Marcus & Millichap Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 3, 2023

There are 5 speakers on the call.

Operator

Greetings, and welcome to Marcus and Millichap's Third Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Jacques Cornet. Thank you. You may begin.

Speaker 1

Thank you, operator. Good morning, and welcome to Marcus and Millichap's Q3 2023 earnings conference call. With us today are President and Chief Executive Officer, Hessam Nadji and Chief Financial Officer, Steve DeGenero. Before I turn the call over to management, please remember that our prepared remarks and the responses to questions may contain forward looking statements. Words such as may, will, expect, believe, estimate, anticipate, goal, Variations of these words and similar expressions are intended to identify forward looking statements.

Speaker 1

Actual results can differ materially from what those implied by such forward looking statements due to a variety of factors, including but not limited to general economic conditions and commercial real estate market conditions, and other factors discussed in the company's public filings, including its annual report on Form 10 ks and filed with the Securities and Exchange Commission on February 28, 2023. Although the company believes the expectations 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.

Speaker 1

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, Hessam Nadji. Thank you, Jacques. On behalf of the entire Marcus Millichap team, Good morning, and welcome to our Q3 2023 earnings call. The market challenges we've been facing this year continued on in the 3rd quarter.

Speaker 1

The 10 year treasury yield briefly touched the psychologically key level of 5% and the Federal Reserve sent a clear signal Higher for longer in its interest rate outlook, citing that inflation is proving to be more persistent than expected. Rate volatility, a restrictive lending environment and the cumulative effect of the sharp increase in the cost of debt over the past 18 months Weighed heavily on sales and financing volumes. Revenue for the quarter came in at $162,000,000 down 50% over last year with an adjusted EBITDA loss of $6,600,000 Revenue production remains hampered by the widened bidask spread, Constrained financing and interest rate volatility disrupting deal closings. Transaction timelines extended significantly beyond historical norms and many deals fill out a contract multiple times, creating a drag on our team's productivity. The result was a 39% decline in the number of brokerage sales transactions and a 59% decline in volume during the quarter.

Speaker 1

Given the macro nature and scope of the capital markets disruption, all product types in 5 segments showed major decline. Our traditional advantage as a market leader in the Private Client segment remains intact. As Steve will cover in his remarks, the Private Client market has declined The least of all segments as smaller deals are more driven by personal circumstances and easier to finance. As history is also shown time and again, the private investor will also likely lead in the recovery. On the other side of the spectrum, the severe drop off in larger transactions is having an outsized impact on MMI's revenue trends, especially considering that this part of our business outpaced the market in the past few years.

Speaker 1

We firmly believe that our expanded coverage In larger transactions and penetration into the institutional client segment through our IPA division are critical to our long term competitiveness. MMI is uniquely qualified to bridge the vast private capital world with institutional assets and create value for all client segments. Notwithstanding expense reductions and various cost containment strategies we've employed, The loss in the quarter is largely due to expenses related to investments made over the past several years, including It also reflects our strategy to remain on the offensive side Despite revenue headwinds, by further growing the experienced cadre of our sales force, investing in key industry conferences, Although transaction activity is down significantly market wide, our clients' need for market information, asset evaluation and opinions of value are at a high given the degree of uncertainty in the marketplace. We view the costs associated with providing personalized client support as an investment in long term relationships that will manifest in future business. We remain steadfast in our belief that these investments over the company's 52 year history.

Speaker 1

Speaking of recovery, we believe several underlying forces will eventually converge to drive higher transaction volumes. These include a still strong labor market, which is more likely to slow than fall off a cliff And resistant consumers who may also come off of recent spending highs, but sustain a solid financial profile. These economic pillars support strong property fundamentals across all property types with the exception of older office assets. Another encouraging factor is that we appear to be very close, if not at the end of the most aggressive Fed tightening cycle in 40 years. This milestone, even without a Fed pivot to lowering interest rates anytime soon, should bring some stability and direction to the market and help price discovery.

Speaker 1

Perhaps more critical than any quantitative factor is time. With time sellers are adjusting to more realistic price expectations and record capital on the sidelines is starting to reenter the market. The difficulty in obtaining financing and significantly lower loan to value is not keeping astute investors from acquiring desired assets, If the price is right, although wholesale distressed sales by lenders are unlikely to become a major wave, Individual situations arising from maturing loans, operating issues and or personal drivers For example, even within multifamily, which generally has the strongest fundamentals in the business, speculative transactions made at the peak Pricing levels on short term financing are having issues with maturing loans that are now far more costly and difficult to replace. One of the most important advantages of the MMI platform is the market coverage in countless relationships that our sales force harnesses through our collaborative culture and internal communication. We're in constant motion and making connections that lead to unique problem solving and opportunity creation for buyers, sellers and lenders.

