Q3 2024 Marcus & Millichap Inc Earnings Call
Speaker Change: Greetings. Welcome to Marcus and Milla Chapp's third quarter 2024 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce John Cornet with ICR. Thank you. You may begin.
John Cornet: Thank you, Operator. Good morning and welcome to Marcus and Milichap's third quarter 2024 earnings conference call.
John Cornet: With us today are President and Chief Executive Officer Hessam Nadji and Chief Financial Officer Steve DeGennaro.
Speaker Change: Before I turn the call over to management, please remember that our prepared remarks and the responses to questions may contain forward-looking statements.
Speaker Change: 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.
Speaker Change: The company's ability to retain and attract transaction professionals, the company's ability to retain its business philosophy and partnership culture amid competitive pressures,
Speaker Change: 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, 2024.
Speaker Change: 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.
Speaker Change: The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.
Speaker Change: In addition, certain financial information presented on this call represents non-GAAP financial measures.
Speaker Change: The company's earnings release, which was issued this morning and is available on the company's website, represents a reconciliation to the appropriate GAAP measures and explains why the company believes such non-GAAP measures are useful to investors.
Speaker Change: The conference call is being webcast. The webcast link is available on 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.
Speaker Change: With that, it is my pleasure to turn the call over to CEO Hessam Nadji.
Hessam Nadji: Thank you, Jacques. On behalf of the entire Marcus Millichap team, good morning and welcome to our third quarter earnings call.
Hessam Nadji: MMI's results showed modest improvement in the third quarter, setting the stage for a measured but sustainable recovery in the transaction and financing markets.
Hessam Nadji: We believe that the underpinnings of a recovery cycle include the return of capital to the market as prices adjust, the Federal Reserve's shift towards lowering interest rates, MMI's record-exclusive listing inventory, and notable improvement in our pipeline.
Hessam Nadji: Revenue for the third quarter was $169 million, up 4% compared to last year, with adjusted EBITDA at break-even and a net loss of $5.4 million.
Hessam Nadji: Our EPS remains challenged by costs related to investments in talent, technology, and business development. We believe these initiatives and our strategy to remain on offense during the downturn will provide leverage in the recovery and strengthen our long-term competitiveness.
Hessam Nadji: The expensing of capital deployed for talent retention and acquisition is particularly important as revenue production among the leading producers we have added and retained has been greatly hampered in the downturn.
Hessam Nadji: We expect these top professionals to contribute significantly to the company's revenue growth in the recovery, enhanced leverage, and support market share gains.
Hessam Nadji: The third quarter brought more conviction that capital is moving off the sidelines, driven by four key catalysts.
Hessam Nadji: First, price adjustments across various property types have made current valuations more attractive relative to replacement costs.
Hessam Nadji: and the market peak in March 2022. It appears that investors' psychology is finally shifting toward missing out on buying opportunities while more sellers are coming to terms with realistic pricing.
Hessam Nadji: The momentum of institutional capital returning to the market, which we noted last quarter, continued to build during the third quarter. At the same time, private investors still grappled with tight lending requirements by banks and credit unions.
Hessam Nadji: Our results for the quarter correlate with this trend as private client revenue declined 4.3% year-over-year while middle market and larger transaction revenue increased 4% and 23.5% respectively.
Hessam Nadji: Second, the Fed's 50 basis point rate cut decisively signaled the beginning of an easing cycle, followed by yesterday's quarter point reduction.
Hessam Nadji: The Fed will likely move more gradually on further rate cuts due to a still strong economy and expectations that the election outcome may bring more inflationary policies.
Hessam Nadji: Third, the supply-demand dynamics are generally healthy across most property types, with few exceptions due to overbuilding. Construction starts are expected to decline significantly in 2025 and 2026, which will reduce new supply.
Hessam Nadji: This will be particularly positive for multifamily and industrial properties, which has seen the most construction in recent years.
Hessam Nadji: And lastly, a combination of pent-up demand from postponed transactions after two years of a dysfunctional market and increasing distress situations are driving more transactions.
