Operator: Greetings, and welcome to Marcus & Millichap Second Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Jacques Cornet. Thank you. You may begin.

Jacques Cornet: Thank you. Good morning and welcome to Marcus & Millichap’s second 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 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; 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 28th, 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. 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 is being webcast. The webcast link is available on the Investor Relations section of the company’s website at www.marcusmillichap.com, along with this 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 second quarter 2023 earnings call. The widened bid/ask spread and restricted lending environment severely hindered commercial real estate trading and financing volumes in the second quarter. MMI’s results for the quarter reflected this challenging market, which was marked by elevated transaction and listing cancellations and frequent asset repricing due to the interest rate shock and economic uncertainty. MMI also faced an exceptionally tough comparison to the second quarter of 2022, which had outsized revenue growth of 39% and was the second highest revenue quarter in our history. Revenue for the second quarter of 2023 came in at $163 million, which was lower by 59% year-over-year.

Adjusted EBITDA loss of $1.1 million was due to expenses related to investments made over the past several years in our salesforce, acquisitions, proprietary technology development and expanded infrastructure. Notwithstanding previous cost reductions and ongoing expense management, we believe playing offense during this prolonged market disruption will create a competitive advantage for the company in the recovery and beyond. Our strategy includes doubling down on client outreach, supporting and retaining our sales force, adding experienced professionals and pursuing strategic acquisitions. I’m proud to report that we made progress on all fronts during the second quarter while elevating internal communication, best practice of sharing and skills development.

These are hallmarks of Marcus & Millichap’s collaborative culture and have been extremely effective in previous downturns. In addition to investments made in expanding the platform, we believe several developments will add value in the long term. For example, the collaboration between our sales and financing professionals has increased markedly, as the difficult financing market is accentuating the knowledge and lender relationships of our loan originators. Our auction division, created just 18 months ago by adding industry-leading specialists, is becoming more integrated with our sales force. Auctions provide an alternative channel for rapid marketing of certain assets and aging inventory. Our financing and sales professionals are actively partnering with our loan sales division to advise lenders, special servicers and government agencies on valuation and disposition of loan portfolios and assets.

Our ever-expanding research content and media coverage is reaching a record number of investors and helping clients develop strategies and pursue opportunities. Last but not least, our technology advances are expanding how we connect with our clients on specific listings and leads. These initiatives are fundamentally enhancing our leverage and execution, which will pay dividends far beyond the current disruption and recovery. From a market standpoint, the Fed’s continued hawkish stance has intensified the disruption and price discovery. Valuations for the lowest cap rate assets, particularly apartments, have been the most impacted by the interest rate shock, leading to a major drop in trading volumes. Bank failures in the first quarter and exposure to distressed real estate has pushed many active lenders out of the market.

Sellers’ price expectations have been misaligned with buyers still struggling with uncertainty and lower loan to values, on top of the doubling of interest rates in the past year. These converging forces manifested in a 54% drop in transactions and a 63% drop in sales volume in the overall marketplace according to RCA. This marks the fourth consecutive quarter of a pronounced industry-wide decline in activity, reflecting the current dislocation’s broad nature. MMI outperformed the broader market in brokerage transactions, which declined 47% in the quarter. The company’s brokerage sales volume decline of 62% was in line with the market. But as mentioned earlier, this is on a 47% year-over-year increase in our sales volume in the second quarter of 2022, and that should be kept into perspective.

Private Client revenue for the quarter fell 54%. The Private Client segment is still driven by many personal motivations to trade and has more available financing options. Nonetheless, a wide bid/ask spread is also lowering volumes in smaller deals, but to a much lesser extent. Revenue from middle market and larger transaction sales declined 69% and 73%, respectively, as major private investors and institutions remained on the sidelines. Given extremely tight credit conditions, revenue from financing fees was off 51%. Yet we transacted with 141 separate lenders in the quarter, illustrating the skill, tenacity and access our financing team brings to investors and our own sales force, regardless of market conditions. I want to highlight that, despite all of these challenging factors, the company closed over 1,400 brokerage transactions and nearly 300 financings during the second quarter.

