Marcus & Millichap Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 4, 2023

There are 5 speakers on the call.

Operator

Greetings, and welcome to Marcus and Millichap Second 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.

Operator

Thank you. Good morning, and welcome to Marcus and Millichap's

Speaker 1

Q2 2023 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 the responses to questions may contain forward looking statements. Words such as may, will, expect, believe, estimate, anticipate, goal and variations of these words in Similar expressions are intended to identify forward looking statements. Actual results can differ materially from those implied by such forward looking statements

Speaker 2

Due to a variety

Speaker 1

of factors, including, but not limited to, general economic conditions and commercial real estate market conditions, 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 ks filed with the Securities and Exchange Commission on February 28, 2023. Although the company believes the expectations reflected in such forward looking statements and 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.

Speaker 1

This conference is being webcast. The web 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.

Speaker 3

Thank you, Jacques. On behalf of the entire Marcus Millichap team, good morning and welcome to our Q2 2023 earnings call. The widened bid ask spread and restrictive lending environment severely hindered commercial real estate trading and financing volumes in the 2nd quarter. MMI's results for the quarter reflected this challenging market, which was marked by elevated transaction and listing cancellations and frequent asset repricing due to the interest rate shock and economic uncertainty. MMI also faced an exceptionally tough comparison to the Q2 of 2022, Which had outsized revenue growth of 39% and was the 2nd highest revenue quarter in our history.

Speaker 3

Revenue for the Q2 of 2023 came in at $163,000,000 which was lower by 59% year over year. Adjusted EBITDA loss of $1,100,000 was due to expenses related to investments made over the past several years ongoing expense management, we believe playing offense during this prolonged market disruption will create a competitive advantage for the company in the recovery And beyond. Our strategy includes doubling down on client outreach, supporting and retaining our sales force, Adding experienced professionals and pursuing strategic acquisitions. I'm proud to report that we made progress on all fronts During the Q2, while elevating internal communication, best practices sharing and skills development. These are hallmarks of Marcus Millichap's collaborative culture and have been extremely effective in previous downturns.

Speaker 3

In addition to investments made in expanding the platform, we believe several developments will add value in the long term. For example, the collaboration between our sales and financing professionals has increased markedly as the difficult financing market Is accentuating the knowledge and lender relationships of our loan originators. Our auction division created just 18 months by adding industry leading specialists is becoming more integrated with our sales force. Auctions provide an alternative channel for rapid marketing of certain assets and aging inventory. Our financing and sales professionals are actively partnering With our loan sales division to advise lenders, special servicers and government agencies on valuation and disposition of loan portfolios and assets.

Speaker 3

Our ever expanding research content and media coverage is reaching a record number of investors and helping clients develop strategies and pursue opportunities. Last but not least, our technology advances are expanding how we connect with our clients on specific listings and leads. These initiatives are fundamentally enhancing our leverage and execution, which will pay dividends far beyond the current disruption and recovery. From a market standpoint, the Fed's continued hawkish stance has intensified the disruption and price discovery. Valuations for the lowest cap rate assets, particularly apartments have been the most impacted by the interest rate shock, Leading to a major drop in trading volumes.

Speaker 3

Bank failures in the Q1 and exposure to distressed real estate Has pushed many active lenders out of the market. Sellers' price expectations have been misaligned with buyers Still struggling with uncertainty and lower loan to values on top of the doubling of interest rates in the past year. These converging forces manifested in a 54% drop in transactions and a 63% drop in sales volume in the overall marketplace according to RCA. This marks the 4th consecutive quarter of a pronounced industry wide decline in activity, reflecting the current dislocation's broad nature. MMI outperformed the broader market in brokerage transactions, Which declined 47% in the quarter.

Speaker 3

The company's brokerage sales volume decline of 62% was in line with the market. But as mentioned earlier, this is on a 47% year over year increase in our sales volume in the Q2 of 2022 and that should be kept into perspective. Private client revenue for the quarter fell 54%. The Private Client segment is still driven by many personal motivations to trade and has more available financing options. Nonetheless, a wide bid ask spread is also lowering volumes in smaller deals, but to a much lesser extent.

