Q3 2023 Marcus & Millichap Inc Earnings Call
Greetings and welcome to Marcus <unk>, Millichap 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 the shock Corning. Thank you you may begin.
Thank you operator, good morning, and welcome to Marcus <unk> Millichap third quarter 2023 earnings Conference call.
With us today are president and Chief Executive Officer Hassan <unk>.
The Chief Financial Officer, Steve de Janeiro.
Before I turn the call over to management. Please remember that our prepared remarks and 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.
Actual results can differ materially from those implied.
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 companys ability to retain and attract transactional professionals.
Company's ability to retain its business philosophy and partnership culture amid competitive pressures.
<unk> ability to integrate new agents and sustain its growth and.
And other factors discussed in the company's public filings, including its annual report on Form 10-K filed with the Securities and Exchange Commission on February 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.
These earnings release, which was issued this morning and is available on the Companys 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 webcast link is available on the Investor Relations section of the company's website at Www Dot Marcus Millichap Dot com along with the slide presentation, you may reference during the prepared remarks.
That is my pleasure to turn the call over to CEO Tom <unk>.
Thank you John on behalf of the entire Marcus <unk> Millichap team good morning, and welcome to our third quarter 2023 earnings call.
The market challenges facing this year continued on in the third quarter.
10 year Treasury yield briefly touch the psychologically key level at 5% and the federal reserve send a clear signal of higher for longer and its interest rate outlook, Saudi that inflation is proving to be more persistent than expected.
Great volatility and 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 volume.
Revenue for the quarter came in at $162 million down 50% over last year with an adjusted EBITDA loss of $6 $6 million.
Revenue production remains hampered by the widening bid ask spread constrained financing and interest rate volatility disrupting deal closing.
Transaction timelines extended significantly beyond historical norms, and many deal with a lot of contract multiple time, 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.
Given the macro in nature and scope of the capital markets disruption all product types and price segments showed major declines.
Our traditional advantage as the 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 at smaller deals are more driven by personal circumstances and easier to finance.
As history has 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 <unk> revenue trend, especially.
Considering that this part of our business outpaced the market in the past few years.
We firmly believe that our expanded coverage and larger transaction and penetration into the institutional client segment through our IPA division are critical to our long term competitiveness.
And he 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 employed.
The loss in the quarter is largely due to expenses related to investments made over the past several years, including the acquisition and retention of top producers and team.
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.
Outreach program and providing resources for analytical and market research support.
Although transaction activity is down significantly market wide, our clients' need for market information after the 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 and long term relationship that will manifest in future business.
We remain steadfast in our belief that these investments will help us lead in that recovery, which is a matter of when not if based on our experience through multiple cycles over the company's 52 year history.
So you get a recovery we believe several underlying forces will eventually converge to drive higher transaction volumes. These.
These include a still strong labor market, which is more likely to slow then fall off a cliff.
And resistant consumers, who may also come off of recent spending highs, but sustain a solid financial profile.
These economic pillar to support strong property fundamentals across all property types with the exception of older office asset.
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 though without a fed pivot to lowering interest rates anytime soon should bring some stability and direction to the market and help price discovery.
Perhaps more critical than any quantitative factor is time with time sellers are adjusting to more realistic price expectations and.
And our record capital on the sidelines as starting to reenter the market differ.
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 distress sales by lenders are unlikely to become a major wave individual situations arising from maturing loans operating issues and or personal drivers are creating investment opportunities and recapitalization across all property types.
For example, even within multifamily, which generally has the strongest fundamentals in the business speculative transaction 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 end of my platform as the market coverage and countless relationships that our salesforce harnesses through our collaborative culture and internal communications.
We're in constant motion and making connections that lead to a unique problem solving and opportunity creation for buyers and sellers and lenders.
Our financing division has matured and grown through the addition of numerous experienced originators team and boutique financing acquisitions, who are now actively partnering with our sales team to help investors find financing solution.
Mtc has access to and relationships with over 400 lenders that are 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 of these advantages demonstrated leading position and investment brokerage despite the market headwinds with over 4000 sales transactions closed year to date and 800 financings.
This is a direct result of our client commitment and their hard work persistence and scale of our sales force and support personnel.
We will 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.
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 platforms specializes in helping sponsored access its vast network of investors to raise project specific equity and debt and provide asset management services to many of its sponsor clients equity multiple proprietary technology enables rapid execution, which is especially valuable in the car.
Current market environment.
We see multiple opportunities for client synergies and mutual referrals facilitated by both companies' heavy emphasis on technological advances.
