Marcus & Millichap, Inc. (NYSE:MMI) Q4 2023 Earnings Call Transcript
Marcus & Millichap, Inc. (NYSE:MMI) Q4 2023 Earnings Call Transcript February 16, 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: Greeting, and welcome to Marcus & Millichap's Fourth Quarter and Year End 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, operator. Good morning. And welcome to Marcus & Millichap's fourth quarter and year end 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 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 transaction 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 statements, 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 Web site, 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, the webcast link is available on the Investor Relations section of the company's Web site at www.marcusmillichap.com, along with the slide presentation you may reference during the 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 Marcus & Millichap team, good morning, and welcome to our fourth quarter and year-end earnings call. 2023 ended up as one of the most challenging periods for the commercial real estate industry. The residual effect of soaring interest rates and volatility caused a breakdown in valuations and pushed buyers and sellers alike to the sidelines. The impact of widened bid-ask spreads and severely restricted financing was illustrated by the lack of the usual fourth quarter investor urgency to close deals before year end. For the year, transaction and financing volumes declined by an estimated 55% market wide based on third-party sources. MMI's revenue for the fourth quarter was $166 million, up modestly from the third quarter and adjusted EBITDA loss came in at $4.5 million.
For the year, revenue was just short of $650 million, a decrease of 50% for the prior year with an adjusted EBITDA loss of $20 million. While these results are extremely frustrating for our team, it is important to note that despite this challenging environment, MMI still closed roughly 7,500 transactions last year, once again more than any other firm. Our unique marketing system and culture of collaboration resulted in 44% of our closings going to out of state buyers, which highlights our ability to generate buyer interest locally and nationally, even in a disruptive market. Our ability to solve problems and uncover opportunities for our clients resulted in a movement of $12.6 billion across markets and product types. The company's financing experts at MMCC and IPA Capital Markets closed nearly 1,100 financing transactions with 350 separate lenders.
Leveraging this vast network of lender relationships and real time information exchange among our originators are major advantages for our clients in this market. These numbers in the company's financial results would be significantly stronger if not for three key challenges that we believe are temporary. The first is the market's impact on our productivity. Listings have been difficult to price appropriately and are taking longer to market and put under contract. An elevated portion of our deals have fallen out of contract with many going in and out of contract more than once. This is due to lender and/or buyer issue and essentially having to remarket the same deal multiple times to reach an actual closing. The net impact of getting the job done for our clients in a difficult environment is reduce time for new business development.
The second challenge is higher expenses related to investments made over the past few years for top tier talent at a time when their revenue production is well below long term averages, entirely due to market headwinds. We're confident that the strategy behind acquiring and retaining top level producers all of which were made with sound underwriting will drive long term growth as the market recovers. Lastly, the broad nature of the market disruption has not only impacted larger institutional transactions, but it's also impeded private client transactions more than past cycles. Although the percentage decline in private client deals is still far less than larger transactions, pricing uncertainty and widened bid-ask spreads across all property types have lowered private client trading.
The pullback by banks and credit unions that usually provide the majority of financing for our private client deals is a contributing factor to this particular challenge. The good news is that the passage of time and the market's realization that interest rates are unlikely to return to record lows is starting to spur the valuation reset necessary to bring buyers and sellers back into alignment. We anticipate that assets previously withheld from the market in the hopes of better pricing will be brought to market at more realistic prices in the quarters ahead. This shift is being prompted by maturing debt as well as operational issues, particularly in deals that were underwritten aggressively over the past few years. Our IPA division is seeing an uptick in inventory coming to market by institutional owners as well as cautious interest on the buy side.
In the meantime, our strategy remain on offense while being diligent on investment underwriting and cost management continues into 2024. Some examples include our leading presence at key industry events and conferences, such as National Multi Housing Council, NMHC, ICSC, NAIOP and other organizations covering every major property types. Our client webcast, which drew over 40,000 investors last year, expanded research content through 3,300 publications, and various client outreach programs help our sales force stay connected and enhance their client relationships. Service expansions, including auction and loan sales continue to provide alternative ways to add value to our clients. We continue to have success in attracting top local teams and groups and remain highly focused on sourcing acquisition opportunities.
