Q2 2021 Marcus & Millichap Inc Earnings Call
[music].
Greetings and welcome to the Marcus and Millichap second quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad at.
As a reminder, this conference is being recorded.
I would now like dependent conference of Whats the hope from Sheila. Thank you you may begin.
Morning, and welcome to Marcus and Millichap second quarter, 2021 earnings conference call.
With us today are president and Chief Executive Officer, Hassan <unk>, and Chief Financial Officer, Steve did you narrow.
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 those 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 <unk>.
General economic conditions, and commercial real estate market conditions.
The company's ability to retain and attract transactional professionals.
The company's ability to retain its business philosophy and partnership culture, and the competitive pressures the cash.
<unk> ability to integrate new agents and sustain its growth.
And other factors discussed and the company's public financial filings.
And cleanest annual report.
And on form 10-K filed with Securities and Exchange Commission on March 1st 2021.
Although the company believes the expectations reflected in such forward looking statements are based upon the reasonable assumptions.
It can make no assurance that is 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 it's available and 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 our website at Www Dot Marcus Millichap Dot 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 Assam Gotcha.
Thank you Tom on behalf of the entire Marcus <unk> Millichap team good morning, and welcome to our second quarter 2021 earnings call.
We're very pleased to report the highest revenue and earnings quarter, and the 50 year history of Marcus and Millichap.
The key milestones for the second quarter include revenue of $285 million.
Over $32 million of net income adjusted EBITDA margin of 17% as well as the year over year revenue growth of 143%.
More importantly, our revenue and earnings outpaced the second quarter of 2019 by 36% and 48% respectively.
We take great Pride and these results, especially relative to the pre pandemic and market environment.
But I'd like to point out the importance of the foundation that has been built to make these numbers possible.
And the second quarter MMA closed nearly 3300 total transaction, which is more than double the second quarter of 2020, and nearly 30% higher than the second quarter of 2019.
For perspective. This is the result of exponentially more client interaction financial analysis run.
Higher evaluation and lender selection that our team delivered the maximized client value.
For the first half of 2021, and then my closed over 5006 hundred transaction for approximately 45 transactions per business day.
This includes just short of 4000 and brokerage transactions, which is by far more than any other firm. According to third party sources and reflects the expansive network of investor relationships the ex.
And for Ts and commitment of our sales force management and support personnel.
These numbers also reflect best of class of infrastructure and technology that helps us bring together the volume that I, just discussed of buyers and sellers lenders and borrowers and consumers of our research together through 1 consistent client driven platform.
In light of of record setting quarter.
Like to express our thanks to our clients for trusting us with your of real estate investment strategy and execution as well as our financing services not only over the past year, but throughout our 50 year history.
I would also like to acknowledge the tireless work and persistence of our sales and financing professionals.
The work closely with our clients to solve problems through incredible uncertainty of year ago amid the worst period of the pandemic and and seeding the market recovery.
And assessing the drivers behind the strong performance and the quarter, we're benefiting from several internal strategies as well as favorable market dynamics.
Let me first share our perspective on the internal drivers before commenting on the market forces.
Perhaps the most important internal factor is the productivity and client relationships of our tenured agents and loan originators.
The focus on long term relationships has always driven our business, but clearly stood out over the past year.
The result, resurrection of previously canceled or delayed transactions and listings continued and the second quarter, which will likely become less of a factor as the market moves past the effects of the market disruption.
At the same time, we're benefiting from impressive incremental contributions from recently acquired companies groups and experienced professional the.
This includes those brought on board in late 2020, who have had more time now to ramp up their business.
We're seeing increasing client and synergies.
And joined the business opportunities emerge from these additions since they're complementary to our existing team and market coverage.
Our revenue diversification strategy continues to pay off illustrated by strong growth and middle market and larger transaction as well as our financing Division MCC.
To put numbers to it our middle market and larger transaction revenue was up 23% and 65% respectively. During the first half of this year versus the first half of 2019 again and important benchmark.