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.
These services include property level performance metric with trough the U 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 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 initiative enhanced training and development and are increasing our recruiting resources to return to positive net hiring this.
This remains a top priority for the management team.
In the meantime, we continue to build on our success in attracting experienced professional teams and independent boutiques to the firm in a complementary fashion to our existing coverage.
In closing, let me emphasize the strength of our balance sheet, leading market position and brand as they enable us to continually improve the antibody platform and pursue strategic acquisitions and investments.
The passage of time appears to a surface interesting acquisition opportunities that we're evaluating even though some of our previous explorations did not close primarily due to a valuation expectation gap.
Our expanded capital allocation strategy reflects these offensive strategy and return a 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 NII to lead in the recovery.
With that I will turn the call over to Steve for additional insight on our results.
Steve Thank you Hassan.
As mentioned market conditions remained challenging due to the fed's steep trajectory of rate increases implemented since last year and their 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.
<unk> restricted credit markets and rate uncertainty.
With that as a backdrop, let's get into the results.
Total revenue for the quarter was $162 million compared to $324 million in the prior year.
Year to date total revenue was $480 million versus $1 billion last year.
Revenue from real estate brokerage commissions for the third quarter was $140 million and accounted for 86% of total revenue compared to $293 million last year, a decrease of 52% year over year.
For the quarter total sales volume was seven $4 billion across 1361 transactions down, 59% and 39% respectively.
Year to date revenue from real estate brokerage commissions was $415 million and accounted for 87% of total revenue.
Compared to the $934 million last year, a decrease of 56% year over year.
Year to date sales volume was $22 $1 billion across 4062 transactions down, 60% and 43% respectively.
Average transaction size during the third quarter was approximately $5 5 million as compared to $8 million a year ago, reflecting the sharp decline of larger transactions.
Within brokerage for the quarter, our core private client business contributed 65% of brokerage revenue were $91 million versus 57% last year.
Year to date, the private client business contributed 67% of brokerage revenue or $278 million 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 million during the quarter compared to 41% last year.
Year to date middle market, and larger transactions, representing 29% of brokerage revenue or $122 million compared with 40% last year.
For the quarter private client middle market, and larger transaction declined, 45%, 60% and 67%, respectively and year to date declined 48%, 64% and 70% respectively.
Revenue in our financing business, including MCC was $17 million in the third quarter compared to $28 million last year.
In the quarter, we closed 276 financing transactions totaling $1 $9 billion in volume compared to 518 transactions for $3 $3 billion in volume in the prior year.
Financing revenue year to date was $51 million compared to $91 million last year.
This represents 839 transactions totaling $5 $3 billion in volume compared to <unk> hundred 35 transactions and $10 $4 billion in volume last year.
Other revenue comprised primarily of consulting and advisory fees, along with referral fees was $5 million in the third quarter compared to $3 million last year.
Year to date other revenue was $13 million this year flat compared to last year.
Moving onto expenses total operating expenses for the third quarter were $177 million, 39% lower than last year.
Year to date total operating expenses were $522 million, 43% lower compared to the prior year.
Lower expenses were largely a result of lower revenue.
Cost of services was $105 million or 64, 6% of total revenue a decrease of 254 basis points over the third quarter last year.
Year to date cost of services was $301 million or 62, 8% of total revenue an improvement of 169 basis points compared to last year.
SG&A during the third quarter was $69 $2 million, a decrease of five 2% over the prior year.
Year to date, SG&A was $210 $3 million, a decrease of seven 5% compared to last year the.
The decrease in SG&A was attributed to lower variable compensation tied to business performance impacted by market conditions, along with cost reduction actions implemented over the past nine months.
This was offset in part by expenses related to talent acquisition and retention as well as new business development and marketing support.
As discussed previously the combination of lower revenue and the fixed nature of certain expenses associated with the expansion of our Salesforce technology and infrastructure in recent years continues to impact our profitability.
During the third quarter, we reported a net loss of $9 2 million or 24 per share. This.
This compares with net income of $21 $4 million or <unk> 53 per share in the previous year.
Year to date net loss totaled $23 $8 million or <unk> 61 per share compared to net income of $96 $3 million or $2 39 per share in the prior year.
For the quarter, adjusted EBITDA was negative $6 $6 million compared to a positive $36 $6 million in the prior year.
Year to date, adjusted EBITDA was negative $15 $1 million compared to positive 151 $4 million in the prior year.
