Marcus & Millichap Inc. Q1 2023 Earnings Call
Greetings and welcome to the Marcus <unk> Millichap first quarter 2023 earnings conference call.
This call is being recorded.
Now my pleasure to turn the conference over to your host <unk>.
Jacques Cornet.
Sir you may begin.
Thank you.
Morning, and welcome to Marcus <unk>, Millichap first quarter 2023 earnings conference call.
With us today are president and Chief Executive Officer, Tom <unk>, 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.
<unk> estimate.
Dissipate goal and variations of these words and similar expressions 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 the company's ability to retain its business.
If he and partnership culture amid competitive pressures the.
Company's ability to integrate new agents and sustain its growth and other factors discussed in the Companys public filings included a chat including its annual report on Form 10-K filed with the Securities and Exchange Commission on February 28 2023.
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 of the appropriate GAAP measures and explains why the company believes such non.
GAAP measures are useful to investors. This conference 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 some dodgy.
Thank you Jack on behalf of the entire Marcus <unk> Millichap team good morning, everyone and welcome to our first quarter 2023 earnings call.
As anticipated and then my face the challenging first quarter due to the market disruption caused by the fed interest rate shock.
The repricing of real estate and ensuing bid ask spread was exacerbated by bank failures, which elevated lender caution and further reduce liquidity during the quarter.
Revenue came in at $155 million, resulting in adjusted EBITDA loss of $7 4 million and net loss of $5 $8 million.
Expensing of capital invested in various growth initiatives over the past several years, particularly talent acquisition and business development pressured earnings significantly revs.
Revenue production was hampered by a general lack of investor motivation to sell at reduced prices and elevated uncertainty keeping many buyers on this island.
Reduced loan to values and frequent repricing of debt by many lenders challenged our key metrics, including an increase in our di deal ratio and extended marketing and closing time lines.
These forces impacted all business segments and price points, but were pronounced in larger transactions as many institutions remained on the sideline and many private investor deals priced above $10 million simply did not pencil out.
First quarter sales transactions in the broader market fell by an estimated 46% with a volume decline of 55% to 60% based on preliminary data from real capital analytics in Costar.
This marks the second consecutive quarter of severe decline in trading activity, which reflects the broad nature of the current market dislocation.
Marcus <unk> Millichap brokerage transactions declined 40% for the quarter.
And reflect execution of nearly 1300 brokerage transactions, which is a testament to our team's creativity and commitment to help clients execute even in a tough market.
Our results was particularly impacted by larger sales, which had posted outsized growth over the past few years, and therefore had a very tough comparison.
Private client revenue fell 44%, while revenue from middle market and larger sales declined 63% and 70% respectively.
For perspective revenue from these two segments price set at $10 million and above combined had grown by 134% in the first quarter of 2022.
The firm's IPA division, which primarily serves institutional investors is fully engaged in providing opinions of value and advisory work to help these clients navigate challenging market dynamics, we believe the integration of IPA with our core private client business to be a major differentiator and a key.
Clear advantage when capital flows resume.
Our team will be well positioned to gain new relationships and market share in their recovery.
On the private client side, our brokers are highly focused on creative solutions to get deals done for sellers with motivation and realistic price expectations. These.
These include seller financing equity expansion in executing 10 31 exchanges.
The company's financing revenue declined 40% as sources of financing became more restricted due to contingent fears the.
Decisive actions and messaging by the fed and the Treasury alleviated. These fears to some degree however, virtually all lenders have taken a more cautious stance.
Financing team still closed 279 transactions with a 142 separate lenders in the quarter, reflecting the skill tenacity and access our team brings to investors even amid the fed induced liquidity tightened.
We believe that the eventual passing of the perfect storm currently impeding sales and financing will lead to higher volumes as the market works through repricing and normalization of credit conditions.
We are positioning <unk> to reach new milestones in that recovery through the actions and strategies. We're currently implementing.