Hessam Nadji: During the quarter, the company closed over 1,300 brokerage transactions, totaling $8.5 billion in volume.
Hessam Nadji: Shopping centers, industrial, self-storage, and institutional apartments serviced by our IPA division saw the most improvement. Single-tenant retail and smaller apartment sales remain hampered due to restrictive lending and persistent bid-ask spreads.
Hessam Nadji: Financing revenue was up 19.3% and transactions increased by 15%, with total financing volume up 12% for the quarter.
Hessam Nadji: We closed over 300 financing transactions and secured capital for our clients through 150 separate lenders in one quarter.
Hessam Nadji: These numbers highlight improved financing capacity by non-bank lenders and the impact of our strategic initiatives.
Hessam Nadji: Middle market and larger transactions not only enhanced our brokerage revenue but also boosted our financing revenue.
Hessam Nadji: In addition, our Loan Sales Division continued to gain momentum driven by increasing trade activity on both performing and distressed loans.
Hessam Nadji: Over the past five years we've positioned our MMCC and IPA capital markets originators as leading finance intermediaries across all investor categories and deal sizes.
Hessam Nadji: The experienced talent, infrastructure expansion, and lender relationships we've added contributed to the improvements in the quarter and will drive future growth in our financing business.
Hessam Nadji: Moreover, this strategy is creating value for our sales professionals as they increasingly team up with our originators to win business.
Hessam Nadji: We continue to add experienced professionals across the firm, which helps mitigate the challenges we still face in growing the newer agent cadre.
Hessam Nadji: The market volatility of the past several years has kept our new agent fallout rate elevated, spurring expanded channels for attracting and training new talent to reverse this trend.
Hessam Nadji: This includes a significantly larger internship program and the deployment of regional recruiters focused on increasing our candidate pool.
Hessam Nadji: We remain dedicated to a dual strategy of experienced talent acquisition and development, as well as organic hiring and training, as both are pivotal to the company's future.
Hessam Nadji: Looking forward, perhaps the biggest challenge we face is the volatility in long-term interest rates, which have the most impact on commercial real estate trading and finance volumes.
Hessam Nadji: Since the Fed's rate reductions began, the 10-year Treasury yield has moved 70 basis points to 4.3% currently.
Hessam Nadji: We anticipate a productivity improvement when rates settle as the Fed's easing cycle unfolds.
Hessam Nadji: At the macro level, inflation has decelerated toward the PETS target, while job growth and retail sales have moderated, but are still positive.
Hessam Nadji: This supports a soft landing scenario for the U.S. economy, pointing to a solidly positive picture for commercial real estate demand across the board.
Hessam Nadji: The election outcome is generally viewed as positive for business, taxes, and the economy, although much remains to be seen related to actual policy implementation over time.
Hessam Nadji: Regardless of the policy dynamics, commercial real estate is poised to attract more capital, maintain, if not improve, fundamentals, and begin a new cycle driven by more realistic pricing and compelling yields.
Hessam Nadji: Real estate values have come a long way in recalibrating to higher interest rates, but the path to increase sales and financing availability will face speed bumps along the way.
Hessam Nadji: Our strategy to continually enhance our platform, help our existing sales force maximize productivity, and further attract top talent positions us very well for solid growth and increased market share.
Hessam Nadji: On the capital allocation front, we have the benefit of a strong balance sheet and maintain the dual approach of returning capital to shareholders while driving business growth at the same time.
Hessam Nadji: We continue to strategically deploy capital by investing in proprietary technology and client services such as our Auction Division and Loan Sales Division, both of which are taking off nicely, while pursuing strategic acquisition targets.
Our ongoing investments in business development.
direct client engagement, industry event participation, branding
Hessam Nadji: and all the other activities we undertake every quarter to market the firm, underscore our commitment to staying on offense and positioning the company for dominance in the market recovery.
Hessam Nadji: With that, I will turn the call over to Steve for additional insights into the quarter. Steve?
Steve DeGennaro: Thank you, Hessam. As mentioned, total revenue for the quarter was $169 million, up 4% compared to $162 million in the prior year quarter.