The effective tax rate for the quarter was 18% and our current expectation that 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 million up modestly from the prior quarter total of $407 million.
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 <unk> 25 per share representing a total of $10 1 million, which was paid in the first week of October.
Over the last 18 months, we have returned approximately $83 million to shareholders in the form of declared dividends.
Additionally, since the end of the quarter through.
Through the end of October we repurchased approximately 161000 shares of common stock at an average price of $27 92 per share for a total of $4 $5 million.
Year to date. This brings total shares repurchased to nearly $1 3 million at an average price of $30 89 per share for a total of $39 $4 million.
Since initiating the program last August we have repurchased more than $2 1 million shares for more than $68 million and have approximately $72 million remaining on the current repurchase authorization.
We remain committed to our multi pronged capital allocation strategy, while at the same time, ensuring that we maintain an appropriate level of liquidity to manage through the current business cycle.
We continue to invest in technology, and the recruitment and retention of top talent as well as ways strategic acquisitions, thus positioning ourselves for the eventual recovery and leveraging the business for long term growth.
As Tom mentioned after the end of the quarter, we made minority investments in two separate innovative prop tech companies.
Looking forward, we expect current market trends to continue.
Given these dynamics the outlook for the fourth quarter is a continuation of transactional levels consistent with the third quarter. Although this week's fed pause may spur some additional activity.
Cost of services as a percentage of revenue for the fourth quarter should follow the usual pattern of increasing sequentially.
SG&A for the quarter should increase modestly over Q3 in absolute dollars and be well below Q4 of last year.
And as I mentioned, the full year tax rate is currently expected to be in the 17% range.
We remain committed to fostering client trust actively pursuing strategic growth opportunities and driving operational excellence through best practices with our entire team the investments.
We have made and continue to make will position us to capture growth as market conditions inevitably improve.
With that operator, we can now open up the call for Q&A.
Thank you 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.
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You May press star two if he would like to remove your question from the queue.
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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.
Great. Thanks, Good morning, guys.
Hassan you all have a somewhat unique concentration in your business model where the.
The transaction brokerage and financing businesses drive the vast majority of your total revenue relative to some of your 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 this market like this give you any desire to potentially diversifying that revenue stream in and get into some of those arguably more stable services. I know you mentioned you know make.
Some investments in prop tech companies that might provide some of those services, but is there any desire to have some of those services in house.
Good morning, Brian absolutely and that desire is been there during the stronger macro environment.
<unk> as well as the current.
Market conditions that we're facing.
So it's not really unique to our 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&A outside of the brokerage world has been a focus on those types of.
Services and those types of complementary.
<unk> that bring value to our existing sales force and our existing clients. So part of the criteria. We've used in exploring those has to do with synergies and additional service lines that would benefit our private clients as well as middle market and institutional clients.
So we examine those opportunities as much about their diversification benefits.
But 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, 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 youre expecting.
On your investments in those platforms.
Well in terms of the investments themselves.
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.
But again it comes back to the synergies and client benefits, we can bring as well as benefits for our own sales force with a.
A combination of three different areas, one is productivity gains new business generation gains and the repeat business off.
Opportunities to our clients, who we know need some of these services and are not getting yet currently.
So the return on that investment is going to be measured by both how well. The company is due of course also the investors in those companies, but also the incremental additional business, we're going to gain from having access in partnerships with these firms, which is very difficult to quantify.
Blaine This is Steve I'll add a little bit there and wanted to ask I want to point out that we're not all of a sudden getting into the venture investing business. Each of these relationships started on the commercial side and looking at the benefits.
They can bring to our business our clients are agents as Hassan.
As indicated.
We liked what we saw on those fronts, there was an opportunity to.
To invest in each of them.
We did that did our diligence we did that's I will point out though that.
Neither of these investments are of a size or.
Our percentage ownership that would require their quarterly operating results to impact hours, which shifts here.
On the.
From a technical standpoint means the investment was less than 20%.
Okay, Great that's helpful color.
Switching gears, you know clearly the transaction market remains deeply depressed but.
All of the transactions that are occurring I guess.
What percentage or a 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 accurately.
As I mentioned blend in my prepared remarks, we're starting to see situations that are unique to the owner or unique to the lender as opposed to large waves of distress being marketed or portfolios of distress, whether their loans or.
Our assets.
Being brought to market or even being really prepared to be brought to market. 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 two years.
And frankly as.
Some.
The players continue to need recapitalization.
Seeing a significant increase in the need for recaps in order to stay at.