These include a continued focus on training internal communication and best practices sharing.
All of which is there to support our sales force, while leveraging our real time research to help investors with strategy and execution.
Our commitment to being a trusted advisor may not lead to transactions in the near term as many of our clients elect to postpone trades.
However, partnering with them during these times will lead to a stronger bond and more business as the market recovers.
This is not a new approach for him and I rather it is a page out of our own playbook from every significant market downturn, which resulted in above average growth and new milestones in recovery cycles.
To this end, we're tightly balancing cost controls with critical investments that keep MMR on offense.
The reduction of force executed in December lowered our expenses going into this year and we continue to strategically prioritize costs.
These include investments in proprietary technology enhancements that directly drive leads and revenue expanding.
Expanding our auction platform, which has been off to a great start heavily promoting our loan sales division.
Two lenders and potential investors in loan pools, and sustaining the company's presence at key industry conferences and signature client events.
We believe all of these are very critical.
Additional expense cuts in select areas are being executed. However, we believe sustaining current support levels is critical to helping our sales force remain in front of clients and respond to their elevated information needs.
Taking a long term view will weigh on our financial performance in the near term, but again, we will pay great dividends in the recovery.
To accelerate external growth management is aggressively pursuing talent acquisition to build on some key hires made in the first quarter.
Our ongoing success in attracting experienced individuals and teams in both financing and brokerage continues to offset the elevated dropout of newer professionals due to market conditions.
The first quarter is more challenging environment added to the difficulty new brokers and originators are experiencing and generating revenue.
The inflow of new candidates, particularly from other sales professions also faces the market headwind. None of these obstacles are deterring, our commitment and actions to reach a wider candidate pool and grow the sales force.
Our multi pronged strategy of traditional organic growth experienced professionals and team additions and strategic acquisitions remains intact. In fact, the pipeline of experienced prospects continues to grow and we are encouraged by active discussions with some quality M&A.
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Now looking forward the timeline for the market recovery has pushed out largely due to the bank failures and further tightening of capital availability.
We remain cautiously optimistic that continued moderation of inflation rates and the likely end of fed tightening cycle as message. This week, we'll bring clarity to the market as we shared on our last call. We believe investors will also regained confidence with visibility on the depth of the labor market slowdown.
As the effects of higher interest rates worked through the economy, we should continue to see a deceleration of job growth as opposed to severe net job losses.
Is critical for real estate demand.
It may take a few more months for this to emerge which should coincide with more price adjustments setting the stage for improving trading activity.
The volume of maturing real estate loans and pressure on the banking system are understandably concerning many investors.
Maturing loans face a major price correction in some categories, but it is critical to remember that most property types with the exception of office have experienced robust rent growth and strong fundamentals over the past five to seven years. When this year's maturing loans come to market. Many properties will undoubtedly require a fresh equity and <unk>.
Restructuring to varying degrees lenders.
Lenders and the fed appear to be focused on working with borrowers as opposed to Offloading. These loans at a discount.
Let me also point out that the banking system as a whole has substantially more liquidity going into the pandemic.
This liquidity level has further increased in the last two years.
This is a stark difference to the 2008 2009 period when bank liquidity prior to the great recession was that a fraction of current levels.
We have the balance sheet to be prudently offensive as a company during this market dislocation while at the same time, continuing our strategy to return capital to shareholders.
This is being executed through our semiannual dividend and extended stock repurchase program announced yesterday.
The entire Marcus <unk> Millichap team is committed to leveraging this difficult time to build client relationships and harvest the pent up demand that will undoubtedly fuel growth in the recovery.
With that I will turn the call over to Steve for more details on the quarter Steve.
Thank you Hassan.
Before delving into the details I want to provide some historical context.
If you recall the first quarter of 2022 was a record first quarter and the fourth best overall quarter in the company's 52 year history, where revenue increased 74% over the first quarter of 2021, creating a high watermark and even tougher comparable for Q1 2023.
