurdle, we just couldn't get our heads around, even if you can get the numbers resolved. But the bid-ask spread has been wide from our standpoint. There are others who are more aggressive and maybe more willing to take risk back in '23, '24 and we weren't on a case-by-case basis. And then as I mentioned, the gap in terms of guaranteed value versus earn-out. We are very focused on bringing on talent that wants to be a part of MMI for at least 7 to 10 years or longer. And we're not really looking to become somebody's retirement plan. And what we face is a big challenge, Mitch. I think you're very familiar with this based on our previous conversations is that the vast majority of our targets are boutiques and regional firms that have 1 or 2 founders, that started a brokerage group or a team that became somewhat of a company. And those founders just having had some decades behind them are not really the revenue producers in most of the cases and their current revenue producers would not participate in an acquisition from a capital event perspective. So it's like, what are you really paying for? And in our fragmented core business, the pool of targets of any size that have a diverse revenue kind of stream sources of revenue stream are fairly rare to find. That's why our experienced producer recruiting has been much more successful. And -- but again, we have organized ourselves in a way where we're targeting specific spaces, specific companies and specific groups, whether it falls under experienced professional recruiting or a quasi-acquisition. Steve, anything to add?

Yes. Mitch, that's exactly where I was going to go. The guarantee and not wanting to be founder's retirement plan, that is certainly a very real factor in the brokerage business, perhaps a little bit less so in some of these adjacent spaces, but still, it's a strong, strong consideration that has kept us from consuming a handful of these deals.

Are you able to -- have you been able to increase your cross-sell from your financing division to your brokerage? Where does that stand today?

Yes. That's a definite, yes. The best example, is in our IPA Capital Markets segment where we brought in a very experienced finance professional, teamed them up with some of our most experienced sales teams. The one case that I can think of right away is our IPA Capital Markets for Multifamily where we brought in the Eisendrath Financial (sic) [ Finance ] Group in 2022 and paired them up with our top 5 or 7 IPA sales teams across the country and their collaboration and joint efforts in winning business and serving the clients for both the investment sales component and financing and then in some cases, refinancing of other properties has been very successful in a short amount of time. Other examples include another IPA Capital Markets team that we brought on board in New York that has collaborated with a number of our investment sales teams. Our loan sales division, Mission Capital is actively either responding to leads that our sales force uncovers by talking to lenders or the other way around. And I'm also happy to say that within our auction business, the channel that auction has opened, both for aging inventory that is not effectively selling through conventional marketing and now can be put on an auction platform. And frankly, our Head of Auction would say that's too limiting of how the auction channel can be helpful to a seller even in the front end of deciding to market an asset, the right asset that is. So both of those types of scenarios are now creating cross-selling between auction, loan sales and our conventional finance division and our sales force.

Got you. How do you envision 2026 performance with regards to, obviously, the market has been fairly unstable. And it appears that outside of this whole AI noise that's been impacting the share price, the market itself, going into 2026, it things like it appears as if allocations are increasing, people have accepted the new pricing paradigm. Definitely things like -- it seems like there's a little bit less volatility. So do you think that, that will begin to resonate in the financial performance of MMI, particularly in the early part of the year. It's been a little bit of a kind of unstable start where you're kind of starting at a deficit in earnings and then kind of in the fourth quarter, working your way back up. Do you think that some of those losses are going to begin to narrow now that the environment stabilized a bit?

Here's how I'll respond to the question, Mitch. I'll say that going into the early stages of 2026 is the best start of a calendar year since 2022. I will definitely say that because the factors that you mentioned have all occurred in the resetting of the prices, the acceptance that a Fed miracle is not around the corner, to bring interest rates way back down and basically be the Hail Mary for the pressure on values, reversing after the Fed to increase rates by 500 basis points. All those kind of processes that take the market a couple of years to process and recalibrate are, for the most part, behind us. That is not to say that 2026 or the current environment is a normal operating environment. We still have a bid-ask spread. We still have very fickle investor sentiment where the cautiousness because of the unexpected events of 2025, i.e., Liberation Day and the tariff effect, the 6-week shock to the capital markets that we absorbed last week, has a lot of our clients asking ourselves, what's around the corner? What else could happen? And the fact that the interest rates have been sticky around the 4% yield on the 10-year treasury hasn't been all that constructive. We really don't see a surge in activity and a big boost in investor sentiment unless the 10-year gets closer to 3.5. And so expecting it to be range bound around that 4% and expecting this sort of measured incremental improvement in market sentiment and therefore, activity is, I think, is reasonable for 2026. Certainly, not a hockey stick where we can declare the end of uncertainty and announce the beginning of certainty because they're still just these lingering tentacles of what's happened because of the Fed action, because of the inflation pressure and still price discovery. Mitch, there are multiple markets where we're just beginning to see the level of distress, what I'll call situational distress, not systemic big portfolios being sold off by lenders at big discounts, but actual individual assets, small portfolios with situational distress where the property was purchased with very aggressive financing, very aggressive underwriting, and that didn't materialize in the near term loan is terming out or a longer-term loan is maturing. Those assets all need rescue capital or they have to be sold at a significantly lower price than they traded last time. And our team is actively working with countless owners on working out those situations that aren't yet translating into immediate transactions but will in the next 12 months, 12 to 18 months. So it's not a smooth normalized environment where it's still a lot of troubleshooting. Deals are taking longer. Our marketing time lines have not come in that much. And what we benefited from was just increasing our exclusive inventory through a lot more focus on being out talking to clients and really trying to make a market. So a lot of the incremental improvement, which we're frustrated with because it should be even better is coming from the fact that most of it was created by sweat and blood, not so much a hockey stick relief type of a trend in the marketplace.

Yes. And I'll just add, Mitch, that as we've talked about, there's a certain amount of fixed costs that are sort of embedded into our business model, loan amortization on capital to attract and retain producers. But as the revenue -- it only really takes even modest revenue growth before you start seeing operating leverage in the -- flow down through our financials. That's not a forecast of any sort, but just a reminder that as revenue starts to recover as the market starts to recover, revenue follows the impact on our operating income has a pretty solid flow-through.

We have no further questions at this time. Mr. Nadji, I'd like to turn the floor back over to you for closing comments.

Thank you, operator, and thank you, everybody, for participating on our call. Thank you for the questions, Blaine and Mitch. We look forward to seeing a lot of you on the road. This concludes our fourth quarter call, and we look forward to having you on the next earnings call. The call is adjourned.