Speaker 1

Our financing division has matured and grown through the addition of numerous experienced originators, teams and boutique financing acquisitions We are now actively partnering with our sales teams to help investors find financing solutions. MMCC's access to and relationships with Over 400 lenders that our originators have closed deals with in the past 12 months alone are of great value in the current market where we face financing scarcity and very tight scrutiny. All these advantages demonstrate MMI's leading position in investment brokerage Despite the market headwinds, with over 4,000 sales transactions closed year to date and 800 financing. This is a direct result of our client commitment and the hard work, persistence and scale of our sales force and support personnel. To expand our market position, we have supplemented our core business with industry leading research, Auction services in recent years and our loan sales division to foster new client relationships and help existing clients execute in this difficult market environment.

Speaker 1

In the same spirit, I'm excited to announce the strategic investment in a technology driven platform for equity raising and private debt placement called Equity Multiple. Their platform specializes in helping sponsors Access is vast network of investors to raise project specific equity and debt and provides asset management services to many of its sponsor clients. EquityMultiple's proprietary technology enables rapid execution, which is especially valuable in the current market environment. We see multiple opportunities for client synergies and mutual referrals facilitated by both companies, We also made a strategic investment in a venture backed company called Archer, which specializes in services that will increase our property underwriting productivity and ability to generate sales and financing leads. These services include property level performance metrics with troughs U.

Speaker 1

S. Through consolidating multiple data sources with proprietary technology as well as analytics we expect will make our client targeting more efficient. Looking forward, we expect the market disruption to take more time and the recovery to be pushed out, given all of the factors that I've summarized. As I stated on prior calls, we are committed to our organic hiring system and continue to execute expanded candidate outreach initiatives, Enhanced training and development and are increasing our recruiting resources to return to positive net hiring. This remains a top priority for the management team.

Speaker 1

In the meantime, we continue to build on our success in attracting experienced professionals, In closing, let me emphasize the strength of our balance sheet, leading market position and brand as they enable us to that we're evaluating even as some of our previous explorations did not close, primarily due to evaluation expectation gap. Our expanded capital allocation strategy reflects these offensive strategies and return of significant capital to shareholders over the past 18 months. We look forward to continuing on the path of long term value creation as we position MMI to lead in the recovery. With that, I will turn the call over to Steve for additional insights on our results. Steve?

Speaker 2

Thank you, Hessam. As mentioned, market conditions remain challenging due to the Fed's steep trajectory of rate increases implemented since last year and there continued higher for longer messaging. This has led to a significant decline in transactional activity due to a lack of price discovery between buyer and seller, increasingly restricted credit markets and rate uncertainty. With that as a backdrop, let's get into the results. Total revenue for the quarter was $162,000,000 compared to $324,000,000 in the prior year.

Speaker 2

Year to date, total revenue was $480,000,000 versus $1,000,000,000 last year. Revenue from real estate brokerage commissions for the Q3 was $140,000,000 and accounted for 86% of total revenue compared to $293,000,000 last year, a decrease of 52% year over year. For the quarter, total sales volume was $7,400,000,000 across 1361 transactions, down 59% and 39%, respectively. Year to date, revenue from real estate brokerage commissions was 4 $15,000,000 and accounted for 87 percent of total revenue compared to $934,000,000 last year, a decrease of 56 Year to date sales volume was $22,100,000,000 across 4,062 transactions, down 60% 43%, respectively. Average transaction size during the Q3 was approximately $5,500,000 as compared to $8,000,000 a year ago, reflecting the sharp decline of larger transactions.

Speaker 2

Within brokerage, For the quarter, our core private client business contributed 65% of brokerage revenue or $91,000,000 Revenue were $278,000,000 versus 57% again last year. Middle market and larger transactions, which experienced Outsized growth over the past couple of years together accounted for 31% of brokerage revenue or $43,000,000 during the quarter compared to 41% last year. Year to date, middle market and larger transactions represented 29% of brokerage revenue or $122,000,000 compared to 40% last year. For the quarter, Private client, middle market and larger transactions declined 45%, 60% and 67%, respectively, and year to date declined 48%, 64% and 70%, respectively. Revenue in our financing business, including MMCC, was $17,000,000 in the 3rd quarter compared to $28,000,000 last year.