The outsized results a year ago were driven by an urgency in the marketplace to transact in anticipation of rising interest rates today's market conditions are much different and reflect 10 consecutive rate increases totaling 500 basis points as well as the failure of three regional banks in recent weeks that has tightened credit markets.
Significantly.
With that as a backdrop, let's move to first quarter results.
Revenue for the quarter was $155 million compared to $319 million in the prior year quarter.
Breaking down revenue by segment real estate brokerage commissions for the first quarter were $135 million and accounted for 87% of total revenues compared to $287 million last year, a decrease of 53% year over year.
This represents total sales volume of $7 $1 billion across 279 transactions, which is down 59% and 40% respectively.
To again add perspective, the $17 billion in sales volume in the first quarter of last year was far and away the largest first quarter in our history.
Average transaction size was approximately $5 $6 million down from $8 $1 million a year ago reflective of the mix shift to fewer active institutional buyers given the current market environment.
Within brokerage our core private client business accounted for 67% of brokerage revenue or $91 million.
This compares to 56% and $161 million last year.
Our middle market and larger transaction segments, which are accounted for outsized growth over the past couple of years together accounted for 29% of brokerage revenue or $40 million compared to 42% and $120 million last year.
Many institutional buyers remained on the sidelines in Q1 waiting for clarity on interest rates and pricing before re entering the market.
Revenue in our financing segment, including MCC was $16 million in the first quarter compared to $26 million last year.
Fees from refinancing and recapitalization accounted for 46% of loan originations for the quarter compared to 52% last year driven by the sharp rise in interest rates during the past year.
In the quarter, we closed 279 financing transactions totaling $1 $7 billion in volume compared to 520 transactions for $2 $7 billion in volume in the prior year.
Despite market conditions, the average transaction size in the financing segment increased 21% over the prior year driven by the addition of top talent in our institutional capital markets group.
Other revenue comprised primarily of consulting and advisory fees, along with referral fees was nearly $4 million compared to $6 million during the first quarter last year.
Moving onto expenses for the first quarter total operating expenses were $171 million, 38% lower than a year ago, primarily as a result of lower variable expenses directly attributable to revenue.
Cost of services was $95 million or 61, 6% of total revenue flat on a percentage of revenue basis with the first quarter of 2022, despite lower revenue.
In challenging markets like this a larger share of revenue is generated by more senior producers, who have the skill and expertise to complete deals.
SG&A during the quarter was $72 million, a decrease of 3% year over year, primarily due to lower employee compensation expense tied to company performance largely offset by expensing of investments in talent acquisition and retention as well as new business development and client marketing support.
The head count and expense reduction actions taken in December benefited us in the quarter as they will throughout the year.
The combination of lower revenue and proportionately higher operating costs resulted in a net loss of $5 $8 million or <unk> 15 per share compared to net income of $32 $8 million or <unk> 81 cents earnings per share in the first quarter of 2022.
For the quarter, adjusted EBITDA was negative $7 $4 million compared to a positive $51 $9 million in the prior year.
The effective tax rate in the quarter was unusually high compared to our historical range, primarily due to the amount of expenses that are non deductible for tax purposes in relation to lower pre tax income for the full year.
Over the long term, we would expect our effective tax rate to return to the normal range in the mid to high twenties, but for the remainder of the current year, we will likely experience rates similar to or even greater than what we saw in the first quarter.
Moving to the balance sheet.
We remain extremely well capitalized with no debt and cash cash equivalents in marketable securities totaling $431 million.
The decrease in cash during the quarter was expected due to seasonal outlays for current and deferred agent commissions performance based management bonuses for 2022 investments made in talent acquisition and retention and share repurchases.
The deferred commission outlay was larger than usual given the record revenue performance over the past two years.
During the quarter, we declared a semiannual dividend of <unk> 25 per share representing a total of $10 $3 million that was paid in the first week of April .