Speaker 3

Revenue from middle market and larger transaction sales declined 69% and 73% respectively, as major private investors and institutions remained on the sideline. Given extremely tight credit conditions, revenue from financing fees All 51%. Yet, we transacted with 141 separate lenders in the quarter, Illustrating the skill, tenacity and access our financing team brings to investors and our own sales force regardless of market conditions. I want to highlight that despite all of these challenging factors, The company closed over 1400 brokerage transactions and nearly 300 financings during the 2nd quarter. For the first half of the year, we've closed 2,700 brokerage transactions and over 550 financings.

Speaker 3

MMI continues to rank as the top brokerage company by transaction count. This is the result of our client commitment and the hard work, persistence and skill of our sales force and support teams. On another positive note, there is no shortage of capital or demand for appropriately priced Commercial Real Estate Assets. In these cases, we're generating multiple offers for our clients from buyers using more equity And in some cases, paying all cash to be in the right markets and fetch the right assets that fit their long term strategies. We're also seeing short term financing solutions and structures to secure well priced assets with buyers leaving themselves flexibility for future refinancing.

Speaker 3

Office properties remain the outlier in price discovery, while improving fundamentals in retail over the past several years has Fostered more buyer demand and ironically makes retail a highly desired asset class. Looking forward, the notion of a Fed pivot to lowering interest rates in the near term has been taken off the table. Despite major progress in reining inflation, there's still a long way to go to reach the Fed's 2% target. This means recalibrating real estate values in light of higher interest rates will simply take more time to work through the marketplace. Healthy property fundamentals with the exception of office and a shift in sentiment from recession concerns To an expectation of an economic soft landing bode well for sustained buyer interest.

Speaker 3

Although some distressed sales are expected, The Fed and the FDIC have specifically encouraged lenders to extend the maturing loans as much as possible to avoid write downs. As buyers come to realize that a widespread price correction is unlikely and sellers become more realistic on pricing, A realignment in the marketplace will trigger a reversal in trading volume trends. The clarity that will come when the Fed declares The end of the tightening cycle should also foster more activity. We cannot predict or control the timeline for the shift. However, We are laser focused on executing our own strategy in the meantime.

Speaker 3

For MMI, this prolonged market disruption is an opportunity to help more investors By partnering with us, our clients will navigate this environment and we will gain more of their confidence, mindshare and eventually market share. One of the key challenges exacerbated by the market downturn is net hiring of new professionals. The unusually strong job market and rising wages Our greater factors today than in previous cycles in attracting recent college graduates and newer professionals from other sales industries. At the same time, a challenging market is making it harder for our new trainees to break into the business. As I've mentioned on past calls, we're committed to our organic hiring system and continue to push various candidate outreach initiatives, Enhanced training and development and are adding corporate recruiters to return to positive net hiring.

Speaker 3

In the meantime, for many experienced professionals, MMI is proving to be the ideal platform to enhance their careers. We have demonstrated this through many such additions since the pandemic with positive mutual results and continue to build on this momentum. I'm happy to announce the most recent addition of our market leading finance team in New York that will further elevate our capital markets capabilities. We're also in active discussions with potential acquisition targets that we believe would bring strategic and market coverage advantages to MMI. Our strong balance sheet forces the foundation to remain offensive while continuing to return capital to shareholders through dividends and share repurchases.

Speaker 3

We will continue to assess the highest and best use of capital as market conditions shift with an eye to increasing our acquisition target pipeline further as valuation expectations become more reasonable. And with that, I will turn the call over to Steve for additional insights on our results. Steve?

Speaker 2

Thank you, Hessam. As we look at this quarter's results, it's important to provide context and a reminder of the market landscape a year ago. In the first half of last year, investor demand was fueled by still low interest rates and an urgency to transact ahead of further interest rate hikes. In contrast, today's higher rate environment resulting from the Fed's aggressive actions over the past 15 months and severely restricted credit markets Our impeding trading volumes, year over year comparisons are also skewed by the fact that Q2 2022 It was the 2nd highest revenue quarter in the company's history. With that backdrop in mind, let's turn to the current year results.