Pre pandemic.
The expansion of our IPA Division in particular, which is designed to service larger private and institutional investors has been well received by the marketplace and shows up strongly and these numbers.
MCC increased its revenue by 64% year over year, and 46% and the first half of this year over the same time in 2019.
MCC has emerged as the leading intermediary with access of the most competitive capital on behalf of our clients with nearly 1200 financing closings and the first half of this year alone.
And executed through 281 separate lenders.
I'm happy to report that many of our tenured loan originators continue to grow their business and integrate with our sales force, while key acquisitions and market initiatives that were previously not covered or adding value in terms of client service and revenue contribution.
This dual strategy of supporting our existing team and adding experienced professionals as proven to be effective and is being scaled by our new MCC leadership team and announced at the beginning of this year.
We're also making key investments and mcc's infrastructure its own systems and marketing.
We continue to transition the recruiting of financing professionals, 2 experienced loan originators, while still investing and our own tenure teams.
As we have managed consistently these diversification initiatives are complimentary and supportive of our industry, leading position and the private client segment.
The company's second quarter of private client revenue grew 123% year over year and 23% over the second quarter of 2019.
Our product line revenue for the first half of 2021 was up 42% year over year and 17% over the first half of 2019 very important benchmarks.
We also attribute of great deal of this year's results to our expanded client outreach record attendance on virtual investor webcast, which have continued in 2021 by the way and research content that had been elevated at the onset of the pandemic.
Our content and advisory role has clearly strengthened the company's connectivity with investors as well as direct business leads.
Last but certainly not least our results were made possible by disciplined cost management, while investing aggressively and a new generation of technology and marketing to these.
These investments started in earnest 3 years ago and position the company extremely well against the pandemic with no business disruption and foster new business generation into the recovery as we speak.
Our platform of investments, we're not interrupted by the pandemic. This is a key reason why we continue to see success and speaks to 1 of the most important founding principles and.
And that is to provide the best support tools and training for our team.
Sales force growth remains impacted by the fallout of newer professionals from the market disruption reflected in higher than usual terminations in this cadre during the first half of this year.
As we've indicated before this is consistent with past downturn.
Various initiatives to make LMI of viable choice for promising new talent continues unabated.
At the same time, our strategy to augment our traditional organic growth model through strategic acquisitions and recruiting.
Experienced talent has brought and measurable contributions to our results. We expect this to continue as recent additions moved further into the ramp up period as part of the Marcus and Millichap family.
Our performance during the pandemic and sense for.
Reaffirms, our strategy and points to additional growth opportunities through all the channels I just summarized.
From a market perspective continued job growth release of pent up demand record low interest rates and ample liquidity are fueling of trading velocity resurgence.
Record volume of capital is seeking commercial real estate as an attractive investment powered by low cost capital and of widely held view that real estate can act as an inflation hedge.
In recent months more investors of cited uncertainty related to future tax law changes as 1 of the motivations to trade, which has added some incremental urgency into the marketplace.
We're seeing strong buyer demand across the spectrum with the safest segments of apartments and single tenant net lease and industrial continuing to attract record capital.
Fundamentals are generally supporting valuation, especially given the.
Expectation of new demand raising future occupancies and rents going into the next 12 to 24 months.
As the case and 0.2nd quarter of apartment rent growth was the highest in 20 years and most markets, including urban areas are reporting exceptional improvement and the renter demand.
Trading and recovery place bound and shopping centers hotels seniors housing and student housing of bounce back by varying degree with many investors realizing the truly distressed buying opportunities are rare indeed.
And increasing number of opportunistic buyers are becoming more realistic on pricing and moving to lock in interest rates into the economic recovery.
Although trading volumes were up measurably in the office sector uncertainty regarding the future of office space used and remote work is still a headwind in terms of price discovery and investor confidence.
Overall.
The real capital analytics reports of 33% increase and the number of market sales during the first half of 2021.