In addition, we repurchased approximately 560000 shares of common stock at an average price of $31 73 per share for a total of $17 $8 million.
Since initiating our stock repurchase program mid last year, we have repurchased approximately one 8 million shares at an average price of $32.88 or $60 million in total.
Yesterday, we announced that the board has authorized an additional $70 million for future stock repurchases.
Combined with our remaining open authorization, we have up to $80 million available to repurchase stock under the program, which provides valuable optionality to take advantage of near term market dislocations.
We remain committed to a balanced long term capital allocation strategy.
This includes a combination of investing in technology recruiting and retaining the best in class producers and strategic acquisitions, while returning capital to shareholders through dividends and stock buybacks.
As we look ahead, we expect current market headwinds to persist through the second quarter with improvements gradually emerging in the latter half of the year, albeit at a slower pace than what was anticipated when we last spoke in early February .
The onset of the regional banking issues in recent weeks likely has pushed out the recovery timeline as markets need to adjust to even tighter lending requirements and reduced credit availability.
However, the fed commentary earlier this week seemed to signal that they are ready to pause further rate hikes, which begins to provide some clarity.
Cost of services for the second quarter, we'll follow the usual pattern and be sequentially higher than the first quarter.
SG&A is expected to be largely in line with the first quarter on an absolute dollar basis, reflecting the benefit of cost actions taken previously.
We remain focused on cultivating client trust pursuing strategic growth opportunities and driving operational excellence through best practices with our sales professionals and corporate support staff.
Investments, we have made and continue to make will position us to return to strong growth as market conditions improve.
With that operator, we can now open up the call for Q&A.
Thank you Sir we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the queue. You May press star two if you would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
And the first question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks, Good morning out there. So you guys clearly have a great vantage point into the investment sales market and recent trends. So I wanted to ask for a little more color on what trends you might be seeing in and which deals are most likely to trade in this environment from a real a real estate sector standpoint, a geographical region.
Standpoint, and you know any other characteristics like in place debt or others that might be important I guess, just where's the sweet spot in the market for getting a deal done today.
Good morning, Brian .
There is a lot of variation.
Across the country and by property type Whats unusual is the drop off in multifamily trading activity.
Because multifamily for so many years has been the Darling of the industry and the most stable asset class during market disruptions what's happened there is.
The gap between the interest rate shock.
The a rapid and dramatic increase in the cost of debt versus the lowest cap rates in the industry.
That were basically held by apartments that industrial properties and those ironically had the biggest shock in valuation resets.
Maturing loans, having the challenge of having to secure new debt in this environment, so that really affected the trading volumes in an unusual way.
But I will tell you that we are starting to see stabilization.
And we're starting to see a very creative financing solutions that are restarting transactions at least coming back into the pipeline.
Might be a while before they close and that comment was really about many of our deals that got postponed.
Or cancelled during the first quarter on the multifamily side.
From an institutional perspective multifamily has always been hit.
That's also been hit very hard because of the pencils down approach.
Really starting in the fourth quarter, but.
Showing up in the numbers significantly in the first quarter lots of institutions are just completely recalibrating. The buy sell decision based on the same factors that I talked about but on a larger scale of course.
And looking at the other property types, what's interesting the interest in retail is as strong as ever and our trading activity on retail was down significantly as well, but because retail is far ahead of us.
Any other product type in the reinvention and re imagining thats been going on for 10 plus years because of e-commerce.
It's in a whole different.
Space now than it was even three years or five years ago, both on the multi tenant side and ongoing demand on the single tenant side, where private investors are simply putting in more equity leveraging less because of interest rates keeping their options open to refinance later.
And still fetching the investments that they want now there is clearly a bid ask spread across the board.
That isn't unique to really any property type.
And other.
Other areas of strength to mention Brian or hospitality.
Very comparable to multi tenant retail coming out of the pandemic and now really showing sustainable recovery, especially on the consumer side not so much on the business travel side just.