Steve DeGennaro: Revenue from real estate brokerage commissions for the third quarter was 142 million dollars accounting for 84 percent of total revenue compared to 140 million dollars last year, an increase of 2 percent year-over-year.
Steve DeGennaro: brokerage revenue was generated from total sales volume of 8.5 billion dollars across 1331 transactions up 15% and down 2% respectively compared to last year
Steve DeGennaro: Year-to-date, revenue from Real Estate Brokerage Commission was $387 million, accounting for 85% of total revenue, compared to $415 million last year, which was 87% of total revenue.
Steve DeGennaro: Year-to-date total sales volume was $21.4 billion across 3,705 transactions, down 3% and 9% respectively.
Steve DeGennaro: The year-to-date results reflect a more challenging first half of the year, followed by an improved Q3.
Steve DeGennaro: The average transaction size during the third quarter was approximately $6.4 million, up 17% from $5.5 million a year ago, resulting from a sizable increase in middle market and larger transactions.
Steve DeGennaro: Within brokerage, private client contributed 62% of brokerage revenue or 87.5 million dollars for the quarter. This compares to 65% and 91.5 million dollars last year.
Steve DeGennaro: Our middle market and larger transaction segments together accounted for 35% of brokerage revenue, or $49 million during the third quarter. This is an increase from 31% and $43 million last year.
Steve DeGennaro: These segments saw a combined increase of 36% in dollar volume and 23% in the number of transactions.
Steve DeGennaro: Revenue in our financing segment, including MMCC, grew 19% to $21 million during the third quarter, compared to $17 million last year.
Steve DeGennaro: We closed 318 financing transactions totaling 2.1 billion dollars in volume compared to 276 transactions for 1.9 billion dollars in volume in the prior year.
Steve DeGennaro: Financing revenue for the nine months was $53 million compared to $51 million last year.
Steve DeGennaro: We closed 824 transactions year-to-date, totaling $5.6 billion in volume, compared to 839 transactions for $5.3 billion in volume last year.
Steve DeGennaro: Fees from refinancing accounted for 42% of loan originations in the quarter compared to 44% last year, while year-to-date refinancing fees were 41% of loan originations compared to 51% last year.
Steve DeGennaro: Other revenue comprised primarily of leasing, consulting and advisory fees was six million dollars during the third quarter, up 20% compared to five million dollars last year.
Steve DeGennaro: Year-to-date, other revenue was $15.8 million this year, up 17% compared to $13.5 million last year.
Steve DeGennaro: Turning to expenses, total operating expenses for the third quarter were 180 million dollars.
Steve DeGennaro: 1% higher than last year, while on a year-to-date basis, total operating expenses of $496 million were 5% lower compared to the same period a year ago.
Steve DeGennaro: The year-to-date reduction in expenses was principally driven by lower variable expenses directly attributable to revenue and cost containment efforts.
Steve DeGennaro: Breaking down the expense components further, cost of services was 105 million dollars or 62.2 percent of total revenue compared to 64.6 percent in the third quarter last year, an improvement of 240 basis points.
Steve DeGennaro: Year-to-date, Cost of Services was $280 million or 61.3% of total revenue and improvement of 150 basis points over the same period last year.
Steve DeGennaro: SG&A during the quarter was 71 million dollars, up 2% year over year.
Steve DeGennaro: On a year-to-date basis, SG&A was $205 million, 3% lower compared to last year.
Steve DeGennaro: The year-to-date changes are primarily due to a reduction in marketing support tied to prior-year revenue and continued balancing of key investments with prudent expense reductions.
Steve DeGennaro: For the third quarter, we reported a net loss of $5.4 million, or $0.14 per share, compared to a net loss of $9.2 million, or $0.24 per share, last year.
Steve DeGennaro: For the nine-month period, the net loss was $20.9 million, or $0.54 per share, compared to a net loss of $23.8 million, or $0.61 per share, in the same period of the prior year.
Steve DeGennaro: For the nine-month period, adjusted EBITDA was negative $8.7 million compared to negative $15.1 million in the prior year.