Speaker 2

Revenue for the quarter was $163,000,000 compared to $396,000,000 in the prior year quarter. For the 6 month period, revenue was $318,000,000 versus $715,000,000 last year. On a segment basis, revenue from real estate brokerage commissions for the 2nd quarter was $140,000,000 and accounted for 86% of Total revenue compared to $352,000,000 last year, a decrease of 60% year over year. The quarter represents total sales volume of $7,500,000,000 across 14 22 transactions, which is down 62% and 47%, respectively. For the 6 months year to date, revenue from real estate brokerage commissions was $275,000,000 and accounted for 87% of total revenue compared to $642,000,000 last year, a decrease across 2,701 transactions, down 60% and 44%, respectively.

Speaker 2

Average transaction size during the Q2 was approximately $5,300,000 as compared to $7,400,000 a year ago, reflective of fewer larger transactions. Within brokerage, for the quarter, our core private client business contributed For the 6 month period, the Private Client business contributed 68% of brokerage revenue or $187,000,000 versus 58 Our middle market and larger transaction segments, which experienced outsized growth over the past couple of years, Together accounted for 28% of brokerage revenue or $39,000,000 during the Q2 compared to 39% last year. For the 6 month period, the middle market and larger transaction segments represented 29% of brokerage revenue or $79,000,000 compared to 40% last year. Once again, these results reflect the fact that many institutional buyers are out of the market Pending further clarity on rates and pricing. Revenue in our financing segment, including MMCC was $18,000,000 in Q2 compared to 30 compared to 6.97 transactions for $4,500,000,000 in volume in the prior year.

Speaker 2

Financing revenue for the 6 months was $34,000,000 compared to $63,000,000 last year. Year to date, this represents 5.63 transactions totaling $3,400,000,000 in volume compared to 12.17 transactions and $7,200,000,000 in volume last year. Other revenue comprised primarily of consulting and advisory fees along with Referral fees was $4,600,000 in the 2nd quarter compared to $4,500,000 last year. Year to date, other revenue was $8,500,000 this year compared to $10,600,000 last year. Moving on to expenses.

Speaker 2

Total operating expenses for the Q2 were $174,000,000 49% lower than Last year, year to date total operating expenses were $344,000,000 44% lower compared to the prior year. Lower expenses were largely a result of lower revenue. Cost of services was $101,000,000 For 62.1 percent of total revenue, an improvement of 260 basis points over the Q2 last year, consistent with lower revenue. Year to date, cost of services was $197,000,000 or 61.9 percent of total revenue, An improvement of 140 basis points compared to last year. SG and A during the quarter was $69,000,000 a decrease of 14% over the prior year.

Speaker 2

For the 6 month period, SG and A was $141,000,000 a decrease of 9% compared to last year. The decreases in SG and A reflect lower variable compensation tied to business performance as well as cost reductions implemented over the past 6 months. This was partially offset by expenses related to talent acquisition and retention as well as new business development and client marketing support. As we have discussed over the last few calls, The combination of lower revenue with the fixed nature of certain expenses related to growing the sales force, technology and infrastructure over the past few years Impacts profitability. For the Q2, we recorded a net loss of $8,700,000 or $0.23 loss per share Compared to net income of $42,200,000 or $1.04 earnings per share in the prior year.

Speaker 2

For the 6 month period, the net loss was $14,600,000 or $0.37 loss per share Compared to net income of $75,000,000 or $1.85 earnings per share in the prior year. For the quarter, adjusted EBITDA was negative $1,100,000 compared to a positive $62,900,000 in the prior year. For the 1st 6 months, adjusted EBITDA was negative $8,500,000 compared to a positive $114,800,000 in the prior year. The effective tax rate for the quarter Reflects the change necessary to bring the year to date rate into alignment with the rate we expect for the full year. The expected annual rate is sensitive to the amount of expenses that are non deductible for tax purposes in relation to Rate is approximately 17%.

Speaker 2

Moving to the balance sheet. We remain well capitalized with no debt and cash, Cash equivalents and marketable securities totaling $407,000,000 While our cash balance decreased $24,000,000 in the quarter, That includes returning $27,000,000 in capital to shareholders through a combination of dividends and share repurchases. Continuing on the capital allocation theme, earlier this week, our Board declared a semi annual dividend of $0.25 per share To be paid on October 6 to shareholders of record as of September 15. And during the quarter, We repurchased nearly 539,000 shares of common stock at an average price of $30.81 per share for a total of $16,600,000 Year to date, this brings total shares repurchased to nearly 1,100,000 at an average price $31.28 per share for a total of $34,400,000 As of today, Approximately $76,000,000 is remaining on the current repurchase authorization. As we have done since expanding our capital allocation 18 months ago, I want to emphasize that our approach remains balanced, including strategic acquisitions, investments in technology, The Fed has messaged it will continue to raise rates in response to stubbornly high inflation and a strong labor market.

