Earnings Call Transcript - MMI Q4 2024

Operator, Operator

Greetings, and welcome to Marcus & Millichap’s Fourth Quarter and Year End 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, Host

Thank you, Operator. Good morning, and welcome to Marcus & Millichap’s fourth quarter and year end 2024 earnings conference call. With us today the 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, 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. 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. 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, CEO

Thank you, Jacques. Good morning, everyone, and welcome to our fourth quarter and year-end earnings call. I'm happy to announce that we finished 2024 with our highest quarterly revenue in two years. Revenue for the fourth quarter reached $240 million, an increase of 44% compared to last year, with adjusted EBITDA of $18 million and net income of $8.5 million. For the entire year, revenue rose by 8% to around $700 million, with adjusted EBITDA of $9.4 million and a net loss of $12 million. While we have made progress in reducing the net loss from the market disruptions of 2023, returning to profitability is a top priority and drives essential initiatives. During the quarter, brokerage revenue grew by 40%, with 23% more transactions and a volume growth of 41%. Our results significantly outperformed the market, which only saw a 6% increase in transaction count and a 32% rise in volume as reported by RCA. Financing revenue nearly doubled in the fourth quarter, and volume surged by 139% as our team made further inroads into larger transactions and expanded our IPA Capital Markets Group. To highlight our progress, our previous quarterly record before the market disruption in 2022 was just over $36 million. In the fourth quarter of 2024, we achieved $31 million in revenue despite a challenging lending environment. A significant factor was our originators’ connections with lenders. MMCC worked with 177 different lenders in the quarter and 367 for the entire year 2024, which was instrumental in these improved outcomes. Our fourth-quarter results exceeded expectations due to three key factors. Firstly, the substantial decline in the ten-year treasury yield to 3.6% in September, following the Fed's decisive interest rate cut of 50 basis points. This period of lower interest rates coincided with price adjustments since the peak of 2022 and a surge of capital eager to re-enter the market. Internally, our continuous effort throughout the year to enhance client interaction and grow our exclusive inventory helped expand our deal pipeline heading into the fourth quarter as these factors aligned. This included a notable rise in larger transactions returning to the market as institutional capital gained momentum. Importantly, the urgency to close deals, spurred by rising interest rates, began to boost revenue growth toward the end of the fourth quarter. By mid-November, the ten-year treasury yield increased to 4.4%, influenced by the elections, perceptions of inflationary policies, and the Fed's ongoing struggle to control inflation. This created heightened motivation to finalize deals that had secured lower interest rates in anticipation of a potentially higher rate environment in 2025. Consequently, our impressive results in the fourth quarter stemmed from a significantly higher closing ratio of deals under contract compared to historical averages, along with some transactions moving forward in timing. Revenue from middle market and larger transactions increased by 56% and 88% respectively, while private client revenue grew by 27%, even as financing for smaller deals from banks and credit unions remained limited. For the year, the company completed 7,800 transactions with a volume of $43.6 billion, reflecting increases of 4% and 14% respectively compared to 2023. This averages out to 31 transactions per business day, or four per business hour, keeping MMI as the leading investment brokerage firm by transaction count according to various third-party sources. I want to acknowledge the hard work and commitment our team showcases for each client in every transaction. Looking ahead, the Fed's efforts to control inflation are proving tougher than anticipated, as the labor market stays robust and tariff threats create added uncertainty. As a result, many clients who planned to bring inventory to market in the first quarter are now taking a more cautious approach. Our team is actively contending with interest rate volatility, which remains a major challenge in facilitating transactions between buyers, sellers, and lenders. Notably, the ten-year treasury yield has fluctuated by at least 50 basis points in either direction 15 times since March 2022, when the Fed started market disruptions. Each of these changes impacts real estate pricing, investor sentiment, and loan-to-value ratios, among other factors related to marketing and closing deals. The frequency of price adjustments, expirations, and contracts falling through remains high, diverting our sales force’s attention from pursuing new business. Despite these challenges, there are reasons to be cautiously optimistic about incremental growth in transactions this year after a sluggish start. We're observing an increase in situational distress, where maturing loans and operational challenges related to insurance costs and availability are prompting more listings and sales. Furthermore, elevated interest rates and a Fed that shows no urgency to ease soon are pushing prices down further. As hopes for a miraculous Fed intervention diminish and the urgency to sell increases, we expect more realistic pricing. Well-priced assets are still attracting multiple buyers in most instances. Overall, current pricing for most property types remains attractive compared to replacement costs, encouraging private investors and institutional buyers to seek out opportunities. Additionally, construction starts are rapidly declining as we move into 2025 and are projected to decrease further in 2026. This is particularly relevant for apartments, industrial properties, hotels, and self-storage sectors, where overbuilding has led to localized softness. Retail continues to be a sought-after asset class due to limited new supply and recent repositioning efforts. This demand is especially evident in our multi-tenant shopping center operations. The office market exhibits a split, with older urban properties performing well while newer suburban office spaces also show resilience. Moreover, there is plenty of capital available, with many buyers interested in well-priced assets. On the buying side, expectations for large-scale distressed acquisitions at significant discounts have lessened, as lenders are typically choosing to extend maturing loans. For MMI, our primary strategy involves enhancing our outreach to investors and clients, providing valuable content to assist in decision-making. Internally, we focus on boosting individual producer productivity and business plans to enhance client engagement more efficiently. We are implementing various technological advancements, such as an expanded use of AI across our underwriting and support processes and enhancing our centralized underwriting and back office services. Our investments in industry events, research, media outreach, talent acquisition, and retention align with our goal to deepen our market penetration across property types and geographic areas. We are building on the success of our auction and loan sales divisions, both of which provide effective value-added services for clients and complement our sales efforts. We continue pursuing strategic acquisitions in our core and adjacent businesses to expand these synergies. As I've mentioned, the gap between acquisition bids and expectations, along with near-term performance risks, has impeded some desired acquisitions. However, recruiting experienced individuals and teams remains a positive aspect, as we add talent with established businesses to the MMI platform. This also helps mitigate the turnover of trainees and newer agents amid current market conditions. This strategy facilitates market expansion with minimal overlap with existing teams. We take pride in having built a strong balance sheet with no debt and a capital allocation plan that has returned $170 million to shareholders through dividends and share repurchases since 2022, even during one of the most challenging periods in real estate history. Most importantly, we believe we possess the experience, capital, and client support necessary to drive growth and enhance shareholder returns over the long term. With that, I will hand the call over to Steve for further details on our results.