Steve DeGennaro: The year-over-year improvement is an encouraging sign that we've moved past the market's low point.
The effective tax rate for the quarter was 15 percent.
Steve DeGennaro: Our current expectation of the rate for the full year is 13 to 16 percent.
Steve DeGennaro: Turning to the balance sheet, we continue to be well capitalized with no debt and $349 million in cash, cash equivalents, and marketable securities, which is an increase of $13 million over the prior quarter.
Steve DeGennaro: Subsequent to quarter end, we returned 10 million dollars in capital to shareholders through a dividend paid in October.
Steve DeGennaro: Since initiating our dividend and share repurchase programs over two years ago, we have returned more than $170 million in capital to shareholders.
Steve DeGennaro: During the quarter we evaluated a number of acquisition investment opportunities and remain active in pursuing external growth channels.
Speaker Change: As Hessam mentioned, we are dedicated to maintaining a balanced, long-term capital allocation strategy.
Speaker Change: This encompasses investing in technology, attracting and retaining top sales talent, prudently pursuing strategic acquisitions, and returning capital to shareholders.
Speaker Change: Looking ahead, we clearly have seen the start of a market recovery. However, interest rate volatility and restrictive lending continue to pose challenges.
Speaker Change: Given these dynamics, our outlook remains cautiously optimistic, including sequential revenue growth in Q4.
Speaker Change: Cost of services as a percentage of revenue for the fourth quarter should follow the usual pattern of increasing sequentially.
Speaker Change: SG&A for the quarter should be relatively consistent with Q3 in absolute dollar terms and a favorable improvement over Q4 of last year.
Speaker Change: And as I mentioned, the full year tax rate is currently expected to be in the 13 to 16 percent range.
Speaker Change: With that, Operator, we can now open the call for Q&A.
Thank you.
Speaker Change: 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Blaine Heck with Wells Fargo. Please proceed.
Speaker Change: Great thanks, good morning. Hessam, can you talk a little bit more about the financing environment for commercial real estate deals, especially for the private client market? I guess have you seen any increase in availability of debt capital at reasonable rates from regional banks or credit unions that would kind of suggest the transaction volume could pick up in that segment?
Speaker Change: and then maybe also just provide some color on how that compares with what you're seeing in the middle market and larger segments.
Thank you. Bye.
Sure. Good morning, Blaine.
Speaker Change: The answer to your question is yes, gradually. We're seeing a little bit of easing by banks and credit unions coming back into the market.
Speaker Change: And the hindrance is more about the fact that the normal cycle of
that would traditionally free up more lending capacity.
Speaker Change: just hasn't been operating as normal. Therefore, they just have less capacity to lend. In addition to being more conservative, obviously having adjusted underwriting criteria,
Speaker Change: and really moving forward with a lot more caution than in a normal market environment.
Speaker Change: Those are the things that really make obtaining financing for smaller transactions more challenging. It's not to say that there isn't financing, there certainly is. I mean, we did 150 transactions with 150 separate lenders.
Speaker Change: get the lender, buyer, and seller aligned on all the different metrics and valuations and loan-to-values and moving forward.
Speaker Change: More important than the timing of that is the question of what's going to be the catalyst.
Speaker Change: for more transactions to occur. For us, we're seeing much better alignment on the bid-ask spread and more motivation by sellers that really haven't been desperate to bring properties to market.
starting to shift.
Speaker Change: And that's probably even more important than the restrictive finance environment.
Speaker Change: But as far as what has kept the private client market to perform better, say, in the third quarter or even in the second quarter, is the combination of restrictive lending and the dividend ask spread.
Speaker Change: The catalyst is really the fact that the type of investors that are executing larger transactions are less reliant on bank and credit union financing.
Speaker Change: They are more driven by the replacement cost question and the pricing adjustment from peak in 2022, particularly institutional investors.
Speaker Change: who've been out of the market for 18 to 24 months and are now aggressively looking to put capital back in the market.
Speaker Change: and are seeing enough of a price adjustment to care less about the financing component because they have the purchase power of all cash or very low leverage types of transactions.