Just yet and self storage holding up very strongly.
Relatively speaking that is.
But one universal comment that I will make is that there is no shortage of capital, we're starting to see price adjustments and the 10% to 15% range regenerating multiple tours with multiple offers and.
The private capital side of the equation always finds a creative way to get a deal done when the prices right. The.
The fact that our financing is tied to the fact that rates are higher it doesn't really stop an entrepreneur owned private investor who group two.
So after the asset they really want if the price is right and Thats a big if right now as the market goes through still a price discovery period.
But it's encouraging to see so much interest in so much capital.
Still in the marketplace, including new routes by the way that are forming fun.
But we're not quite there yet on the bid ask spread and the digestion of the interest rate shock, it's still really working its way through the market geographically speaking of course the growth.
Areas of the country, Georgia, Florida, the Carolinas, Texas and.
Nevada, Arizona are continue to see in migration continues to see business formation, and so on and more of the urban areas are still lagging, especially of course on the office space usage, we're still seeing serious issues in San Francisco downtown Chicago down.
Town of Seattle, even and of course Manhattan from from that.
Perspective.
But so hopefully that gives you a little bit more color on what's happening out there.
Yeah, absolutely very helpful. Thanks for all that color has hum.
On the share repurchase front, where you guys have increased your allocation can you just give us an update about how youre thinking about that relative to other opportunities for capital allocation. How do you think about relative pricing our yields with regard to where your stock is trading versus external.
Additional opportunities.
Maybe when it makes sense to shift from one to the other.
I'll go first and then ask Steve to weigh in as well.
Those are of course very important considerations, we spent a lot of time thinking through them and discussing that with the board.
To us there is almost as important if not slightly more important bigger picture.
The driver behind this and that is the fact that we've always wanted to get to a point, where we have a very diverse and sustainable our capital allocation strategy. We wanted the company to be in a position to be able to maximize shareholder returns be on the offense on acquisitions, we know how important it is for us.
To accelerate our external growth and.
Scale it as much as possible.
And at the same time be very strong defensively being able to withstand any kind of a market turbulence, including the one we're experiencing right now and at the same time have the firepower to keep investing in the platform. We know that the biggest return we achieve on an ongoing basis is investing in the plan.
Making our own salesforce more productive and of course, adding adding more talent, we feel strongly that we're in a position to be able to do all of those things without really having to sacrifice one.
In favor of another and Thats why its been important to us to find that balance and essentially create value for every one of those buckets. If you will so that's my broader commentary Steve anything to add.
I think I would I would reiterate just at that.
We look at between those those three prongs of our diverse capital allocation strategy internal investment.
M&A and return of capital to shareholders the strongest pull for US certainly is.
Those internal investments the greatest return there.
M&A.
At the right price and we can speak a little to to that of as we said on prior calls.
There has been and continues to be a bid ask spread on that that front I think it's getting better.
Or closing.
And that still leaves us with ample of opportunity to return capital to our shareholders. We have been active we said when we initiated the program back in in August of last year that that we would be active.
Participants, so where appropriate I think we've done a good job at that and I think we've done a good job of balancing those three although on the M&A side nothing to to report as of as of yet.
Yes.
Okay, Great. That's very helpful. We noticed that you guys have added a slide on commercial real estate debt maturities in your presentation. This quarter and I. Appreciate your earlier commentary on the topic, but can you give us a little bit more color on what you're seeing and hearing in terms of lender and borrower discussions around potential workouts for looming.
<unk> or alternatively for sales or distressed transactions and also you know what sectors other than office seem to be seeing the most stress and in which sectors appear to be best positioned.
Sure Blayne, Yeah, we added that slide because we.
We get so many questions about it and there is so much.
CERN about maturing loans that we wanted to also kind of.
Go one layer deeper and show the breakdown.
Rent growth over the past five years by property type and looking at that chart.
You can just immediately see the fact that.