For the first half of the year, we’ve closed 2,700 brokerage transactions and over 550 financings. MMI continues to rank as the top brokerage company by transaction count. This is the result of our client commitment and the hard work, persistence and skill of our sales force and support teams. On another positive note, there is no shortage of capital or demand for appropriately priced commercial real estate assets. In these cases, we’re generating multiple offers for our clients from buyers using more equity and, in some cases, paying all cash to be in the right markets and fetch the right assets that fit their long-term strategies. We’re also seeing short-term financing solutions and structures to secure well-priced assets with buyers leaving themselves flexibility for future refinancing.

Office properties remain the outlier in price discovery, while improving fundamentals in retail over the past several years has fostered more buyer demand and ironically makes retail a highly desired asset class. Looking forward, the notion of a Fed pivot to lowering interest rates in the near term has been taken off the table. Despite major progress in rating in inflation, there’s still a long way to go to reach the Fed’s 2% target. This means recalibrating real estate values in light of higher interest rates will simply take more time to work through the marketplace. Healthy property fundamentals, with the exception of office and a shift in sentiment from recession concerns to an expectation of an economic soft landing, bode well for sustained buyer interest.

Although some distressed sales are expected, the Fed and the FDIC have specifically encouraged lenders to extend the maturing loans as much as possible to avoid write-downs. As buyers come to realize that a widespread price correction is unlikely and sellers become more realistic on pricing, a realignment in the marketplace will trigger a reversal in trading volume trends. The clarity that will come when the Fed declares the end of the tightening cycle should also foster more activity. We cannot predict or control the time line for the shift. However, we are laser-focused on executing our own strategy in the meantime. For MMI, this prolonged market disruption is an opportunity to help more investors assess portfolios and solve problems, benefit from our market making and value-added services and leverage opportunities we can uncover for them.

By partnering with us, our clients will navigate this environment, and we will gain more of their confidence, mind share and eventually, market share. One of the key challenges exacerbated by the market downturn is net hiring of new professionals. The unusually strong job market and rising wages are greater factors today than in previous cycles in attracting recent college graduates and newer professionals from other sales industries. At the same time, a challenging market is making it harder for our new trainees to break into the business. As I’ve mentioned on past calls, we are committed to our organic hiring system and continued to push various candidate outreach initiatives, enhance training and development and are adding corporate recruiters to return to positive net hiring.

In the meantime, for many experienced professionals, MMI is proving to be the ideal platform to enhance their careers. We have demonstrated this through many such additions since the pandemic with positive mutual results and continue to build on this momentum. I’m happy to announce the most recent addition of our market-leading finance team in New York that will further elevate our capital markets capabilities. We’re also in active discussions with potential acquisition targets that we believe would bring strategic and market coverage advantages to MMI. Our strong balance sheet forces the foundation to remain offensive while continuing to return capital to shareholders through dividends and share repurchases. We will continue to assess the highest and best use of capital as market conditions shift with an eye to increasing our acquisition target pipeline further as valuation expectations become more reasonable.

And with that, I will turn the call over to Steve for additional insights on our results. Steve?

Steve DeGennaro: Thank you, Hessam. As we look at this quarter’s results, it’s important to provide context and a reminder of the market landscape a year ago. In the first half of last year, investor demand was fueled by still low interest rates and an urgency to transact ahead of further interest rate hikes. In contrast, today’s higher rate environment, resulting from the Fed’s aggressive actions over the past 15 months and severely restricted credit markets, are impeding trading volumes. Year-over-year comparisons are also skewed by the fact that Q2 2022 was the second highest revenue quarter in the company’s history. With that backdrop in mind, let’s turn to the current year results. Revenue for the quarter was $163 million compared to $396 million in the prior year quarter.

For the six-month period, revenue was $318 million versus $715 million last year. On a segment basis, revenue from real estate brokerage commissions for the second quarter was $140 million and accounted for 86% of total revenue compared to $352 million last year, a decrease of 60% year-over-year. The quarter represents total sales volume of $7.5 billion across 1,422 transactions, which is down 62% and 47%, respectively. For the six months year-to-date, revenue from real estate brokerage commissions was $275 million and accounted for 87% of total revenue compared to $642 million last year, a decrease of 57% year-over-year. Year-to-date total sales volume was $14.7 billion across 2,701 transactions, down 60% and 44%, respectively. Average transaction size during the second quarter was approximately $5.3 million as compared to $7.4 million a year ago, reflective of fewer larger transactions.