Speaker 2

In the quarter, we closed 276 financing transactions totaling $1,900,000,000 in volume compared to 5 18 transactions for $3,300,000,000 in volume in the prior year. Financing revenue year to date was $51,000,000 compared to $91,000,000 last year. This represents 839 transactions totaling $5,300,000,000 in volume compared to 17.35 transactions and $10,400,000,000 in volume last year. Other revenue comprised primarily of consulting and advisory fees along with referral fees was $5,000,000 in the 3rd quarter compared to $3,000,000 last year. Year to date, other revenue was $13,000,000 this year, flat compared to last year.

Speaker 2

Moving on to expenses. Total operating expenses for the Q3 were $177,000,000 39% lower than last year. Year to date, total operating expenses were $522,000,000 43% lower compared to the prior year. Lower expenses were largely a result of lower revenue. Cost of services was $105,000,000 or 64.6 percent of total revenue, A decrease of 254 basis points over the Q3 last year.

Speaker 2

Year to date, cost of services was 301,000,000 or 62.8 percent of total revenue, an improvement of 169 basis points compared to last year. SG and A during the Q3 was $69,200,000 a decrease of 5.2% over the prior year. Year to date, SG and A was $210,300,000 a decrease of 7.5% compared to last year. The decrease in SG and A was attributed to lower variable compensation tied to business performance impacted by market conditions, along with cost reduction actions implemented over the past 9 months. This was offset in part by expenses related to talent acquisition and retention, as well as new business development and marketing support.

Speaker 2

As discussed previously, the combination of lower revenue and the fixed nature of certain expenses associated with the expansion of our sales force, technology and infrastructure in recent years continues to impact our profitability. During the Q3, we reported a net loss of $9,200,000 or $0.24 per share. This compares with net income of $21,400,000 or $0.53 per share in the previous year. Year to date, net loss totaled $23,800,000 or $0.61 per share compared to net income of 96 $300,000 or $2.39 per share in the prior year. For the quarter, adjusted EBITDA was negative 6 point $1,000,000 compared to positive $151,400,000 in the prior year.

Speaker 2

The effective tax rate for the quarter was 18% and our current expectation of the effective tax rate for the full year is approximately 17%. Turning to the balance sheet. We maintain a well capitalized debt free position with cash, Cash equivalents and marketable securities totaling $411,000,000 up modestly from the prior quarter total of $407,000,000 During the quarter, there were no share repurchases or dividend payments. However, we have had activity on both fronts subsequent to quarter end. In the quarter, we declared a semiannual dividend of $0.25 per share, representing a total of $10,100,000 which was paid in the 1st week of October.

Speaker 2

Over the last 18 months, we have returned approximately $83,000,000 to shareholders in the form of for a total of $4,500,000 Year to date, this brings total shares repurchased to nearly 1,300,000 at an average price of $30.89 per share for a total of $39,400,000 Since initiating the program last August, we have repurchased more than 2,100,000 shares of more than $68,000,000 and have approximately $72,000,000 remaining on the current repurchase authorization. We remain committed to our multi pronged We continue to invest in technology and the recruitment and retention of top talent as well as Way's strategic acquisitions, thus positioning ourselves for the eventual recovery and leveraging the business for long term growth. As Hessam mentioned, after the end of the We made minority investments in 2 separate innovative PropTech Companies. Looking forward, we expect current market trends to continue. Given these dynamics, the outlook for the Q4 is a continuation of transactional levels consistent with the Q3, As a percentage of revenue for the Q4 should follow the usual pattern of increasing sequentially.

Speaker 2

SG and A for the quarter should increase modestly over in the 17% range. We remain committed to fostering client trust, actively pursuing strategic growth opportunities and driving operational excellence With that, operator, we can now open up the call for Q and A.

Operator

Thank you. We will now be conducting a question and answer session. One moment please while we poll for your questions. Our first questions come from the line of Blaine Heck with Wells Fargo. Please proceed with your questions.

