Q1 2024 Marcus & Millichap Inc Earnings Call
Operator: Greetings and welcome to Marcus & Millichap's first quarter 2024 earnings conference. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Jacques Cornet. Thank you. You may begin.
Greetings and welcome to Marcus <unk>, Millichap first quarter 'twenty 'twenty four earnings conference call. As a reminder, this call is being recorded I would now like to turn the conference or would yields Jacques cornet. Thank you may begin.
Jacques Cornet: Thank you, operator. Good morning, and welcome to Marcus & Millichap's first quarter 2024 earnings conference call. With us today are President and Chief Executive Officer Hessam Nadji and Chief Financial Officer Steve DeGennaro. Before I turn the call over to management, please remember that our prepared remarks and the responses to questions may contain forward-looking statements. Words such as may, will, expect, believe, estimate, anticipate, goal, and variations of these words and similar expressions are intended to identify forward-looking statements.
Jacques Cornet: Thank you operator, good morning, and welcome to Marcus <unk> Millichap first quarter 2024 earnings conference call.
Steven F. DeGennaro: With us today are president and Chief Executive Officer, So I'm, not cheap and Chief Financial Officer, Steve D. Janeiro.
Jacques Cornet: Before I turn the call over to management. Please remember that our prepared remarks and responses to questions may contain forward looking statements.
Jacques Cornet: 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, Commercial Real Estate Market Conditions, and the company's ability to retain and attract transactional professionals. The company's ability to retain its business philosophy and partnership culture amid competitive pressures; the company's ability to integrate new agents and sustain its growth, and other factors discussed in the company's public filings, including its annual report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2020.
Jacques Cornet: Words, such as May will expect believe estimate anticipate goal.
Jacques Cornet: And variations of these words and similar expressions are intended to identify forward looking statements.
Jacques Cornet: 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.
Jacques Cornet: The company's ability to retain its business philosophy and partnership culture amid competitive pressures.
Jacques Cornet: The company's ability to integrate new agents and sustain its growth.
Jacques Cornet: And other factors discussed in the Companys public filings included including its annual report on Form 10-K filed with the Securities and Exchange Commission on February 28 2024.
Jacques Cornet: 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.
Jacques Cornet: 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.
Jacques Cornet: The company undertakes no obligation to update any forward looking statement, whether as a result of new information future events or otherwise.
Jacques Cornet: 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, includes 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 in the Investor Relations section of the company's website at www. MarcusMillichap.com along with the slide presentation you may reference during the prepared remarks. With that, it's my pleasure to turn the call over to CEO Hessam Nadji. Thank you, Jacques.
Jacques Cornet: 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 includes a reconciliation to the appropriate GAAP measures and explains why the company believes such non-GAAP.
Jacques Cornet: <unk> are useful to investors.
Jacques Cornet: This conference call is being webcast. The webcast link is available on the Investor Relations section of the company's website at Www Dot and Marcus <unk> 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.
Hessam Nadji: C E O Assam dodgy.
Hessam Nadji: On behalf of the entire Marcus & Millichap team, good morning and welcome to our first quarter earnings call. The highly anticipated start to the interest rate easing cycle by the Federal Reserve, scheduled to begin in early 2024, reversed course during the first quarter. The shift toward higher for longer has prolonged interest rate volatility, which remains disruptive to real estate valuations, marketing of listings, and transaction closings. After dropping 51% in the first quarter of 2023 from the previous year, overall market sales volume dropped another 19% in the first quarter of 2024 based on preliminary estimates by RCA. Given this difficult backdrop, revenue for the quarter was $129 million, with a just-de-dividend loss of $10 million.
Hessam Nadji: Thank you shark on behalf of the entire Marcus <unk> Millichap team good morning, and welcome to our first quarter earnings call. The highly anticipated start to the interest rate easing cycle by the Federal reserve Messaged in early 'twenty 'twenty four reversed course during the first quarter.
Hessam Nadji: The shift toward higher for longer has prolonged interest rate volatility, which remains disruptive to real estate valuations marketing of listings and transaction closings after dropping 51% in the first quarter of 2023 from the previous year well were all market sales volume dropped another 19.
Hessam Nadji: Were sent in the first quarter of 'twenty 'twenty four based on preliminary estimates by RCA.
Hessam Nadji: Given this difficult backdrop revenue for the quarter was $129 million with adjusted EBITDA loss of $10 million. These results reflect the productivity drag on our sales force as listings take longer to market and many deals continue to fall out of contract due to financing issues or repricing.
Hessam Nadji: These results reflect the productivity drag on our sales force as listings take longer to market, and many deals continue to fall out of contract due to financing issues or repricing. This is time-consuming for our sales force, as you can imagine, and limits their bandwidth to engage in new business developments in the current environment. Our financial results were also impacted by expenses related to investments made over the past several years in talent retention and acquisition, technology development and implementation, and expanded brokerage. The expected revenue levels, which would typically follow these investments in a stable market, remain hampered temporarily as we work through this market disruption.
Hessam Nadji: This is time consuming for our sales force as you can imagine and limits their bandwidth to engage in new business development in the current environment.
Hessam Nadji: Our financial results were also impacted by expenses related to investments made over the past several years and talent retention and acquisition technology development and implementation and expanded brokerage support.
Hessam Nadji: The expected revenue levels, which would typically follow these investments in a stable market remain hampered temporarily as we work through this market disruption.
Hessam Nadji: We remain steadfast in our strategy to stay on offense and position the company to lead in the eventual recovery. This includes ongoing investments in business development. Client Outreach, Branding, and Ensuring that MMI remains prominently on the center stage at key industries. As an example, client demands for market analysis, updated valuations, and general advisory services remain at an all-time high as investors navigate uncertainty. To remain fully capable of providing this level of granular client support, we have proactively maintained our service level and resources. As we know from past cycles, staying close to investors and developing new advisory-based relationships during tough times leads to future revenue. Our strategy is also unwavering when it comes to pursuing strategic acquisitions.