Within brokerage, for the quarter, our core Private Client business contributed 69% of brokerage revenue or $96 million. This compares to 59% of revenue last year. For the six-month period, the Private Client business contributed 68% of brokerage revenue or $187 million versus 58% last year. Our middle market and larger transaction segments, which experienced outsized growth over the past couple of years, together accounted for 28% of brokerage revenue or $39 million during the second quarter compared to 39% last year. For the six-month period, the middle market and larger transaction segments represented 29% of brokerage revenue or $79 million compared to 40% last year. Once again, these results reflect the fact that many institutional buyers are out of the market, pending further clarity on rates and pricing.

Revenue in our financing segment, including MMCC, was $18 million in Q2 compared to $37 million last year. In the quarter, we closed 284 financing transactions totaling $1.6 billion in volume compared to 697 transactions for $4.5 billion in volume in the prior year. Financing revenue for the 6 months was $34 million compared to $63 million last year. Year-to-date, this represents 563 transactions totaling $3.4 billion in volume compared to 1,217 transactions and $7.2 billion in volume last year. Other revenue, comprised primarily of consulting and advisory fees, along with referral fees, was $4.6 million in the second quarter compared to $4.5 million last year. Year-to-date, other revenue was $8.5 million this year compared to $10.6 million last year.

Moving on to expenses, total operating expenses for the second quarter were $174 million, 49% lower than last year. Year-to-date, total operating expenses were $344 million, 44% lower compared to the prior year. Lower expenses were largely a result of lower revenue. Cost of services was $101 million or 62.1% of total revenue, an improvement of 260 basis points over the second quarter last year, consistent with lower revenue. Year-to-date, cost of services was $197 million or 61.9% of total revenue, an improvement of 140 basis points compared to last year. SG&A during the quarter was $69 million, a decrease of 14% over the prior year. For the six-month period, SG&A was $141 million, a decrease of 9% compared to last year. The decreases in SG&A reflect lower variable compensation tied to business performance as well as cost reductions implemented over the past six months.

This was partially offset by expenses related to talent acquisition and retention as well as new business development and client marketing support. As we have discussed over the last few calls, the combination of lower revenue, with the fixed nature of certain expenses related to growing the sales force, technology and infrastructure over the past few years, impacts profitability. For the second quarter, we recorded a net loss of $8.7 million or $0.23 loss per share compared to net income of $42.2 million or $1.04 earnings per share in the prior year. For the six-month period, the net loss was $14.6 million or $0.37 loss per share compared to net income of $75 million or $1.85 earnings per share in the prior year. For the quarter, adjusted EBITDA was negative $1.1 million compared to a positive $62.9 million in the prior year.

For the first 6 months, adjusted EBITDA was negative $8.5 million compared to a positive $114.8 million in the prior year. The effective tax rate for the quarter reflects the change necessary to bring the year-to-date rate into alignment with the rate we expect for the full year. The expected annual rate is sensitive to the amount of expenses that are nondeductible for tax purposes in relation to projected pretax income for the full year, and therefore, can fluctuate. Our current expectation of the full year tax rate is approximately 17%. Moving to the balance sheet, we remain well-capitalized with no debt and cash, cash equivalents and marketable securities totaling $407 million. While our cash balance decreased $24 million in the quarter, that includes returning $27 million in capital to shareholders through a combination of dividends and share repurchases.

Continuing on the capital allocation theme, earlier this week, our Board declared a semiannual dividend of $0.25 per share to be paid on October 6th to shareholders of record as of September 15th. And during the quarter, we repurchased nearly 539,000 shares of common stock at an average price of $30.81 per share for a total of $16.6 million. Year-to-date, this brings total shares repurchased to nearly $1.1 million at an average price of $31.28 per share for a total of $34.4 million. As of today, approximately $76 million is remaining on the current repurchase authorization. As we have done since expanding our capital allocation strategy 18 months ago, I want to emphasize that our approach remains balanced, including strategic acquisitions, investments in technology, recruitment of top talent and returning capital to shareholders.