Compared to our brokerage transaction increase of 46%.
Pointing to continued outperformance for MMA.
Looking forward I am happy to report strong pipelines and improved metrics across the board.
We expect market conditions to remain favorable and the foreseeable future barring any unexpected external event.
And retaining our best talent and supporting their productivity through additional advancements and technology.
Branding and expanded marketing our top management priorities.
We are re engaging in person activities and training and events as well as physical client interactions with an eye on health and safety measures.
Our strong balance sheet gained knowledge and experience and targeting acquiring and integrating strategically selected companies and groups.
Physician is very well to further scale, our external growth strategy.
As such acquisition and technology investments remain our top capital allocation strategy as we build on the 9 successful acquisitions, we've made since 2018.
We're actively evaluating a number of quality targets, particularly and the financing arena and look forward to sharing more details as these opportunities evolve.
And with that I will pass the call to Steve to discuss our financial results and further detail Steve.
Thanks, Tom.
And the second quarter, we delivered all time record revenue adjusted EBITDA and earnings per share.
While year over year Comparables are extremely favorable due to the impact of Covid on results and the second quarter of last year. We are most pleased with the significant growth in all areas of the business compared to the pre pandemic second quarter of 2019.
I will provide both year over year, and 2019 comparisons given the market disruption and to provide better perspective on our performance.
Total revenue and the second quarter was $285 million, which exceeded our previous record quarter of $250 million and the fourth quarter of 2020 by 14% and also marks the first time a record quarter has fallen outside the fourth quarter.
For the first half of 2021 total revenues were $469 million.
Up 52% year over year, and up 27% compared to the same period and 2019.
Brokerage commissions for the second quarter accounted for 89% of total revenues for $253 million and grew 145% over the second quarter of 2020, and 34% compared to the second quarter of 2019.
Brokerage commissions for the first half of 2021 increased 51% year over year and 25% over the same period and 2019.
Our private client business remains strong and our competitive advantage accounting for 63% of brokerage revenue for the quarter for $158 million.
This is more than double the second quarter of 2020 and up 23% compared to the second quarter of 2019.
Despite our leading position and the private client segment, we believe the fragmentation and size of this dynamic business provides further growth opportunity.
Our middle market business accounted for 17% of brokerage revenue or $42 million and was up more than threefold year over year and up 55% compared to the same period and 2019.
Our larger transactions business represented 18% of brokerage revenue for the second quarter and grew 176% year over year and 74% over the second quarter of 2019, principally due to strength in our IPA Division as Tom explained, including a large multi state portfolio of REIT.
<unk> properties.
Brokerage revenue from these businesses combined for the first half of 2021 accounted for 33% for $138 million up.
Up 73% year over year, and 43% over the same period and 2019.
Contributions from these businesses have made a meaningful impact and reflect the recent strategies to diversify and attract experienced brokers.
Moving on to MMC financing fees, and the second quarter rose, 122% year over year, and 59% compared to 2019.
<unk> growth was fueled in part by several key acquisitions made in the last year as well as the exceptional performance of our tenured financing professionals.
Refinancings were 52% of total financing fees and as expected represented a lower percentage of transactions compared to prior year due to higher sales activity and the current quarter.
Financing fees for the first half of 2021 were up 64% year over year, and 46% compared to the same period and 2019.
Other revenues comprised primarily of consulting and advisory fees, along with referral fees from other real estate brokers were $4 million for the quarter compared to $1 million and the second quarter of last year and up 21% compared to 2019.
Other revenues comprised primarily of consulting and advisory fees, along with referral fees from other real estate brokers were $4 million for the quarter compared to $1 million and the second quarter of last year and up 21% compared to 2019.
Other revenues for the first half of 2021 increased 47% year over year, and 38% compared to the same period in $2000.19 million to $7 million.
In the second quarter, we generated total sales volume of more than $17 billion across 3285 transactions.