Hessam Nadji: We remain steadfast in our strategy to stay on offense and position the company to lead in the eventual recovery.
Hessam Nadji: This includes ongoing investments in business development efforts.
Hessam Nadji: Client outreach branding and ensuring that MMA remains prominently in the center stage at key industry events as.
Hessam Nadji: As an example client demands for market analysis updated valuation and general Advisory services remain at an all time high as investors navigate uncertainty.
Hessam Nadji: It remains fully capable of providing this level of granular client support we have proactively maintained our service level and resources.
Hessam Nadji: As we know from past cycles, staying close to investors and developing new advisory based relationships during tough times leads to future revenue growth our.
Hessam Nadji: Our strategy is also unwavering when it comes to pursuing strategic acquisitions, attracting additional experienced individuals and teams and returning capital to shareholders.
Hessam Nadji: Attracting additional experienced individuals and teams and returning capital to shareholders. During the quarter, we added several brokerage and financing professionals in key segments where we lacked coverage, and began dialogue with a number of new targets and investment opportunities. Our underwriting is highly sensitive to balancing near-term downside with future upside and strategic enterprise value when it comes to valuations and deal structure. Looking back at M&A opportunities we decided to pass on over the past 18 months, there is no doubt that results would have been below expectations had we accepted terms required by the CELF.
Hessam Nadji: During the quarter, we added several brokerage and financing professionals in key segments, where we lacked coverage and began dialogue with a number of new targets and investment opportunities.
Hessam Nadji: Our underwriting is highly sensitive to balancing near term downside with future upside and strategic enterprise value when it comes to valuation and deal structure.
Hessam Nadji: Looking back at M&A opportunities with decided to pass on over the past 18 months. There's no doubt that results would have been below expectations. How do we accepted terms required by the salary.
Hessam Nadji: Having said that, the bid-ask spread in the market is not keeping us from pursuing targets given the importance of external growth. Internally, we continue to focus on providing our team with the best-in-class tools, training, communication, and support. The company's expanded research content is instrumental in keeping investors informed and connecting our sales force to clients and prospects. Additionally, additional resources have been added to our recruiting team to help our managers increase outreach to high-quality sales professionals to regain momentum in our traditional organic growth.
Hessam Nadji: Having said that the bid ask spread in the market is not keeping us from pursuing targets given the importance of external growth.
Hessam Nadji: Internally, we continue to focus on providing our team with the best in class tools training communication and support.
Hessam Nadji: The company's expanded research content is instrumental in keeping investors informed and connecting our salesforce to clients and prospects.
Hessam Nadji: Additional resources have been added to our recruiting team to help our managers increased outreach to a high quality sales professionals to regain momentum in our traditional organic growth.
Hessam Nadji: While these efforts are making a difference, the turnover rates for newer individuals remain elevated due to the challenging market environment. We continue to proactively transition lower-probability individuals out of the firm if they're not able to meet key development and production metrics. In time, we believe our organic growth will fuel net contributions to headcount as we build on our recent success in attracting experienced professionals. Notwithstanding the current challenges, MMI closed over 1,300 transactions in the quarter, including 234 financings, with 121 separate lenders in this tough environment.
Hessam Nadji: These efforts are making a difference the turnover rates for newer individuals remain elevated due to the challenging market environment.
Hessam Nadji: We continue to proactively transition lower probability individuals' out of the firm if they're not able to meet key development and production metrics.
Hessam Nadji: In time, we believe our organic growth will fuel net contributions to head count as we build on our recent success in attracting experienced professionals.
Hessam Nadji: Notwithstanding the current challenges LMI closed over 1300 transactions in the quarter, including 234 financings with 121 separate lenders in this tough environment. These.
Hessam Nadji: These numbers reflect our ability to solve problems for clients, facilitate opportunities for investors, and get deals done. MMI remains the top investment brokerage firm by number of transactions, which in turn enables us to execute on behalf of our clients due to our market reach and Unique Investor Access.
Hessam Nadji: These numbers reflect our ability to solve problems for clients facility opportunities, where investors and get deals done.
Hessam Nadji: And then my remains the top investment brokerage firm by number of transactions, which in turn enables us to execute on behalf of our clients due to our market reach.
Hessam Nadji: And unique investor access.
Hessam Nadji: From a market perspective, we continue to see hampered transaction activity across all business segments and price points, given the macro nature of the interest rate shock still working its way through the industry. However, a number of very important positive signs are emerging that I'd like to point out. First, even without the shift in Fed policy toward lowering interest rates, the passage of time is driving price adjustment.
Hessam Nadji: From a market perspective, we continue to see hampered transaction activity across all business segments and price points, given the macro nature of the interest rate shock still working its way through the industry.
Hessam Nadji: However, a number of very important positive signs are emerging that I'd like to point out.
Hessam Nadji: First even without the shift in fed policy toward lowering interest rates. The passage of time is driving price adjustments.
Hessam Nadji: Positive momentum on buyer tours and offers is building on realistically priced assets across all property types and markets. This is indicative of the record capital on the sidelines awaiting more clarity on interest rates and well-priced acquisition opportunities. As prices reset, we are seeing an uptick in our inventory with assets coming to market at more realistic values, which should have a higher conversion rate in the quarters ahead. Many sellers who were hoping for a Fed miracle are coming to terms with having to sell due to maturing loans that cannot be extended or refinanced without fresh equity or personal circumstances, which we typically rely on as a driver of transactions. Situational distress is also increasing for assets that were underwritten too aggressively with short-term financing that is terming out, and those with operational issues.
Hessam Nadji: Positive momentum on buyer tours and offers is building on realistically priced assets across all property types and markets.
Hessam Nadji: This is indicative of the record capital on the sideline awaiting more clarity on interest rates and well priced acquisition opportunities.