Turning now to the near-term outlook. The Fed has messaged that it will continue to raise rates in response to stubbornly high inflation and a strong labor market. Therefore, rates are expected to remain higher for longer. This, coupled with the gap in price expectations and reduced credit availability, means that recovery will take time to play out. Given these conditions, we will continue to monitor our key metrics and stay vigilant in expense management. Cost of services as a percentage of revenue for the third quarter should follow the usual pattern and be sequentially higher than the second quarter. SG&A for the quarter should increase modestly from Q2 and be in line with the Q1 spend due to seasonal agent and client-related events. And as I mentioned previously, the tax rate is currently expected to be in the 17% range.

Our primary focus continues to be proactively engaging with clients, exploring strategic growth opportunities and driving operational excellence throughout the business. Our ongoing investments in systems, talent and market coverage are important steps for positioning ourselves for robust growth once the market conditions improve. With that, operator, we can now open up the call for Q&A.

Operator: Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Blaine Heck: Great. Thanks. Good morning out there. Hessam, can you talk about the relative resiliency in transaction volume in different size segments? I guess, do you find that the private client group is less sensitive to macroeconomic factors than larger institutional players? Or is it the opposite?

Hessam Nadji: Hi Blaine. There is sensitivity definitely across the full spectrum when it comes to interest rates, the direction of the economy, job growth and so on. But as we’ve discussed many times before, the private client group has personal circumstances, death, divorce, partnership breakups, needing to take profit from one investment in order to create more liquidity and take advantage of 1031 exchange opportunities to trade out of one property into another as kind of a reflection of the entrepreneurship of the private clients. And so that just creates more transactional opportunity for us and smaller deals are more financeable in a difficult financing environment like we’re facing right now. So, the decline in trading activity in the $1 million to $10 million Private Client segment has been less pronounced than the larger transactions, both in the marketplace and, of course, for us.

That doesn’t necessarily mean that there isn’t a bid/ask spread, there definitely is across the full spectrum. And the uncertainty that the entire industry has faced related to the direction of interest rates and the economy has impacted everybody up and down the spectrum. So, that’s, in a way, the kind of view of the attitudes among our private clients versus the institutions. We’re starting to see more of an interest in acquiring assets a lot among private clients. A lot of our private clients are well capitalized and ready to respond to opportunities that come up, if they’re priced correctly. And as I said in my comments, we’re starting to see that price adjustment and more realism on the sell side generate more activity. But we have quite a ways to go before the bid/ask spread really comes to align.

Blaine Heck: Great, that’s really helpful color. Obviously, the jobs report came in this morning with some mixed results, but an unemployment rate that’s stubbornly low. Can you talk a little bit more about how you’re thinking about hiring and retention in this tight labor market? And can you give us any thoughts on how we should think about your broker count moving forward?

Hessam Nadji: Sure. We are committed to our organic growth model. It has worked so well for us for so many years. And at the same time, we’re taking additional actions to help those newer professionals that are on board with Marcus & Millichap have a better chance of making it through the market dislocation through more mentorship, more training and more management support. Because we know that if they really survive, if you will, this type of a market environment as we experienced in 2008, 2009, their skill sets and the relationships that they develop will really launch their careers even more effectively, frankly, than a normal market. So, we’re very committed to that, both on the defensive side of helping as many of our newer professionals make it through the downturn, which is where we are starting in terms of priority and at the same time, doing even more with recent college graduates and sales professionals from other industries to bridge this very unusual employment market where we’re competing against a lot of different industries with base salaries and of course, the uncertainty around commercial real estate performance and the overblown media coverage in many ways around the stress on banks and commercial real estate being kind of a risk factor for the macro economy is making a lot of our candidates concerned about the industry.