Speaker Change: number of our institutional clients that I've personally talked with over the past quarter will literally tell me that they are
Speaker Change: looking to buy the right assets at the right prices, not too worried about financing because they plan to put financing on projects later if they have to.
Speaker Change: and they see this window of opportunity to act on the price adjustments as more important than figuring out the finance component.
I hope that answers your question.
Thank you.
Speaker Change: Yeah, absolutely. That's great color related to that and and I know this is a
Speaker Change: It's a very difficult question to answer, but you noted that trading and financing volumes will likely take time to reach long-term averages. I guess, can you just expand on that a little bit? I guess, given kind of what you're seeing in the market today, do you think we can get back to a long-term average run rate sometime in 2025, or do you see the choppiness in the market as likely to push that normalization into 2026 or beyond that?
Speaker Change: Sure. By our analysis and estimations, the market in 2024 is somewhere between 35% to 40% below the 5-10 year previous averages, which is probably the closest proxy for, quote, a normal transaction marketplace.
Speaker Change: And so the market has room to run, to catch up to its long-term average for sure, and I do believe
Speaker Change: very confidently that we will get there, the market will get there, there's...
Speaker Change: No reason that it wouldn't, in fact, if anything, commercial real estate today is in much better shape than it's been in previous cycles, because as an industry, at a macro level, we haven't really overbuilt the product type, or I should say the investment class.
Speaker Change: and we have all the different intrinsic economic benefits of a solid U.S. economy to indicate that demand for various property types is going to be very strong going into the next couple of years.
Speaker Change: but I do believe it will be very different than the 2021 recovery.
Speaker Change: from the pandemic year. And that's the most recent recovery reference that most people ask me about.
Speaker Change: mainly because the conditions coming out of the pandemic and going into 21 and 22 were very different than they are today. We were really benefiting from record stimulus and almost
Speaker Change: free money in a way that made the issue of underwriting really getting the bid-ask-spread equation removed as an obstacle, you know, functioning in a very different way than those things are currently. We're already you know, looking at
Speaker Change: a higher interest rate environment even after, you know, a few more reductions by the Fed just because of the fact that the economy is in much better shape and we're not in, you know, in the kind of environment we were that was stimulus driven.
Speaker Change: as much as it was in 2021. So there is the reason why I believe it'll be more of a gradual recovery, yet a solid recovery may not all happen in 2025. It's unlikely that we catch up to long-term averages.
Speaker Change: in one year. But, you know, we've been surprised before. There is a lot of pent-up demand with a lot of our clients who were not...
Speaker Change: comfortable transacting over the last two years that have become more comfortable. There's more distress at the at the local level on a situational basis, you know, the kind of institutional distress of massive discounted portfolio sales is not happening.
Speaker Change: because lenders are not in a position to discount huge portfolios mark-to-market and take those losses. Therefore, they've been much more willing to work with lenders to work out maturing loans that were underwater and buy them more time.
Speaker Change: and so we could we could see some bursts. At the end of the day I think there's going to be some choppiness to to the recovery curve but we will definitely regain those averages at some point.
Speaker Change: Great, that's helpful. And I guess just following up on that, with respect to that run rate level, just to clarify...
Speaker Change: As you mentioned, you guys had very strong years in 2021 and 2022 with EBITDA in the $150 to $200 million range, but it sounds like the average kind of normalized level that you're expecting from this recovery might be a little lower given the different circumstances. Is that fair?
from a pure market factor perspective.
Yeah.
from the perspective of our strategy with having many more
Speaker Change: experience professionals added to our company with a number of boutique firms that we've acquired and brought into our culture very successfully from the standpoint of our ongoing
Speaker Change: evolution of training and development for our sales force. There are many things above and beyond the market factor that we are aggressively pursuing both internally and through external growth that
Speaker Change: really fall into the control the controllable aspect of our business plan, that shouldn't be underestimated either.
Thank you very much. Have a good day. Thank you.
Speaker Change: provision. There hasn't been too many cycles where that hasn't come up or carried interest.