Presenting year on year growth of 151% and 107% respectively.
Compared to the second quarter of 2019 total sales volume was up 34% and total transactions were up 30%.
For the 6 months ended 2021, we generated total sales volume of more than $29 billion across 5617 transactions representing year over year growth of 57% and 46% respectively.
Compared to the same period and 2019 total sales volume was up nearly 29% and total transactions were up over 25%.
Brokerage transactions increased 117% year over year, and the second quarter and 46% year over year for the first half of 2021.
We continue to outperform the broader market, which is a testament to the strength of our brand our platform and our value added brokerage and financing capabilities.
This was true when the market was soft and the depths of the pandemic and as true today as we capitalize on a strong macro environment.
Total sales force head count decreased by 26 year over year to 1935 investment sales professionals and 87% financing professionals for a total of 2022.
As Tom alluded to turnover of newer professionals increased due to the market dislocation and was amplified by limited physical interactions.
Record revenue and a continued focus on expense management and execution and the business created significant operating leverage and the quarter.
Total operating expenses were $243 million and increase of 103% year over year, but far less than the 143% revenue growth during the same period for.
For the first half of 2021 total operating expenses were $407 million, a 40% increase compared to a revenue increase of 52%.
Cost of services was $179 million or <unk> 62, 7% of total revenues 10 basis points lower than the second quarter of 2020, and 170 basis points higher and the same period of 2019.
For the first half of 2021 cost of services was $288 million or <unk> 61, 4% of revenue up 50 basis points year over year, and up 210 basis points compared to the same period in 2019.
The increases are due to outperformance of revenue thresholds by our senior agents, who are reaching higher commission splits earlier than our usual seasonal patterns.
SG&A and the second quarter increased 42% year over year, and 15% year over year for the 6 months ended 2021, primarily due to an increase and performance based compensation reserves tied to record earnings and absorption of operating costs related to newly acquired firms.
For the quarter, we generated 78 earnings per diluted share compared to essentially breakeven and the second quarter of last year and 54 cents per share in Q2.2019.
For the first 6 months earnings were $1.16 per diluted share compared to 33, and <unk> 93, respectively for the same period and 2020 and 2019.
Our tax rate was 26, 4% and 27, 2% respectively for the 3 and 6 months ended June 2021, compared to 28, 4% and 31, 1% for the same periods last year.
This was primarily due to change and the relationship of permanent non deductible items to pre tax income and improvement and our Canadian business.
Adjusted EBITDA for the quarter jumped to a record $48 million for $16, 9% of total revenues.
Paired to 3.5% and the second quarter of 2020.
And up 160 basis points compared to 15, 3% and the second quarter of 2019.
Moving now to the balance sheet, we finished the quarter and our historically strong position with $475 million of cash cash equivalents and marketable securities, which is an increase of $52 million and the quarter and equates to $11.84 per diluted share.
During the pandemic are significant cash reserves, we're an important asset for the stability of our business and at the same time allowed us the closed 4 acquisitions and the middle of the challenging operating environment.
As Tom mentioned, we are actively working to build on this track record and pursuing additional acquisition opportunities as well as investments and technology and platform improvements as our capital allocation priorities.
Turning now to the outlook for the remainder of 2021.
Absent unexpected macro events, we believe that favorable market conditions and positive fundamentals will continue and the near term and potentially through the end of the year.
As a result revenue and the second half of 2021 should reflect historical semi annual patterns.
Cost of services for the third quarter should follow the normal trend and increased sequentially over the second quarter to the 63 and a half the 65% range.
SG&A for the remainder of 2021 should increase modestly from second quarter levels due to the return of in person events related travel and salary adjustments for support staff.
Lastly, we expect our full year tax rate to be and the 26 to 27, 5% range.
With that we can now open up the call for Q&A operator.
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Yeah.
Our first question comes from Blaine Heck with Wells Fargo. Please proceed.
Hi, Thanks, good morning.
On previous calls you guys have discussed.