Speaker 2

Therefore, rates are expected to remain higher for longer. This, coupled with the gap in price expectations Key metrics and stay vigilant in expense management. Cost of services as a percentage of revenue for the 3rd quarter should follow the usual pattern and be sequentially higher than the Q2. SG and A for the quarter Should increase modestly from Q2 and be in line with the Q1 spend due to seasonal agent and client related events. And as I mentioned previously, the tax rate is currently expected to be in the 17% range.

Speaker 2

Our primary focus continues to be proactively engaging with Clients exploring strategic growth opportunities and driving operational excellence throughout the business. Our ongoing investments in systems, With that, operator, we can now open up the call for Q and A.

Operator

Thank you. Our first question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Speaker 4

Great, thanks. Good morning out there. Saum, can you talk about the relative resiliency in transaction volume in different size segments? I guess, Do you find that the private client group is less sensitive to macroeconomic factors than larger institutional players or is it the opposite?

Speaker 3

Hi, Blayne. There is sensitivity definitely across the full spectrum when it comes to interest rates, the direction of the economy, job Personal circumstances, debt, divorce, partnership breakups, needing to take profit from one investment in order to create more liquidity And take advantage of 1031 exchange opportunities to trade out of 1 property into another as Kind of a reflection of the entrepreneurship of the private clients. And so that just creates more transactional opportunity for us and smaller deals are more financeable in a difficult financing environment like we're facing right now. So the decline in trading activity in the $1,000,000 to $10,000,000 private client segment has been less Pronounced than the larger transactions, both in the marketplace and of course for us. That doesn't necessarily Meaning that there isn't a bid ask spread, there definitely is across the full spectrum.

Speaker 3

And the uncertainty that The entire industry has faced related to the direction of interest rates and the economy has impacted everybody up and down the spectrum. So that's in a way the kind of view of the attitudes among our private clients versus the institutions. We're starting to see more of interest in acquiring assets A lot of our private clients are well capitalized and ready to Respond to opportunities that come up if they're priced correctly. And as I said in my comments, we're starting to see that price adjustment And more realism on the sell side generate more activity. But we have quite a ways to go before the bid ask spread really comes to Align.

Speaker 4

Great. That's really helpful color. Obviously, the jobs Report came in this morning with some mixed results, but an unemployment rate that's stubbornly low. Can you talk a little bit more about how you're thinking about hiring and retention in this tight labor market? And can you give us any thoughts on how we should

Speaker 3

Sure. We are committed to our organic growth model. It has worked Professionals that are on board with Marcus and Millichap have a better chance of making it through the market This location through more mentorship, more training and more management support Because we know that if they really survive, if you will, this type of a market environment as we experienced in 2,008, 2009, Frankly than a normal market. So we're very committed to that both on the defensive side of helping Many of our newer professionals make it through the downturn, which is where we are starting in terms of priority and at the same time, Doing even more with recent college graduates and sales professionals from other industries to bridge This very unusual employment market where we're competing against a lot of different industries with base salaries and Of course, the uncertainty around commercial real estate performance and the overblown media coverage In many ways around the stress on banks and commercial real estate being a kind of a Risk factor for the macro economy is making a lot of our candidates concerned about the industry. So our job and our manager's job is to combat that at the local level with career nights, With career fairs, individual interactions with candidates and to overcome it.

Speaker 3

I don't expect a turnaround immediately, but I know that over time as both the employment conditions change And all these different initiatives that we're launching or have been launching make a difference, the results will begin to improve. I should add, Blayne, on the experienced professional side of the equation, we continue to see great success both in the Testimonials and the case studies of those that have joined the company over the past 3 or 4 years and a very healthy pipeline of additional Experienced professionals on both the brokerage side and the financing side that we're actively speaking with right now.