Hessam Nadji: As prices reset we are seeing an uptick in our inventory with assets coming to market at more realistic values, which should have a higher conversion rate in the quarters ahead.
Hessam Nadji: Many sellers, who are hoping for a miracle are coming to terms with having to sell due to maturing loans that cannot be extended or refinanced without fresh equity or personal circumstances, which we typically rely on as a driver of transaction.
Hessam Nadji: Situational distress is also increasing or assets that were underwritten to aggressively with short term financing that as terming out and those with operational issues.
Hessam Nadji: We're also seeing growing demand for our auction services, which is a complementary offering we added ahead of the market decline. While these positive factors will take time to manifest in better financial results, we believe they are the building blocks to an eventual recovery. Most importantly, when the market becomes more favorable, we believe the production capacity of the talent that has been added and retained for the firm, coupled with the numerous technological advances we've made over the past few years, will play a major part in accelerating our growth into the next cycle.
Hessam Nadji: We're also seeing growing demand for our auction services, which is a complementary offering we added ahead of the market downturn.
Hessam Nadji: While these positive factors will take time to manifest in better financial results. We believe there are the building blocks to an eventual recovery.
Hessam Nadji: Most importantly, when the market becomes more favorable we believe that production capacity of the talent that has been added and retained for the firm coupled with numerous technological advances we've made over the past few years will play a major part and accelerating our growth into the next cycle.
Hessam Nadji: In the meantime, we continue to guard our strong balance sheet with diligence while pursuing internal and external growth opportunities and keeping the Marcus & Millichap brand as strong as ever. With that, I will turn the call over to Steve for additional insights into our financial results. Steve? Thank you.
Hessam Nadji: In the meantime, we continue to guard, our strong balance sheet with diligence.
Steve: While pursuing internal and external growth opportunities and keeping the Marcus <unk> Millichap brand as strong as ever.
Steven F. DeGennaro: As Hessam mentioned, revenue for the first quarter was $129 million, compared to $155 million in the prior year quarter. Breaking down revenue by segment, Real Estate Brokerage Commission revenue for the first quarter was $109 million and accounted for 85% of total revenue, compared to $135 million last year, a decrease of 19% year-over-year. Brokerage volume for the quarter was $5.7 billion over 1,102 transactions, down 21% and 14%, respectively, compared to last year. Average transaction size was approximately $5.1 million, down from $5.6 million a year ago, partially driven by a lower mix of deals with institutional buyers as well as lower property values across asset types.
Hessam Nadji: With that I will turn the call over to Steve for additional insight into our financial results Steve.
Speaker Change: Thank you Hassan it's as Tom mentioned revenue for the first quarter was $129 million compared to $155 million in the prior year quarter.
Steven F. DeGennaro: Breaking down revenue by segment real estate brokerage Commission for the first quarter was $109 million and accounted for 85% of total revenue compared to $135 million last year, a decrease of 19% year over year.
Steven F. DeGennaro: Brokerage volume for the quarter was $5 $7 billion over 1100, two transactions down, 21% and 14% respectively compared to last year.
Steven F. DeGennaro: Average transaction size was approximately $5 $1 million down from $5 $6 million, a year ago, partially driven by a lower mix of deals with institutional buyers as well as lower property values across asset types.
Steven F. DeGennaro: Within brokerage, our core private client business accounted for 67% of revenue, or $73 million. This compares to 67% and $91 million last year. Private client transactions were down 20% in dollar volume and 17% in number of transactions. This is largely due to restrictive financing by banks and credit unions, which are the primary funding sources for smaller transactions.
Steven F. DeGennaro: Within brokerage our core private client business accounted for 67% of revenue were $73 million.
Steven F. DeGennaro: This compares to 67% and $91 million last year.
Steven F. DeGennaro: Private client transactions were down 20% in dollar volume and 17% in number of transactions.
Steven F. DeGennaro: This is largely due to restrictive financing by banks and credit unions, which are the primary funding sources for smaller transactions.
Steven F. DeGennaro: Our middle market and larger transaction segments together accounted for 29% of brokerage revenue, or $32 million, compared to 29% and $40 million last year. However, middle market and larger transactions combined were down 21% in dollar volume and 14% in number of transactions. Revenue in our financing business, which includes MMCC, was $14 million in the first quarter, compared to $16 million last year. Fees from refinancing accounted for 51% of loan originations this year, compared to 46% last year.
Steven F. DeGennaro: Our middle market and larger transaction segments together accounted for 29% of brokerage revenue were $32 million compared to 29% and $40 million last year.
Steven F. DeGennaro: Middle market and larger transactions combined were down 21% in dollar volume and 14% in number of transactions.
Steven F. DeGennaro: Revenue in our financing business, which includes M. M. C. C was $14 million in the first quarter compared to $16 million last year.
Steven F. DeGennaro: Fees from refinancing accounted for 51% of loan originations this year compared to 46% last year.
Steven F. DeGennaro: During the quarter, we closed 234 financing transactions totaling $1.7 billion in volume, compared to 279 transactions for the same $1.7 billion in volume in the prior year. Other revenue was $5 million in the first quarter compared to $4 million last year. Total operating expenses for the quarter were $149 million, 13% lower than a year ago, primarily due to lower variable expenses directly attributable to revenue and cost containment efforts. Cost of services was $77 million for the quarter, or 59.5% of total revenue, a decrease of 210 basis points over the same period last year, consistent with lower revenue.
Steven F. DeGennaro: During the quarter, we closed 234 financing transactions totaling $1 $7 billion in volume compared to 279 transactions for the same $1 $7 billion in volume in the prior year.
Steven F. DeGennaro: Other revenue was $5 million in the first quarter compared to $4 million last year.
Steven F. DeGennaro: Total operating expenses for the quarter were $149 million, 13% lower than a year ago, primarily due to lower variable expenses directly attributable to revenue and cost containment efforts.