Some challenges and hiring duty having too.
Ducks the REIT.
The recruiting virtually and we noticed the number of professional decrease from the first quarter.
And it's down but as city and the opened during the quarter of hiring has become easier or are there still some hurdles to overcome there.
Hi, Brian Good to have you on the call is easing and we're seeing some improvement and the whole continuum of both the.
The recruiting and interviewing and selecting individuals and in some states actually.
Making sure that the real estate departments are operating again and issuing of real estate licenses, which is.
And another hurdle, we've had to overcome because of the pandemic. So it's easing we are definitely seeing an improvement and.
And most of the challenges that we faced with the numbers as we had set the expectation.
Last year has to do with the fallout rate of the newer professionals that just can't really break through the market interruption. That's of course, the easing very rapidly because of the market is improving and we do have extensive training and different support mechanisms in place to help folks but.
The inevitable.
For the fallout rate to go up and a market environment that we faced over the last 12 months.
Okay, and that's very helpful and.
And then I'm interested in the the pretty significant increase you saw and the average size of deals both on the brokerage and financing sides of the business.
That just reflective of maybe some segments of the market being more active than others at this point and seeing more volume and the the mid and large size of deals than in the private client segment or is it maybe even more indicative of of shifts towards those larger deals for MMA and the future.
What's the combination of both Blaine and that we did see the institutional marketplace.
Pretty much shutdown and the second quarter of last year and part of the third quarter of last year and there has been a significant release of those.
And those activities that were delayed or.
Actually canceled a lot of the.
Transactions were actually canceled that have come back to the marketplace and institutions.
Are flush with a lot of capital that their clients want to put to work. So there is definitely and market factor, but as I have shared with you before a lot of our.
Targeting of established teams and senior level experienced brokers and various segments, where we don't have coverage.
Inherently brings the experts do larger transactions. So the combination of those 2 factors and the same store improvement of our IPA Division more senior Marcus and Millichap brokers that are doing larger deals all added to the results.
Okay that makes sense last 1 from me can you just talk a little bit more about the opportunities that you guys see in front of you with respect to acquisitions. I think you guys had made for some solid purchases and the past few years and and had grown the business thoughtfully, but it seems like.
Large needle moving acquisitions have been a little of lucid for you guys. So can you just talk about what you see out there now and whether the timing might be right for a larger acquisition.
Sure Glenn 1 of the things I want to clarify is that there has been no resistance or concern about acquiring the larger entity that fits all of the different criteria that we have for our sales, which is mainly driven by cultural fit and making sure that the specialty for market.
Area that the target coverage is not in conflict with our existing coverage. So that we don't disrupt or cannibalize existing success and.
Of course, and making sure that the synergies are there and the accretion is there.
And if those criteria are basically met we would acquire of any size firm. We don't really have a limitation the nature of our business is such that the fragmentation, especially and the private client business.
And as driven and.
Kind of a little bit of of limit as to how many firms have organized the become a scaled platforms that we can go acquire obviously, that's 1 of our competitive advantages. There are no other markets of Millichap is out there or even close so by the inherent and nature of the fragmented marketplace.
And the deals tend to be small to mid sized transactions both on the financing side and on the brokerage side now having said that we are in conversation with a number of different entities that.
And have gone very well and we continue to pursue those and some of them are and the on the larger and of the scale compared to the kinds of transactions that we've already done and the last 3 years.
Great. Thanks, that's helpful.
Thanks for being on the call Blaine.
Once again, ladies and gentlemen to ask a question. Please press star 1 on your telephone keypad at this time.
Yeah.
There are no further questions in queue at this time I would like to turn the call back over to management for closing comments.
Thank you very much of operator, and thank you for everyone for joining our call. We look forward to interacting with you between now and next quarter and having you back for our third quarter earnings call the call and this is Jeremy.
Thank you. This does conclude today's teleconference. You may disconnect. Your time at this time and have a great day.
Yes.