Speaker 3

Great, thanks. Good morning, guys. Hassam, you all have a somewhat unique concentration in your business model where The transaction brokerage and financing businesses drive the vast majority of your total revenue relative to some of Competitors who have more diversification across revenue streams with other services like leasing and asset management. Clearly, there are times in which your structure is advantageous and levered to more healthy transactional markets, but does a smooth market like this give you any desire to potentially diversify that revenue stream and get into some of those arguably more stable services. I know you mentioned making some investments in PropTech Companies that Mike provides some of those services, but is there any desire to have some of those services in house?

Speaker 3

Good morning, Blayne. Absolutely. And that desire has been there during the stronger macro environment Trends as well as the current market condition that we're facing. So it's not really unique to a reaction To the challenging market that we face today, it's been part of the company's long term strategy for some time. And most of our exploration In terms of M and A, outside of the brokerage world has been focused on those types of services and those types of complementary services that bring value to our existing sales force And our existing clients.

Speaker 3

So part of the criteria we've used in exploring those have to do with synergies and additional service lines that would benefit our product clients as well as middle market and institutional clients. So we've examined those opportunities as much about their diversification benefits, hopefully margin benefits And so on from an accretion perspective, but also from a service expansion and client capturing and repeat business perspective. So the long answer the short answer to your question is absolutely it's been a focus and we are as focused on it in this period as ever. Great. Thanks.

Speaker 3

And I don't know if I missed this, but can you give us any sense of kind of the size of those investments and Potential returns you're expecting on your investments in those platforms? Well, in terms of the investments themselves, They kind of give us an entry point into some of these really interesting platforms that we believe have a lot of growth ahead of them. And But again, it comes back to the synergies and client benefits we can bring as well as benefits for our own sales force And with a combination of 3 different areas, one is productivity gains, new business generation gains and the repeat business Opportunities to our clients who we know need some of these services and are not getting it currently. So the return on that investment is going to be measured by both how well the companies do, of course, and us as investors in those companies, But also the incremental additional business we're going to gain from having access and partnerships with these firms, which is Very difficult to quantify.

Speaker 4

Yes, Blaine, this is Steve. I'll add a little bit there and want to point out that we're not all As indicated, we like what we saw on those fronts. There was an opportunity to invest in each of them. We did that. We did our diligence.

Speaker 4

We did that. I will point out though that neither of these investments are of a Impact hours, which if you're on the from a technical standpoint means the investment was less than 20%.

Speaker 3

Okay, great. That's helpful color. Switching gears, clearly, the transaction market remains deeply depressed. But of the transactions that are occurring, I guess, what percentage or portion would you say are driven by some form of distress that's kind of forcing sellers to capitulate versus those that are occurring a little bit more naturally. As I mentioned, Blaine, in my prepared remarks, we're starting to see situations that are unique to the owner, unique to the lender as opposed to large waves of distress Being marketed or portfolios of distress, whether they're loans or assets being brought to market or even being Really prepared to be brought to market.

Speaker 3

It's one off situations that are starting to happen and we anticipate to see a lot more of them As more loans come due over the next 2 years and frankly as some Players continue to need recapitalization. We're seeing a significant increase in the need for recaps In order to stay active in certain assets that are having either refinancing issues or operating issues. As a percentage of our closings in the Q3, it wouldn't have been significant. But I can clearly share with you that This bucket of transaction catalyst is on the rise measurably. Got it.

Speaker 3

That's really helpful. Can you talk a little bit more about how the market dislocation and The press transaction market is kind of affecting your recruiting efforts and I guess how we should think about what Broker count should look like as we move forward into 2024? Sure. The market condition around inexperienced professionals being hired, trained and transitioned into productive producers for us is still very challenged for the same reasons We've talked about for a while now, the early post pandemic, in that the very tight labor market, Which is starting to loosen to some extent based on today's jobs report, of course, as well as the disruption, the Significant swings since the pandemic of a severe market shutdown and the downturn in 2020, A big comeback in 2021, 2022 and then an interest rate induced dislocation has made the usual process of Bringing inexperienced people onto the business, training them, having them work with a mentor and transition them into productive Individuals has really been disrupted. And we're still, if you will, reacting and pivoting to the ripple effects of that 3 year disruption and the normal cadence of our new agent and originator hiring.

Speaker 3

But the trends are moving in the right direction. The additional initiatives that we've implemented are paying off, whether it's our The fellowship program, our internship program expanded channels for reaching out to sales professionals from other industries And a lot of flooding the zone in helping the newer professionals that are within the firm already Get more training, get more support and make it to the other side. But I don't want to underestimate just how difficult it is as a new professional to make it in this market. What we do know is that those that started in 2008, 2009 with us, maybe even 2010 and really struggled for the 1st few years Are some of our top performers now because they really learned the business in a healthy Foundational way that has given them an advantage as a career. And we're really advertising that and using those best practices To do everything we can to help our newer professionals right now.