Recent negotiations with firms within our core business as well as complementary service lines reinforced the external growth opportunity and interest in MMI. However, they've been hampered by ongoing gaps between pricing and terms expectations given the degree of short to mid term market uncertainty. We're confident that in time, there will be more realism by sellers as we pursue additional opportunities to accelerate growth. Notwithstanding our cost containment measures, we're investing more in M&A related resources as this area remains a high priority. Another key priority is expanding recruiting resources and programs. Our experienced professional targeting and acquisitions continued to show success. In the last year, we brought on board numerous experienced individuals and teams across the country and product types.
Recent examples include a major institutional apartment team that joined IPA in our Washington, D.C. office and major capital markets team that joined in New York, as well as highly experienced market leaders added in Dallas, Nashville, Los Angeles and Toronto, just to name a few. Our net hiring of newer professionals continues to be a challenge as the market disruption is keeping the fallout ratio of newer agents elevated. In the fourth quarter, we initiated a proactive push to terminate those who are unlikely to become productive. The flow of new candidates is actually increasing, which is very encouraging and we're expanding our internship, mentorship and training programs as part of our commitment to return to positive net hiring of new associates.
Looking forward, we believe that the Fed's eventual lowering of interest rates and investors' growing confidence in the economic soft lending will be the key catalyst in rising trading activity. Persistently strong job numbers and January's higher than expected inflation data have taken the pressure off the Fed to start easing, further fueling the higher for longer trend we pointed out on our last call. However, with the real estate pricing reset underway and some degree of interest rate easing by the Fed expected by midyear, we're cautiously optimistic for an improving market environment in the second half of this year. In the meantime, our theme of control the controllable drives management's focus as applied to internal tools, education and best practices sharing as well as providing best-in-class brokerage services to our teams.
At the same time, we continue to pursue external growth opportunities through our acquisition strategy. Our playbook from past down cycles in 52 years of being in business continues to improve each time with the benefit of technology, a strong and growing brand and laser focused on revenue growth. Throughout the recent market and economic shifts, we've effectively balanced strategic investments with returning capital to shareholders. MMI has a long history of producing high quality earnings that have generated strong cash flows through multiple economic cycles. The combination of share repurchases and dividends reflect our commitment to maximizing shareholder value. The strength of our balance sheet combined with our leading market position and brand form an exceptionally strong foundation for our long term success.
And with that, I will turn the call over to Steve for additional insights on our financial results. Steve?
Steve DeGennaro: Thank you, Hessam. As previously mentioned, revenue for the fourth quarter was $166 million compared to last year's $262 million. For the full year, total revenue was $646 million compared to last year's record high of $1.3 billion. Revenue from real estate brokerage commissions for the fourth quarter was $145 million or 87% of total revenue compared to $236 million last year, a decrease of 39% year-over-year. For the quarter, total sales volume was $8.7 billion across 1,413 transactions, down 33% and 31% respectively. For the full year 2023, revenue from real estate brokerage commissions was $560 million and accounted for nearly 87% of total revenue compared to $1.2 billion last year, a decrease of 52% year-over-year.
Full year sales volume was $30.8 billion across 5,475 transactions, down 55% and 40% respectively. Average transaction size during the fourth quarter was approximately $6.2 million compared to $6.4 million a year ago. For the full year, average transaction size was $5.6 million compared to $7.5 million in the prior year. The year-over-year decrease in average transaction size reflects a decline in property values as well as a lower mix of revenue coming from middle market and larger transactions due to the disproportionate impact of the market disruption on institutional business. Within brokerage, for the quarter, our core private client business contributed 66% of brokerage revenue or $95 million versus 62% last year. For the full year, the private client business contributed 67% of brokerage revenue or $373 million versus 58% last year.
Middle market and larger transactions, which experienced strong growth over the past couple of years, together accounted for 31% of brokerage revenue or $44 million during the fourth quarter compared to 36% last year. For the full year, middle market and larger transactions represented 30% of brokerage revenue or $166 million compared to 40% last year. For the quarter, private client business declined 35% while middle market and larger transactions declined 49% and 47% respectively. For the full year, the trend away from larger deals was more pronounced with private client declining 45% and middle market and large transactions declining 61% and 66% respectively. Revenue in our financing business, including MMCC, was $16 million in the fourth quarter compared to $22 million last year.