Active in certain assets that are having either refinancing issues are operating issues.
The percentage of our closings.
The third quarter it wouldn't have been significant but I can clearly share with you that.
This bucket.
Transaction catalyst is on the rise.
<unk>.
Got it that's really helpful.
Can you talk a little bit more about how the market dislocation and depressed 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.
Market condition around inexperienced professionals being higher trained.
<unk> transitioned into productive.
Producers for us.
Still very challenged for the same reason as we've talked about before for awhile necessarily post pandemic.
<unk>.
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.
Significant swings since the pandemic of a severe market shut down and the downturn in 2020, a big comeback in 'twenty, one 'twenty two and then an interest rate induced.
Dislocation has made the usual process of bringing in experienced 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 we're reacting and pivoting to the ripple effects of that three year disruption in the normal cadence of our new agent and originator hiring but the trends are moving in the right direction. The additional initiatives that we've implemented are paying.
Off whether it's our.
Our Fellowship program, our internship program expanded.
Our channels for reaching out to sales professionals from other industries.
A lot of flooding.
Flooding the zone and helping the newer professionals that are within the firm already.
More training get more support and make it to the other side.
But I don't know I don't want to underestimate just how difficult. It is there's 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.
And really struggled for the first few years are some of our top performers now because they have to really learn 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.
Complementing that with experienced professional hiring teams boutique firms has been very successful and we continue to build on that this year, we brought a number of.
Market, leading teams onboard we designed that effort in a way to be complementary to our existing coverage in our existing teams. So we avoid as much overlap as possible.
So that we're not cannibalizing current opportunities that are already being pursued.
That strategy is very much alive and kicking in at a high priority for us.
Okay. Great. That's helpful. Last one for me can you just give us a little bit more color on any additional external growth opportunities you guys might be exploring how far along any of those discussions might be and given that you didnt repurchase shares this quarter, although as Steve mentioned you guys have.
Enacted since then I guess, just how should we think about your preferences between those two options for capital deployment.
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 have advanced discussions with some targets that didn't work out.
Predominantly because of a valuation.
The purchase terms gap that we still felt brought too much near term risks and midterm risks.
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 and with time, we are seeing a little bit more realistic price expectations.
In terms of expectations.
Because the targets that we're talking to our 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 on 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.
Reference 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 the diversification, although thats very important but also recognizing blame that within our core business brokerage and in finance.
Plenty of room for growth.
Plenty of opportunity for additional boutiques additional groups.
Where we don't have that coverage.
We added to the company and the success stories that we've had with.
Numerous firms that have joined us over the past five years, our the reason to do more of it both for the.
Sellers as well as as well as us so.
So that's the preference, but I think the benefit of our current capital deployment strategy is.
Is the fact that we work 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.
As importantly, we are investing in ourselves we are doubling down on MMR and 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 that just happened to be the the dynamics for that particular quarter.
And we have optionality.
So as we pursue these external growth opportunities hopefully as they scale and some exciting things come together, that's where we'd love to see the capital deployed first and foremost as well as I said doubling down on ourselves.
Technology investments are talent acquisition that wouldn't be considered necessarily M&A, yes.
And really the only thing for me to add that was very comprehensive is pointing out that between the dividend and the share repurchase programs.
Returned over $150 million.
To shareholders over the last 18 months and it is that 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.
And externally.
Okay, Great just a follow up here for Hassan you talked about a value valuation gap on some of those deals that fell out.
Can you give us any better sense of how far off you work for them and agreeable price was this you know closer to 5% or 25%.
It's somewhere in.
Between.
And yes, it really was.
Maybe about a turn.
With a multiple turnover.
What we felt.
A fair market value versus what the.
What the sellers would have liked and or the combination of the guarantee devalued 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 were targeting.
The group's and entities that have a lot of runway.
<unk> would benefit from.
A exciting growth path in the future that would be much much more rewarding with Marcus and Millichap, then without or with any other platform and so we don't see those characteristics in a deal.
We're not just looking to buy market coverage, we really want to find.
Complementary services complementary folks that are like minded that are similar in culture, and our aggressive about future growth and I would say those are as important criteria for us.
Any financial metrics.
Okay, great. Thanks for all the commentary.
Thank you Glenn.
Okay.
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 Hassan <unk> for closing remarks.
Thank you operator, and thank you everybody for joining our third quarter call. We look forward to seeing you on the road and look forward to our next earnings call have a great day.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.
Okay.
Yeah.
Uh huh.
Okay.
Yes.
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