So, our job and our manager’s job is to combat that at the local level with career nights, with career fairs, individual interactions with candidates and to overcome it. I don’t expect a turnaround immediately, but I know that over time, as both the employment conditions change and all these different initiatives that we’re launching or have been launching make a difference, the results will begin to improve. I should add, Blaine, on the experienced professional side of the equation, we continue to see great success, both in the testimonials and the case studies of those that have joined the company over the past three to four years and a very healthy pipeline of additional experienced professionals on both the brokerage side and the financing side that we’re actively speaking with right now.

Blaine Heck: Okay, that’s helpful. M&A continues to be a focus for investors. Can you talk a little bit more about any activity you guys might have on that front, whether you think pricing has adjusted enough to kind of reflect the higher rate environment? And how likely do you think acquisitions are in the second half of this year?

Hessam Nadji: Sure. As I’ve messaged last time, our pipeline of targets began to increase. And that includes some targets that we had, had dialogue with before that didn’t come to fruition, and we have resurrected some of those conversations. And therefore, I would say that the valuation expectations are beginning to improve. But I would say that they, too, just like real estate prices, have a ways to go before they come into line with what we believe is fair valuation, especially because of the fact that when you look at the last three years as a benchmark of performance and revenue production and earnings and so on, we’ve had such a lumpy period with the pandemic and then the post-pandemic. And you have to look even beyond the last three years for sustainability of revenue and earnings and retention of producers and all those very key metrics in a way that we have to manage the company’s risk going forward.

So, when you factor all that in and the seller’s expectation that underwriting should be based on their best 12 months ever, that’s where the gap kind of comes in. But we’re really encouraged by a number of conversations we’re having. And I really do believe that some good results will come out of our current evaluations and active dialogue. And let me ask Steve if he wants to add anything to the answer.

Steve DeGennaro: Yes. Thanks. Blaine, the only couple of comments I would add or emphasize would be around the pipeline or the funnel. It’s the largest that I’ve seen in the three years that I’ve now been here. So, I’m encouraged by that. As Hessam said, a number of opportunities that maybe were paused over the last six to nine months potentially resurrected. And these are opportunities certainly within our core brokerage and financing space. But we’re also poking around a little bit in areas that are adjacent to our core space, but that are still very much value add to our Private Client constituents. And as it relates to the bid/ask spread, similar comments, that still exists. But I would say that, that spread is closing.

Blaine Heck: Okay. Good to hear. Last one for me. I think you might have alluded to this in your prepared remarks, but can you talk about the partnership with M&T that was established in 2021? And whether you guys have any way to quantify the benefit of that partnership or otherwise kind of comment on the production of that partnership relative to your initial expectations?

Hessam Nadji: Sure Blaine. The overall market downturn has, of course, limited the volume that we would have achieved with M&T in agency lending in a normal market environment, for sure. But having said that, because the agencies have been active in the market, and because we were able to leverage our partnership with M&T to acquire or bring on board the Eisendrath Financial Group, which was the number one industry leader in agency production for major apartments about year and a half ago, we have done more business with M&T in the last six months that we have in the last year and a half or almost two years now since the partnership was put together. And we have a very healthy pipeline that would also qualify as our top performing subsector within our financing division, because the agencies are still active and because we do have the partnership with M&T and the origination capacity that the Eisendrath Group has brought to the firm.

They’re also integrating very well with our IPA multifamily sales teams in a very targeted effort by management to create a streamlined way for them to really partner and bring a combined value proposition to our clients, bring in the investment sales research capabilities that we’ve always had, but now really expanding that to include capital markets. And that includes a lot of advice and consulting as well as execution of actual financings because a lot of our mid-market and larger clients are frankly trying to come up with solutions to maturing loans and bridge the current financing environment to get through the next couple of years and position themselves for refinancing down the road when interest rates do come back down. So, having that capability actually is very beneficial at a strategic level because it puts us in front of the clients that we normally wouldn’t have a reason to be in touch with.

Blaine Heck: Okay, great. Thanks so much for all the time.

Hessam Nadji: Thank you, Blaine.

Operator: There are no further questions in the queue. I’d like to hand it back to management for closing remarks.

Hessam Nadji: Thank you, operator, and thank you, everybody, for joining our call. We look forward to seeing many of you on the road and look forward to our next earnings call for the third quarter. The call is adjourned.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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MARCUS & MILLICHAP INC

Q2 2023

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