Steven F. DeGennaro: Cost of services was $77 million for the quarter or 59, 5% of total revenue a decrease of 210 basis points over the same period last year consistent with the lower revenue.
Steven F. DeGennaro: SG&A during the quarter was $69 million, a decrease of 5% year-over-year, primarily due to lower agent marketing support tied to last year's revenue and continued proactive balancing of key investments with expense reduction. For the first quarter, we reported a net loss of $10 million, or $0.26 per share, compared with a net loss of $5.8 million, or $0.15 per share, in the prior year. For the quarter, adjusted EBITDA was negative $10.1 million compared to negative $7.4 million in the prior year. The effective tax rate for the quarter was 32%, which takes into account the level of expenses that are non-deductible for tax purposes in relation to estimated pre-tax income for the full year.
Steven F. DeGennaro: SG&A during the quarter was $69 million, a decrease of 5% year over year, primarily due to lower agent marketing support tied to last year's revenue and continued proactive balancing of key investments with expense reductions.
Steven F. DeGennaro: For the first quarter, we reported a net loss of $10 million or 26 cents per share compared with a net loss of $5 $8 million or <unk> 15 per share in the prior year.
Steven F. DeGennaro: For the quarter, adjusted EBITDA was negative $10 $1 million compared to negative $7.4 million in the prior year.
Steven F. DeGennaro: The effective tax rate for the quarter was 32%, which takes into account the level of expenses that are nondeductible for tax purposes in relation to estimated pretax income for the full year.
Steven F. DeGennaro: Future tax rates may fluctuate as the relationship between these two components change, given prolonged market uncertainty. Moving over to the balance sheet, we continue to be well capitalized with no debt and $346 million in cash, cash equivalents, and marketable securities, which was down from the prior quarter's balance of $407 million. The decrease during the quarter was expected and reflects seasonal outlays for current and deferred agent commissions, performance-based management bonuses, which were significantly lower as a reflection of 2023 financial results, as well as investments in talent acquisition and retention.
Steven F. DeGennaro: The future tax rate may fluctuate as the relationship between these two components change given prolonged market uncertainty.
Steven F. DeGennaro: Moving over to the balance sheet, we continue to be well capitalized with no debt and $346 million in cash cash equivalents and marketable securities, which was down from the prior quarter's balance of $407 million.
Steven F. DeGennaro: The decrease during the quarter was expected and reflects seasonal outlays for current and deferred agent commissions.
Steven F. DeGennaro: Performance based management bonuses, which were significantly lower as a reflection of 2023 financial results as well as investments in talent acquisition and retention.
Steven F. DeGennaro: As a reminder, our Deferred Earnings Program has a three-year vesting period. Therefore, the Deferred Commission payout was larger than usual given the record revenue performance in 2021. During the quarter, we declared a semi-annual dividend of $0.25 per share, representing a total of $10.1 million. That dividend was paid during the first week of April.
Steven F. DeGennaro: As a reminder, our deferred earnings program has a three year vesting period.
Steven F. DeGennaro: Therefore, the deferred commission payout was larger than usual given the record revenue performance in 2021.
Steven F. DeGennaro: During the quarter, we declared a semiannual dividend of 25 per share representing a total of $10 $1 million.
Steven F. DeGennaro: That dividend was paid during the first week of April.
Steven F. DeGennaro: Over the past two years, we have returned more than $160 million to shareholders and have roughly $71 million remaining on the current share repurchase authorization. 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, strategic acquisitions, and returning capital to shareholders through dividends and opportunistic share repurchases. Investors entered this year with expectations of lower inflation and the start of Fed rate cuts by Q2, which would stimulate transactions and pave the way for a capital markets recovery.
Steven F. DeGennaro: Over the past two years, we have returned more than $160 million to shareholders and have roughly $71 million remaining on the current share repurchase authorization.
Steven F. DeGennaro: We remain committed to a balanced long term capital allocation strategy.
Steven F. DeGennaro: This includes a combination of investing in technology recruiting and retaining the best in class producers strategic acquisitions, and returning capital to shareholders through dividends and opportunistic share repurchases.
Steven F. DeGennaro: Investors entered this year with expectations of lower inflation and the start of fed rate cuts by Q2, which would stimulate transactions and pave the way for our capital market's recovery.
Steven F. DeGennaro: Recent inflation data, however, have tempered prospects for near-term rate cuts and fueled further uncertainty around the number of cuts expected in 2024. Given this backdrop, the market recovery seems likely to be pushed out at least to the second half of 2024. Cost of services, as a percentage of revenue for the second quarter, should 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, reflecting the benefit of cost actions previously taken.
Steven F. DeGennaro: Recent inflation data, however has tempered prospects for near term rate cuts and fueled further uncertainty around a number of cuts expected in 2024.
Steven F. DeGennaro: Given this backdrop the market recovery seems likely to be pushed out at least to the second half of 2024.
Steven F. DeGennaro: Cost of services as a percentage of revenue for the second quarter should follow the usual pattern would be sequentially higher than the first quarter.
Steven F. DeGennaro: SG&A is expected to be largely in line with the first quarter, reflecting the benefit of cost actions previously taken.
Steven F. DeGennaro: As mentioned earlier, our tax rate is highly dependent on the level of non-deductible expenses and, more importantly, the variability of pre-tax income for the full year. As a result, the rate could fluctuate significantly from quarter to quarter. Our primary focus continues to be proactive engagement with clients, leadership at industry events, ensuring the MMI brand remains top of mind, and technological enhancements, all in support of our sales and financing professionals. The investments we have made in systems, talent, and market coverage will position us to capture growth as market conditions improve. With that, operator, we can now open up the call for Q&A.
Steven F. DeGennaro: As mentioned earlier, our tax rate is highly dependent on the level of nondeductible expenses and more importantly, the variability of pre tax income for the full year.
Steven F. DeGennaro: As a result, the rate could fluctuate significantly from quarter to quarter.
