Marcus & Millichap, Inc. (NYSE:MMI) Q1 2024 Earnings Call Transcript

Marcus & Millichap, Inc. (NYSE:MMI) Q1 2024 Earnings Call Transcript May 11, 2024

Marcus & Millichap, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to Marcus & Millichap's First Quarter 2024 Earnings Conference Call. 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.

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. Actual results can differ materially from those implied by such forward-looking statements due to a variety of factors, including, but not limited to general economic conditions and commercial real estate market conditions, the company's ability to retain and attract transactional professionals, the company's ability to retain its business philosophy and partnership culture amid competitive pressures, 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.

Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release, which was issued this morning and is available on the company's website, 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 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.

With that, it's 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 first quarter earnings call. The highly anticipated start to the interest rate easing cycle by the Federal Reserve messaged 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 an 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. 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. 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 support. The expected revenue levels, which would typically follow these investments in a stable market, remain hampered temporarily as we work through this market disruption. 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 efforts, client outreach, branding and ensuring that MMI remains prominently in the center stage at key industry events. 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 growth. Our strategy is also unwavering when it comes to pursuing strategic acquisitions, 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 sellers. 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. 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. 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 are 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 1300 transactions in the quarter, including 234 financings with 121 separate lenders in this tough environment. 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. From a market perspective, we continue to see hamper 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 adjustments. 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 sideline, 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. We are also seeing growing demand for our auction services, which is a complementary offering we added ahead of the market downturn, 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 numerous technological advances we've made over the past few years will play a major part in accelerating our growth into the next cycle.

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?

Steve DeGennaro: Thank you, Hessam. As Hessam mentioned, revenue for the first quarter was $129 million compared to $155 million in the prior year quarter. Breaking down revenue by segments, 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. Brokerage volume for the quarter was $5.7 billion, over 1102 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. 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. 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. 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.

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 the lower revenue. 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.

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. The future tax rate may fluctuate as the relationship between these 2 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. As a reminder, our deferred earnings program has a 3-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. Over the past 2 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. Recent inflation data, however, has 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. 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.

Operator: [Operator Instructions] And our first question comes from the line of Young Ku with Wells Fargo. Please proceed with your question.

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