The story is so different by property type, where industrial rents have increased almost 50% apartment rents are up 35% over the past five years even.
Hospitality and retail posted 50% to 20% rent growth also the fact that the values at the time of the issuance of these loans $5 seven years ago.
Were significantly lower than they are today, even with a price correction from our recent peak, let's say a year ago.
So what is happening in the marketplace. The concern is really being a overreaction to judge the whole book by the cover because of all the headlines related to office space. If you isolate the fact that office properties that had.
Hardly any rent growth in the last five years and forming because renewing leases are signing backup for smaller footprint at a lower rent or leaving low quality buildings in favor of the class a higher quality buildings.
You can obviously conclude there is going to be major gaps in valuation and property operations as the office volume rose over this year, which is by the way the largest segment of maturities for 2023 as shown on the top part of the chart that we added.
So.
Undoubtedly there has to be rescue capital there has to be.
Some level of a price reduced distress sale when it comes to office buildings, we're seeing a little bit of that.
That stress not nearly as bad, but nonetheless visible on the multifamily front where that fund.
Short term loans that were underwritten very aggressively in the last three years are coming due thankfully the agencies are very active and in fact, we've been able to.
Engineer and a lot of bridge solutions and.
Different creative ways to help our clients that have been facing those maturities on the multifamily side by.
By having the iron draught team and other originators within MCC and our IPA capital markets.
Work with the agency solution.
Much more than we've ever been able to do in the past part of that is a benefit from our partnership with <unk> that we put into place a couple of years ago.
So other than that it's really case by case and varied by property type.
Seeing as much distress as you would expect on the Eve shopping center front at all the shopping center front seems to have.
Really repositioned itself much better that's not to say there isn't issues on retail there is.
But.
They are not as bad as well.
One might perceive lastly, what I'll say is what's incredible is that as many banks.
Have left the market or price themselves out our originators are finding other sources of funding for private capital deals local and regional banks, you've never heard of are stepping up because they have really good balance sheets and many cases credit unions are stepping up and like I said in my.
Formal remarks, almost 300 financing transactions closed in the quarter with 142 separate lenders, 60% of those were banks.
So for every problem, there's a solution.
We're actively really working to find those creative ways to help our clients get through this what feels like it should be the worst of this market correction cycle and hopefully we're seeing the bottom and seen the foundation form for a recovery.
Okay, Great very helpful last one for me, we noticed a pretty significant decrease in the marketable debt securities balance on your balance sheet. This quarter from around $253 million at year end to $133 million at March 31.
Can you just talk about that decrease whether that was due to sales or maybe a reduction in the value of those assets.
Yes.
Blayne this is Steve.
A reduction in value.
From our standpoint our.
Investment portfolio of course.
Investment grade very very much managed in accordance with our.
Our stated charter.
It's reviewed.
Both internally and with our board.
We view or I view, our cash balance in totality.
Cash us.
And as well as both long and short term marketable securities.
And.
In aggregate that balanced they'd come down during the during the quarter and overwhelming majority of the change from 12 31 was due to deferred payments.
It's related to outperformance over the last couple of years, we use as I think youre aware.
A deferred commission program, where.
A certain portion of the.
The commissions are paid currently and then another portion is deferred.
As a great long term incentive tool for for folks.
As well as the outperformance.
<unk> of last.
Last year more recently.
<unk> and <unk>.
Variable comp paid to management. So we look at the cash balance and in totality nothing unusual there no no.
No no.
Write downs and no need I don't know.
A big part of the news lately, but no need for us to be selling long term assets in order to meet short term needs.
Okay.
Alright, great. Thanks, so much for all the time.
Great. Thanks My explained.
At this time there are no further questions now I'd like to turn the floor back over to the Marcus and Millichap management team for any closing comments.
Thank you operator, and thank you for joining our call. We look forward to seeing you on the road and look forward to our next earnings call call is adjourned.
Okay.
Thank you everyone. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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