During the quarter, we closed 237 financing transactions totaling $1.5 billion in volume compared to 408 transactions or $2.4 billion in volume in the prior year. Financing revenue for the full year was $67 million compared to $113 million last year. This was achieved across 1,076 transactions totaling $6.7 billion in volume compared to 2,143 transactions and $12.8 billion in volume last year. Other revenue comprised primarily of consulting and advisory fees, along with referral fees was $6 million in the fourth quarter compared to $5 million last year. For the full year, other revenue was $19 million this year compared to $18 million last year. Turning to expenses. Total operating expense for the fourth quarter was $183 million, 29% lower than last year.
For the full year, total operating expense was $705 million, 39% lower compared to the prior year. Lower expenses were primarily due to a reduction in variable expenses related to lower revenue. Cost of services was $105 million or 63.4% of total revenue for the quarter, a decrease of 550 basis points compared to prior year. For the full year, cost of services was $407 million or 63% of total revenue, a reduction of 240 basis points compared to last year. The lower cost of services as a percentage of revenue reflects lower commission rates as fewer agents surpassed revenue thresholds. SG&A in the fourth quarter was $75 million, an increase of 2.9% over the prior year, primarily due to increased stock compensation and consolidation of office space in certain markets.
For the full year, SG&A was $285 million, a decrease of 5% compared to last year. The full year decrease was attributable to lower variable compensation tied to business performance impacted by market conditions along with ongoing cost reductions. The decreases were partially offset by expenses related to talent acquisition and retention, as well as new business development and marketing support. Despite the market disruption and its near term impact on our earnings, we remain committed to investing in our operating platform, sales force growth, technology and infrastructure. Based on our experience through multiple cycles, these enhancements during a downturn have proven to drive long term value. We are working diligently to balance near term profitability with these strategic investments.
During the fourth quarter, we reported a net loss of $10.2 million or $0.27 loss per share compared with net income of $7.9 million or $0.20 per share in the prior year. For the full year, net loss totaled $34 million or $0.88 loss per share compared to net income of $104.2 million or $2.59 per share last year. For the quarter, adjusted EBITDA was negative $4.5 million compared to positive $14.1 million in the prior year. For the full year, adjusted EBITDA was negative $19.6 million compared to positive $165.5 million in the prior year. The effective tax rate for the quarter was 12% and for the full year was 16%. Moving on to the balance sheet. We remain well capitalized with no debt and $407 million in cash, cash equivalents and marketable securities, down only modestly from the prior quarter's $411 million.
During the quarter, we returned a total of $14.6 million of capital to shareholders through dividends and share repurchases at an average price of $27.92 per share. For the full year, we returned $59 million of capital to shareholders, including $39 million in share repurchases and $20 million in dividends despite the challenging market environment. This is a testament to the strength of our balance sheet and the conviction in the long term outlook for the business. Since inception of our capital return programs roughly two years ago, we have returned more than $150 million to shareholders and still have nearly $72 million remaining on the current share repurchase authorization. Finally, last week, we announced that our Board declared a semiannual dividend of $0.25 per share or approximately $10 million payable on April 5, 2024, to shareholders of record on March 12, 2024.
Looking ahead to 2024, the headwinds facing the market are likely to remain a challenge through the first half of the year. In addition, our deal pipeline coming into the year did not have the same momentum it did going into 2023. However, we are cautiously optimistic that the end of the Fed's aggressive rate hikes will lead to improving conditions in the latter half of the year. We expect first quarter revenue to follow the usual seasonal pattern and be down sequentially from Q4. Cost of services for the first quarter should follow the seasonal reset and be in the range of 59% to 61% of revenue. This is slightly lower than the first quarter of last year given current market dynamics. SG&A for the first quarter should decrease year-over-year in absolute dollars, consistent with lower revenue and lower agent support costs tied to 2023 revenue.
We remain committed to helping clients navigate external market conditions, while internally, we continue to drive operational efficiency through best practices across the organization. We know that the investments we continue to make in the platform today position us to capture growth when market conditions normalize and transactional activity resumes. With that, operator, we can now open up the call for Q&A.
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