Steven F. DeGennaro: Our primary focus continues to be proactive engagement with clients leadership at industry events, ensuring the MMA brand remains top of mind and technological enhancements all in support of our sales and financing professionals.
Steven F. DeGennaro: The investments we have made in systems talent and market coverage will position us to capture growth as market conditions improve.
Steven F. DeGennaro: With that operator, we can now open up the call for Q&A.
Steven F. DeGennaro: Yeah.
Operator: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. A participant is using speaker equipment. It may be necessary to pick up your handset before pressing the star key.
Speaker Change: Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Operator: A confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star one.
Operator: One moment, please. I have a poll for questions, and our first question comes from the line of Yung Du with Wells Fargo. Please proceed with your question.
Operator: One moment, please pull for questions.
Yung Du: And our first question comes from the line of young do with Wells Fargo. Please proceed with your question.
Yung Du: Hey, good morning, guys. Just stepping in for Blaine here. Just wanted to go back to your comment on the current environment. Clearly, the transaction market is depressed, but of the transactions that are happening today, to provide some color on what percent are driven by some distress and then versus those that are occurring naturally.
Yung Du: Hey, good morning, guys just stepping on for Blayne here.
Yung Du: Just wanted to go back to your comment on the current environment clearly the transaction market is depressed but of the transactions that are happening today to provide.
Yung Du: Some color on what percent is driven by some distressed and then versus those that are occurring naturally.
Hessam Nadji: Good morning, happy to answer that. Hessam here.
Yung Du: Good morning, and happy to answer that as Tom here.
Hessam Nadji: We're seeing more and more situations, where sellers are having issues with operations.
Hessam Nadji: Or maturing loans that require a fresh equity in order to get refinanced or recapitalized.
Hessam Nadji: We're seeing more and more situations where sellers are having issues with operations or maturing loans that require fresh equity in order to get refinanced or recapitalized. And that's really the definition of distress that we're seeing more than the typical wholesale large portfolio dispositions by lenders that you would typically categorize as distress. Very little of that is really affecting the market, and much more so the situational examples are driving the market.
Hessam Nadji: And that's really been definition distress that were seeing more than the typical wholesale large portfolio dispositions by lenders that you would typically categorized that distress.
Hessam Nadji: Very little of that is really affecting the market.
Hessam Nadji: And much more so of the situational examples are driving the market overall.
Hessam Nadji: Overall, distress is becoming a bigger factor but is really not the driving force in the current real-time transaction activity. The bulk of the market is simply driven by both the personal circumstances of the private investor bringing product to market, or some middle market and institutional investors deciding to punt on certain assets that they don't believe will perform to their expectations going forward, and just have the typical seller motivation that is bringing product to market.
Hessam Nadji: Overall, our distress.
Hessam Nadji: Becoming a bigger factor, but really not the driving force.
Hessam Nadji: And in the current real time transaction activity. The the bulk of the market is simply driven by.
Hessam Nadji: Both personal circumstances, the private investor, bringing product to market or some middle market and institutional investors deciding to punt on certain assets that they don't believe will perform to their expectations going forward and just have the typical seller motivation that is bringing product.
Hessam Nadji: The market a year ago at this time there was so much.
Hessam Nadji: A year ago at this time, there was so much more uncertainty related to the timing of this down cycle and what the Fed would or wouldn't do, and that pushed a lot of people to the sidelines. With the passage of time, we're seeing the natural realization that this cycle is not going to go away overnight, and therefore, if there is a reason to sell a property, you might as well bring that product to market and redeploy the equity or get out of a situation that is very likely to underperform looking ahead.
Hessam Nadji: More uncertainty related to the timing of this down cycle and what the fed would or wouldn't do.
Hessam Nadji: That pushed a lot of people to the sideline with the passage of time, we're seeing the natural kind of realization that this cycle is not going to go away overnight and therefore, if there is a reason to sell a property mine as well bring that product to market and redeploy the equity or.
Hessam Nadji: Get out of a situation that is very likely to underperform looking ahead.
Hessam Nadji: What we're also seeing is that financing is generally available. However, with liquidity in the market, the underwriting standards and the essentially loan-to-values that we're seeing today are much more restrictive than in a normal market environment. That has become more of an obstacle to getting more transactions done than anything else. However, as I mentioned in my formal remarks, we're able to essentially find a willing lender that is available in the marketplace as long as the realistic terms are met by the borrower.
Hessam Nadji: We're also seeing is that.
Hessam Nadji: Financing is generally available there is liquidity in the market the underwriting standards and they essentially loan to values that we're seeing today.
Hessam Nadji: It is much more restrictive than in a normal market environment that has become more of a an obstacle to getting more transactions done than anything else.
Hessam Nadji: Although as I mentioned in my formal remarks, we're able to essentially find.
Hessam Nadji: Willing lender that is.
Hessam Nadji: That is available in the marketplace as long as the realistic terms are are met by the borrowers.
Hessam Nadji: I hope that it gives you some color.
Speaker Change: I hope that gives you some color.
Hessam Nadji: No, that's helpful. Could you talk about what product types could see the most distress? We're, you know, hearing multi-family potentially and then office, obviously, but we're just interested in kind of your thoughts there.
Speaker Change: No. That's helpful could you just talk about what product types could see the most distressed we're not carrying multifamily potentially and then office, obviously, but we're just interested in kind of your thoughts there.
Hessam Nadji: What we're seeing in the product type comparison is that retail continues to have favor. If anything at all is to be said about retail, the 15 previous years of recalibrating shortage of new construction, conversion of retail to other uses, and reduction of essentially supply have repositioned shopping centers in particular much better today than any time we've seen in the last 20 years. At the same time, tenant demand appears to be at the highest level we've seen in that same time period, and the combination is really driving a lot of interest in shopping centers. That's an outlier in terms of positive momentum for transaction activity.
Hessam Nadji: What we're seeing on the product type.
Hessam Nadji: Comparison is that retail continues to have favor.