Speaker Change: There is a lot of questions around the expirations of the provisions that were part of the 2017
Tax Reduction and Jobs Act.
and all those questions led to a lot of uncertainty.
Speaker Change: over the past few months as I traveled around the country.
Speaker Change: And obviously the outcome of the election at least reduces some of that act, that it's more leaning toward the extension of those provisions, if not, you know, maybe improving some of them if some of the campaign
Speaker Change: promises are to be delivered on. But it is so hard to predict, Blaine, as you well know, what will actually come to fruition versus what is intended or what is advertised.
Speaker Change: I mean, that's very, very hard to predict. Overall, though, the sentiment that I'm certainly picking up and were picking up throughout my travels prior to the election was that this outcome would be more favorable toward real estate and economic growth.
Speaker Change: and it happened as many of our forecasters had predicted it would.
Speaker Change: In California, Blaine, as you well know and we've spoken about before, Prop 33, which
Speaker Change: was a proposal for taking the current rent control laws to an extreme, did not pass.
Speaker Change: by a wide margin. It's the third time in several years that
Speaker Change: a group that intended to really disrupt the multifamily market in California. That's just one example. It's a regional example of some of the other local legislative concerns around rent control that have been popping up and it did not pass.
Speaker Change: The industry did a lot to educate the market around the fact that rent control actually exacerbates the problem of supply shortage and affordability. It doesn't help it because it chokes off investment and new supply. So that's another positive factor on that front that's noteworthy.
Speaker Change: Great color. And lastly, just shifting gears, can you give an update on the opportunity set that you guys see in front of you with respect to M&A? Maybe just some color on the types of businesses you're looking at, whether it be on the financing or transaction side. Any specific areas of the business that you think would be beneficial to add or expand? And thoughts on whether we should continue to expect smaller one-off deals, or if there might be any larger transactions you'd consider?
Speaker Change: Sure. In this particular quarter, most of our discussions were around
at Teams.
Speaker Change: and boutiques that would be a nice fit into our brokerage operation and markets where we have certain product types that is low on coverage or has no coverage. But in general, as we've discussed before, we have a strong appetite for complimentary businesses such as appraisal, valuation, and consultation. We've had some conversations with
some entities of scale around that.
We've had a couple of explorations around investment management.
Speaker Change: and both of those verticals appear to be very complimentary to different parts of our business. And it's the synergies with the existing business, it's the expanded service capabilities for the same client base, particularly the private client, obviously.
Speaker Change: Given that it makes up the vast majority of our business, that drives what we look for and the conversations that we have started.
Speaker Change: There are some other interesting synergistic ideas that we're working on, but in the quarter, the particular period was more around individual agents, teams, and boutique firms on the brokerage side.
Steve, anything to add to that?
Steve DeGennaro: and the degree of bid-ask spread, those numbers have come in a little bit. We'll still remain disciplined in how we look at and evaluate these firms.
Speaker Change: but there seems to be some movement there. And again, would reiterate that we have been active on the team front, the Batik firm front, filling out in particular geographies and particular property types.
Speaker Change: You know, Glenn, just kind of a reminder of conversations we've had around the market or the available pool being very fragmented, because if we're driven by synergies for the private client, driven by synergies by our existing brokered sales force,
Speaker Change: that fundamentally points to a pretty fragmented market. Therefore the companies, the service providers that we could bring in, tuck in, are also not huge in size. So our reality has been multiple smaller targets.
Speaker Change: in that part of the business. Other complementary potential ideas around larger deals or our IPA strategy, obviously investment management, fits that part of the business a little tighter just because of property size and price point.
Speaker Change: correlation to IPA's larger deal profile and the kinds of clients that IPA targets.
Very helpful answers. Thanks so much, guys.
Great to have you on the call.
Speaker Change: No further questions in the queue. I would like to hand the conference back over to management for closing remarks.
Speaker Change: Thank you, Operator, and many thanks to everybody who joined this call. We look forward to keeping in touch with you, seeing you on the road, and our next earnings call.
This call is adjourned.
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