Marcus & Millichap, Inc. (NYSE:MMI) Q3 2023 Earnings Call Transcript

Marcus & Millichap, Inc. (NYSE:MMI) Q3 2023 Earnings Call Transcript November 3, 2023

Marcus & Millichap, Inc. beats earnings expectations. Reported EPS is $-0.24005, expectations were $-0.26.

Operator: Greetings, and welcome to Marcus & Millichap’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. 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 Third Quarter 2023 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 variations of these words, and similar expressions are intended to identify forward-looking statements. Actual results can differ materially from what 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, 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, 2023.

Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company’s earnings release, which was issued this morning and is available on the company’s website represents a reconciliation 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 and — 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 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 2023 earnings call. The market challenges we’ve been facing this year continued on in the third quarter. The 10-year treasury yield briefly touched the psychologically key level of 5% and the Federal Reserve sent a clear signal of higher for longer in its interest rate outlook starting with inflation is proving to be more persistent than expected. Rate volatility, a restrictive lending environment, and the cumulative effect of the sharp increase in the cost of debt over the past 18 months, weighed heavily on sales and financing volumes. Revenue for the quarter came in at $162 million, down 50% over last year, with an adjusted EBITDA loss of $6.6 million.

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Q&A Session

Revenue production remains hampered by the widened bid-ask spread, constrained financing, and interest rate volatility, disrupting deal closing. Transaction time-lines extended significantly beyond historical norms, and many deals fell out of contract multiple times, creating a drag on our team’s productivity. The result was a 39% decline in the number of brokerage sales transactions and a 59% decline in volume during the quarter. Given the macro nature and scope of the capital markets disruption, all product types and price segments showed major declines. Our traditional advantage as a market leader in the private client segment remains intact. As Steve will cover in his remarks, the private client market has declined the least of all segments as smaller deals are more driven by personal circumstances, and easier to finance.

As history has also shown time and again, the private investor will also likely lead in the recovery. On the other side of the spectrum, the severe drop-off in larger transactions is having an outsized impact on MMI’s revenue trends, especially considering that this part of our business outpaced the market in the past few years. We firmly believe that our expanded coverage in larger transactions and penetration into the institutional client segment through our IPA division are critical to our long-term competitiveness. MMI is uniquely qualified to bridge the vast private capital world with institutional assets and create value for all client segments. Notwithstanding expense reductions in various cost containment strategies we’ve employed, the loss in the quarter is largely due to expenses related to investments made over the past several years.

including the acquisition and retention of top producers and teams. It also reflects our strategy to remain on the offensive side despite revenue headwinds by further growing the experienced cadre of our sales force, investing in key industry conferences, client outreach programs and providing resources for analytical and market research support. Although transaction activity is down significantly market-wide, our clients’ need for market information, asset evaluation, and opinions of value are at a high, given the degree of uncertainty in the marketplace. We view the costs associated with providing personalized client support as an investment in long-term relationships that will manifest in future business. We remain steadfast in our belief that these investments will help us lead in the recovery, which is a matter of when, not if, based on our experience through multiple cycles over the company’s 52-year history.

To begin a recovery, we believe several underlying forces will eventually converge to drive higher transaction volumes. These include a still strong labor market, which is more likely to slow than fall off a cliff and resistant consumers who may also come off of recent spending highs, but sustain a solid financial profile. These economic pillars support strong property fundamentals across all product types with the exception of older office assets. Another encouraging factor is that we appear to be very close, if not at the end of the most aggressive Fed tightening cycle in 40 years. This milestone, even without a Fed pivot to lowering interest rates anytime soon, should bring some stability and direction to the market and help price discovery.

Perhaps more critical than any quantitative factor is time. The time sellers are adjusting to more realistic price expectations and record capital on the sideline is starting to reenter the market. The difficulty in obtaining financing and significantly lower loan-to-value is not keeping astute investors from acquiring desired assets if the price is right. Although wholesale distressed sales by lenders are unlikely to become a major wave, individual situation arising from maturing loans, operating issues, and or personal drivers are creating investment opportunities and recapitalization across all property types. For example, even within multifamily, which generally has the strongest fundamentals in the business, speculative transactions made at the peak pricing levels on short-term financing or having issues with maturing loans that are now far more costly and difficult to replace.