Hessam Nadji: If anything at all there is to be said about retail is the 15 previous years.
Hessam Nadji: Recalibrating.
Hessam Nadji: Shortage of new construction and conversion of retail to other users and reduction of essentially supply.
Hessam Nadji: <unk> has repositioned shopping centers in particular much better today than anytime we've seen in the last 20 years at.
Hessam Nadji: At the same time tenant demand.
Hessam Nadji: It appears to be at the highest level. We've seen in that same time period and the combination is really driving a lot of interest in shopping centers that outlier.
Hessam Nadji: Outlier in terms of positive momentum for transaction activity, plus retail and other certain other property types like hospitality or even office didn't have the tight spread between cap rates and interest rates before the fed tightening. Therefore, there was more of a margin.
Hessam Nadji: Plus, retail and certain other property types, like hospitality or even office, didn't have the tight spread between cap rates and interest rates before the Fed tightened. Therefore, there was more of a margin for absorbing the negative leverage that has significantly impacted multifamily and industrial, which were the two property types with the lowest cap rates prior to this tightening cycle. That's where we've seen the biggest valuation disruption and uncertainty on pricing. On the multifamily side, we're seeing a rebound in tenant demand for occupancies after a soft period in 2023 and part of 2022, which is a very positive sign.
Hessam Nadji: Absorbing the negative leverage that has significantly impacted multifamily and industrial which were the two property types with the lowest cap rate prior to this tightening cycle.
Hessam Nadji: And that's where we've seen the biggest valuation disruption.
Hessam Nadji: And uncertainty on pricing.
Hessam Nadji: On the multifamily side, we are we're seeing a rebound in tenant demand and occupancies. After a soft period in 2023 and part of 2022, which is a very positive sign but youre right in that we're seeing more examples of.
Hessam Nadji: But you're right in that we're seeing more examples of maturing loan problems, especially because the last three years were driven by very aggressive financing by a lot of debt funds that are terming out, as I mentioned in my comments. And those situations need some kind of a solution, whether it's raising equity, recapping, or a sale. And we're actively working with our clients across the country on numerous examples of those kinds of transactions. The fundamentals of multifamily are still solid. There is a housing shortage, and the Home Affordability Index is showing the widest gap between renting versus owning. So the fundamentals are there.
Hessam Nadji: Maturing loan problems, especially because the last three years were driven by very aggressive financing by a lot of debt funds.
Hessam Nadji: That are terming out as I mentioned in my comments and those situations need kind of a solution, whether its raising equity recapping or a sale and we are actively working with our clients across the country.
Hessam Nadji: On numerous examples of those kinds of transactions.
Hessam Nadji: The fundamentals of multifamily are still solid there is a housing shortage the home affordability index is.
Hessam Nadji: Showing the widest gap between renting versus owning the fundamentals are there and the pockets of overbuilding that we're seeing throughout the country and multifamily are really limited to about eight to 10 metros.
Hessam Nadji: And the pockets of overbuilding that we're seeing throughout the country in multifamily are really limited to about eight to 10 metros. Therefore, the industry is still doing well. I think it's gonna take some time for the repricing of multifamily to really set in.
Hessam Nadji: Therefore, the industry is still doing well.
Hessam Nadji: It's going to take some time for the re pricing of multifamily to really fit in and this is where part of our results have been hampered.
Hessam Nadji: This is where part of our results have been hampered more than usual because the private client multifamily, and the private client single-tenant retail, is more affected in this cycle because of the interest rate shock, in that normally we have the Fed coming in to the market as sort of a rescue when there's a recession or a credit market problem. In this cycle, there's, of course, the reverse where the Fed has caused the disruption in valuation. We are actually successful in many, many office sales. The key factor in office is that the book is being judged by its cover and that distressed office is really limited to older urban products.
Hessam Nadji: <unk> more than usual because the private client multifamily the private client single tenant retail.
Hessam Nadji: More affected in this cycle because of the interest rate shock and that normally we have the fed coming in to the market.
Hessam Nadji: As sort of a rescue when there's a recession or a credit market problem. In this cycle. There is of course, the reverse where the fed has caused the disruption in valuation.
Hessam Nadji: We are actually successful in many many office sales.
Hessam Nadji: The key factor in office is that the book is being judged by its cover in that distressed office is really limited to older urban product suburban product is much better off.
Hessam Nadji: Suburban product is much better off than urban product, and we've sold both distressed and well-performing office assets in the quarter throughout the country. And industrial is holding up okay, although sales in the market for industrial properties were down 20% in the first quarter.
Hessam Nadji: Urban product and we've sold both distressed and well performing office assets in the quarter throughout the country and industrial is holding up okay. In sales in the market for industrial were down 20% in the first quarter and.
Hessam Nadji: And we're viewing industrial as an ongoing growth opportunity for the company. So we're actually adding coverage and penetrating more of the industrial market because we believe that, long-term, it's here to stay. But it is showing signs of a pullback. Hotels were down 23% in the market.
Hessam Nadji: We're viewing industrial as an ongoing growth opportunity for the company. So we're actually adding coverage and penetrating more of the industrial market because we.
Hessam Nadji: I believe that long term is here to stay but it is it is showing signs of a pullback.
Hessam Nadji: Hotels were down 23% in the market.
Hessam Nadji: And for us, that's another growth opportunity. We continue to do well there. And the self-storage business, which we're a top player in, has also seen a major drop in transaction activity. But again, as market leaders there, we are very well positioned to take advantage of that.
Hessam Nadji: And for US that's another growth opportunity, we continue to do well there and the self storage business, which we are top player has also seen at major drop off in transaction activity.
Hessam Nadji: But again as market leaders there we are very well positioned to take advantage of that segment.
Hessam Nadji: Got it. Thank you for the color. And then you talked about experiencing hard turnover given the current environment, so I should think about your brokerage count as we progress through the year.