Speaker 3

Complementing that with experienced professional hiring teams, boutique firms Has been very successful and we continue to build on that. This year we've brought a number of market leading teams on board. We designed that effort in a way to be complementary to our existing coverage and our existing teams, so we avoid as much overlap as possible, So that we're not cannibalizing current opportunities that are already being pursued. And that strategy is very much alive and kicking and a high priority for us. Okay, great.

Speaker 3

That's helpful. Last one for me. Can you just give us a little bit more color on any additional external growth And given that you didn't repurchase I'll take the first part of your question first. As I mentioned in my prepared remarks, We have been actively pursuing external growth through acquisitions for some time now and had advanced discussions with some targets that didn't work out predominantly because of a valuation and purchase terms Yes, that we still felt brought too much near term risk and midterm risk to the company. Those that did not work out have been more than replaced by new activities and new discussions, Pretty advanced discussions with others that fall in the same category of external growth.

Speaker 3

And with time, we are seeing a little bit more Realistic price expectations and terms expectations, not because the targets that we're talking to are distressed in any shape or form, But because this realism is setting in just as much as it is for real estate owners by the way. It's the same process and the same curve if you will. And so we're encouraged by that quite a bit and we are doing everything we can to continue to build that pipeline. Our preference, of course, would be to deploy as much capital For external growth and long term growth and expanding the platform as much as possible, not just because of diversification, although that's very important, But also recognizing Blaine that within our core business brokerage and finance, there's plenty of room for growth. There's Plenty of opportunity for additional boutiques, additional groups, where we don't have that coverage, to be added to the company and The success stories that we've had with numerous firms that have joined us over the past 5 years are the reason to do more of it, both for the sellers as well as us.

Speaker 3

So that's the preference. But I think the benefit of our current capital deployment strategy is the fact that we worked very hard for several years to position the company to have Such a fortress balance sheet to have multiple strategies deployed at the same time. We're returning capital to shareholders through our dividend policy And share buybacks, we're pursuing acquisition opportunities and as importantly, we're investing in ourselves. We are doubling down MMI in this period, that is for sure. So the fact that there was no buybacks in one particular quarter is not signaling any change to the overall strategy.

Speaker 3

That just happened to be the dynamics for that particular quarter. And we have optionality. So as we pursue these Growth opportunities, hopefully as they scale and some exciting things come together, that's where we'd love to see the capital deployed 1st and foremost, as well as, As I said, doubling down on ourselves in technology investments, a talent acquisition that wouldn't be considered necessarily M and A.

Speaker 4

Yes. And Blaine, really the only thing for me to add that was very comprehensive is pointing out that between the dividend and the share repurchase Programs, we returned over $150,000,000 to shareholders over the last 18 months. And it is that very balance sheet that we've built up over the years that's allowed us to do that while also Still being able to make investments both internally and externally.

Speaker 3

Okay, great. Just a follow-up Here for Hessam, you talked about a valuation gap on some of those deals that fell out. Can you give us any better sense of how far off You were from an agreeable price. Was this closer to 5% off or 25%? It's somewhere in between, Blaine.

Speaker 3

And really, it was maybe about a turn With a multiple turn of what we felt may have been a fair market value versus What the sellers would have liked and or the combination of the guaranteed value and an earn out, where Some folks would like to take more chips off the table and we would like to see the opposite because we're not really looking to be anybody's retirement plan And we're targeting groups and entities that have a lot of runway and would benefit from A exciting growth path in the future that will be much, much more rewarding with Marcus and Millichap than without or with any other platform. And so if we don't see those characteristics in a deal, we're not just looking to By market coverage, we really want to find complementary services, complementary folks that are like minded, That are similar in culture and are aggressive about future growth. And I would say those are as important criteria for us as any financial metrics. Okay, great. Thanks for all the commentary.

Speaker 3

Thank you, Glenn.

Operator

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to CEO, Hassam Najee for Closing remarks.

Speaker 3

Thank you, operator, and thank you everybody for joining our Q3 call. We look forward to seeing you on the road and look forward to our next earnings call. Have a great day.

Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. May disconnect your lines at this time. Enjoy the rest of your day.

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