Speaker 4

Okay, that's helpful. M and A continues to be a focus for investors. Can you talk a little bit more about any activity you guys might have on that front, Whether you think pricing has adjusted enough to kind of reflect the higher rate environment and How likely do you think acquisitions are in the second half of this year?

Speaker 3

Sure. As I've messaged last time, our pipeline of Targets began to increase and that includes some targets that we had dialogue with before that didn't come to fruition And we have resurrected some of those conversations. And therefore, I would say that the valuation expectations are beginning to improve, but I would say that they too, just like real estate prices, have a ways to go before They come into line with what we believe is fair valuation, especially because of the fact that when you look at the last 3 years As a benchmark of performance and revenue production and earnings and so on, we've had such a lumpy period with the pandemic and Post pandemic and you have to look even beyond the last 3 years for sustainability of revenue and earnings and retention of producers And all those very key metrics in a way that we have to manage the company's risk going forward. So when you factor all that in and the seller's expectation that underwriting should be based on their best 12 months ever, I really do believe that some good results will come out of our current evaluations and active dialogue. And let me ask Steve if he wants to add anything to the answer.

Speaker 2

Yes, thanks. Blaine, the only I've seen in the 3 years that I've now been here. So I'm encouraged by that. As Hessam said, a number of Opportunities that maybe were paused over the last 6 to 9 months Potentially resurrected. And these are opportunities certainly within our core brokerage and financing space.

Speaker 2

But We're also poking around a little bit in areas that are adjacent to Our core space, but that are still very much value add to our private client constituents. And as it relates to the bid ask spread, similar comments, that still exists. But I would say that that spread is closing.

Speaker 4

Okay, good to hear. Last one for me. I think you might have alluded to this in your prepared remarks, but can you talk about the partnership with M and T that was established in 2021 and Whether you guys have any way to quantify the benefit of that partnership or otherwise kind of comment on the production of that partnership relative to your initial expectations?

Speaker 3

Sure, Blayne. The overall market downturn has Of course, limited the volume that we would have achieved with M and T in agency lending in a normal market environment For sure. But having said that, because the agencies have been active in the market and because we were able to leverage our partnership with M and T To acquire, bring onboard the Isenturais Financial Group, which was the number one industry leader In agency production for major apartments, about a year and a half ago, we have done more business with M and T In the last 6 months that we have in the last year and a half or almost 2 years now since the partnership was put together. And we have a very healthy pipeline that would also qualify as our top performing Sub sector within our financing division, because the agencies are still active and because we do have the partnership with M and T M, the origination Capacity that the Eisen Draught Group has brought to the firm, they're also integrating very well With our IPA multifamily sales teams in a very targeted effort by management to create a streamlined way for them to really partner and bring a combined value proposition to our clients, Bring in the investment sales, research capabilities that we've always had, but now really expanding that to include capital markets.

Speaker 3

And that includes a lot of advice and consulting as well as execution of actual financings because a lot of our Mid market and larger clients are frankly trying to come up with solutions to maturing loans And bridge the current financing environment to get through the next couple of years and position themselves for

Operator

There are no further questions in the queue. I'd like to hand it back to management for closing remarks.

Speaker 3

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

Operator

You may disconnect your lines at this time, and have a wonderful day.

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Key Takeaways

  • Marcus & Millichap reported Q2 2023 revenue of $163 million—down 59% year-over-year—resulting in an adjusted EBITDA loss of $1.1 million and a net loss of $8.7 million.
  • Despite market challenges, the firm closed over 1,400 brokerage transactions and nearly 300 financings in the quarter, retaining its position as the top brokerage company by transaction count.
  • Management is investing in client outreach, robust sales force support, enhanced training and strategic acquisitions to secure competitive advantages during the prolonged market downturn.
  • The commercial real estate market faced its fourth consecutive quarter of declines—driven by restrictive lending, widened bid-ask spreads and asset repricing—yet MMI outperformed broader transaction declines (47% vs. 54%).
  • With no debt and $407 million in cash, the company declared a $0.25 per share dividend and repurchased $16.6 million of stock in Q2, leaving $76 million available under its share-buyback authorization.
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Earnings Conference Call
Marcus & Millichap Q2 2023
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