Speaker Change: Got it. Thank you for the color and then you talked about experiencing higher turnover given the current environment. So how should we think about your brokerage talent as we progress through the year.
Hessam Nadji: Yeah.
Hessam Nadji: Well, first, a little bit more details on what is happening in that we've gone from the pandemic to a major post-pandemic market reversal to the upside, and then a very dramatic market shift downward because of the interest rate shock. So the last three to four-year period has provided nothing resembling a typical market environment in which we train people, we mentor people, they learn the fundamentals of brokerage, underwriting, client contact, and they basically start to develop their production and their brokerage careers.
Speaker Change: Well, firstly, a little bit more detail on what is happening in that.
Hessam Nadji: <unk> gone from the pandemic to a post pandemic.
Hessam Nadji: Major market reversal to the upside and then a very dramatic market shift downward because of the interest rate shock. So the last three to four year period has provided.
Hessam Nadji: Nothing resembling a typical market environment in which we train people, we mentor people the learn the fundamentals of brokerage underwriting client contact and they basically.
Hessam Nadji: Start to develop their production and their brokerage careers. This disruption both on the way down on the way up and on the way back down is the primary reason that skill sets.
Hessam Nadji: This disruption, both on the way down, on the way up, and on the way back down, is the primary reason that skill sets aren't developing in the way that we're used to seeing through our excellent training and market-leading ways of mentoring new people into the business. That's what's causing the disruption, in that a lot of the people that you would typically bring in after, let's say, two years of this initial training and mentorship would become productive or would become standalone new additions to our sales force.
Hessam Nadji: Developing in a way that we're used to seeing through our excellent training and market leading.
Hessam Nadji: Ways of mentoring new people into the business.
Hessam Nadji: That's what's causing that disruption in that a lot of the people that you would typically bring in after let's say two years of this initial training and mentorship would become productive or would become.
Hessam Nadji: Standalone, new additions to our sales force.
Hessam Nadji: And we're still attracting, at the top of the funnel, a phenomenal volume of both interns, fellows, and new agent candidates. What is causing the challenge is the higher turnover rate of the people that have gone through the training but are not able to function because of the market challenges and headwinds, and the lower transaction velocity is just making it very hard to break into the business. So that's a little bit more color on the mechanics of where the challenge is.
Hessam Nadji: And we're still attracting at the top of the funnel.
Hessam Nadji: The nominal volume of both in terms of.
Hessam Nadji: Fellows and new agent candidates, what is causing causing the challenge is the higher turnover rate of the people that have been.
Hessam Nadji: Through the training, but are not able to function.
Hessam Nadji: Because of the market challenges and headwinds and the lower transaction velocity, just making it very hard to break into the business. So thats a little bit more color on the mechanics of what were the challenges. We do expect this to be a.
Hessam Nadji: We do expect this to be an obstacle we will overcome. We're taking a variety of different initiatives on the top of the funnel to bring in more candidates. We've implemented a new version of a screening task and a screening process for our management team. We have recruiters that are helping them with the bandwidth and available time in order to reach out to more candidates. And so all of that, we're confident, will make a major difference.
Hessam Nadji: And optical will overcome we're taking a variety of different initiatives.
Hessam Nadji: On the top of the funnel to bring in more candidates, we have implemented a new version of a.
Hessam Nadji: Screening test and our screening process for our management team we've added recruiters.
Hessam Nadji: That are helping them with bandwidth and.
Hessam Nadji: Available time in order to reach and reach out to more candidates and so all of that we're confident will make a major difference, but I think the biggest difference will come from the market essentially a satellite and being able to provide a somewhat of a normal operating environment.
Hessam Nadji: But I think the biggest difference will come from the market essentially settling and being able to provide a somewhat normal operating environment for new trainees. Meanwhile, I really want to emphasize the importance of success in bringing experienced individuals and teams. It's more than offsetting the disruption and the creation of new producers through our organic channel. And the fact that we strongly believe in a multi-channel strategy going forward, getting back to our organic contribution to the Salesforce when the market really normalizes, and at the same time, continuing to build on our success in bringing in experienced people.
Hessam Nadji: New trainees. Meanwhile, I really want to emphasize the importance of the success in bringing in experienced individuals and teams is more than offsetting the disruption and the creation of new producers through our organic channels and the fact that we strongly believe in and multichannel strategy going forward.
Hessam Nadji: Getting back to our organic contribution to the sales force when the market normalizes and at the same time.
Hessam Nadji: To build on our success of bringing in experienced people.
Hessam Nadji: We make a point to only bring in experienced individuals and teams that don't overlap with our existing Salesforce in order to make sure that we're expanding market coverage and segment coverage and not cannibalizing our existing Salesforce.
Hessam Nadji: We make a point to only bring in experienced individuals and teams that don't overlap with our existing sales force in order to make sure that we're expanding the market coverage and the segment coverage and not cannibalizing our existing sales force.
Hessam Nadji: Okay, that's helpful. And lastly, can you provide some thoughts on external growth opportunities that you may be pursuing? Maybe in terms of what stage of negotiations you may be in right now and then maybe also compare those opportunities versus repurchasing.
Hessam Nadji: Okay.
Speaker Change: That's helpful.
Hessam Nadji: Lastly, can you provide some thoughts on external growth opportunities that you can maybe for Tony maybe in terms of what stage of negotiations that you may be right now and then maybe also compared to those opportunities.
Hessam Nadji: Is that repurchase in shares.
Hessam Nadji: Yeah, I'll let Steve comment as well, but in general, we are always in the market with a proactive strategy, various verticals that we believe are complementary to our core business, as well as an ongoing pipeline of core business acquisitions or individual and team recruiting. It never stops, so we have explored different opportunities in appraisal under advisory services. We've explored a number of boutique brokerage acquisition opportunities and boutique finance acquisition opportunities in the last 12 to 18 months, as well as considerations around the investment management vertical, where we're looking at some opportunities there.
Speaker Change: Yes, I'll, let Steve comment as well, but in general we are always in the market with a proactive strategy in various verticals that we believe are complementary to our core business as well as an ongoing pipeline of.
Hessam Nadji: Core business.
Hessam Nadji: The acquisitions or.
Hessam Nadji: Individual and team recruiting it never stops so we have explored different opportunities in appraisal wanted advisory services, we've explored a number of boutique brokerage acquisition opportunities and boutique finance acquisition opportunities in the last 12 to 18 months.
Hessam Nadji: As well as considerations around the investment management.
Hessam Nadji: Vertical where we're looking at some opportunities there, but the most important aspect of our growth strategy is the balance that we're trying to maintain between.
Hessam Nadji: But the most important aspect of our growth strategy is the balance that we're trying to maintain between the near-term risk in underwriting and valuation, as I mentioned in my remarks. It's a very tough environment to assess that near-term risk and the timing of the market recovery versus the bid-ask spread that appears to be in the marketplace. However, it is narrowing.
Hessam Nadji: The near term risk and underwriting evaluation as I mentioned in my remarks, it's a very tough environment in assessing debt near term risks and the timing of the market recovery.
Hessam Nadji: Versus the bid ask spread that appears to be in the marketplace. It is narrowing I will say our current conversations are much more realistic.
Steven F. DeGennaro: I will say our current conversations are much more realistic that are ongoing right now than they were even six to nine months ago. But nonetheless, for us, the important thing is to be in the market through our platform, developing relationships, knowing the targets that would work for us from a cultural perspective, and having more of a ground-up strategy than just trying to buy-share, if you will. Steve, do you want to add some comments to that?
Steven F. DeGennaro: That are ongoing right now than they were even six to nine months ago.
Steven F. DeGennaro: But nonetheless for us the important thing is to be in the market through our platform developing relationships knowing the targets that would work for us from a cultural perspective, and having more of a ground up strategy than just trying to trying to buy share. If you will Steve you want to add some comments I think more.
Steven F. DeGennaro: Yeah, I think more broadly on capital allocation, which I think is what you were getting at, Young, it's important to acknowledge that we are wanting to invest for long-term growth. That means investments in technology, recruiting, and retention, as Hassam has talked about, as well as M&A, and returning capital to shareholders. And in different environments, our priorities and our focus can move around, can shift, depending on circumstances, as we evaluate the best use of deploying our capital.
Steve: More broadly around capital allocation, which I think is what you were getting at young.
Steven F. DeGennaro: It is important to us.
Steven F. DeGennaro: Acknowledge that we are wanting to invest for long term growth that means investments in technology recruiting and retention is.
Steven F. DeGennaro: Tom has talked about as well as M&A and returning capital to shareholders and in different environments, our priorities and our focus is.
Steven F. DeGennaro: Can it can move around can shift depending on circumstances.
Steven F. DeGennaro: As we evaluate the best use for declined our capital.
Steven F. DeGennaro: As it relates specifically to repurchases, which I think you mentioned, we've always said our repurchase program would be opportunistic. And to that end, we've repurchased roughly $70 million of shares over the last year or so.
Steven F. DeGennaro: As it relates specifically to repurchases, which.
Steven F. DeGennaro: Thank you mentioned.
Steven F. DeGennaro: We've always said our repurchase program, we will be opportunistic.
Steven F. DeGennaro: And.
Steven F. DeGennaro: To that end, we've repurchased roughly $70 million of.
Steven F. DeGennaro: Shares over the last.
Steven F. DeGennaro: That is a program that we can dial up or down depending on the balancing of the various opportunities and other relative uses of our capital. So yes, we were a little bit on the lighter side this last quarter, partly, I guess you could say, a function of the fact that the business is not necessarily generating as much free cash flow as we do in normal times. So that's just an example of how we balance our various priorities.
Steven F. DeGennaro: 18 months or so.
Steven F. DeGennaro: That is a program that we can dial up or down depending on.
Steven F. DeGennaro: A balancing of the various opportunities.
Steven F. DeGennaro: That.
Steven F. DeGennaro: And other relative uses of our capital so.
Steven F. DeGennaro: Yes, we were a little bit on the lighter side this last quarter.
Steven F. DeGennaro: Partly.
Steven F. DeGennaro: I guess, you could say a function of the fact that the.
Steven F. DeGennaro: The business is not necessarily generating is as much of the free cash flow as we do in normal time. So that's just an example of how we balance our various priorities.
Yung Du: Got it. Great. Thank you, guys.
Speaker Change: Got it great. Thank you guys.
Speaker Change: Thank you.
Hessam Nadji: And we have reached the end of the question and answer session. I'll now turn the call over to President and Chief Executive Officer Hessam Nadji for a closing remark. Thank you.
Speaker Change: Thank you and we have reached the end of the question and answer session. I will now turn the call over to the President and Chief Executive Officer.
Maggie: Maggie for closing remarks.
Hessam Nadji: Thank you, operator, and thank you for joining our first quarterly call. We appreciate your participation and look forward to seeing many of you on the road and looking forward to our next earnings call. The call is adjourned. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Hessam Nadji: Thank you operator, and thank you for joining our first quarter call. We appreciate your participation and look forward to seeing many of you on the road.
Hessam Nadji: And look forward to our next earning call.
Hessam Nadji: The call is adjourned.
Hessam Nadji: And this concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Hessam Nadji: Okay.
Hessam Nadji: Yeah.
Hessam Nadji: Yes.
Hessam Nadji: Yeah.
Hessam Nadji: Yes.
Hessam Nadji: Yes.
Hessam Nadji: Uh-huh.
Hessam Nadji: [music].
Hessam Nadji: Hum.
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Hessam Nadji: [music].
Hessam Nadji: Uh-huh.
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Hessam Nadji: Sure.
Hessam Nadji: [music].
Operator: The Ultimate Parody Site!