Steve DeGennaro, CFO

Thank you, Hessam. As mentioned, revenue for the fourth quarter was $240 million, up 44% compared to last year's $166 million. For the full year, total revenue was $696 million, up 8% compared to $646 million last year. The significant year-over-year and sequential revenue growth in the fourth quarter was driven by low rates when the Fed initially began to make cuts in September and buyers' incentive to close in the quarter before rate locks expired. Revenue from real estate brokerage commissions for the fourth quarter was $203 million compared to $145 million last year, an increase of 40%. For the quarter, sales volume was $12.3 billion across 1742 transactions, up 41% and 23% respectively. For the full year 2024, revenue from real estate brokerage commissions was $590 million compared to $560 million last year, an increase of 5%. Full year sales volume was $33.6 billion across 5,447 transactions, up 9% and essentially flat respectively. Average transaction size during the fourth quarter was approximately $7 million compared to $6.2 million a year ago. For the year, average transaction size was $6.2 million compared to $5.6 million in the prior year. Increases in average transaction size for both the quarter and full year are due to a greater mix of revenue coming from middle market and larger transactions as institutional investors re-entered the market starting in the third quarter. Within brokerage for the quarter, our core private client business contributed 59% of brokerage revenue or $120 million versus 66% or $95 million last year. For the full year, the Private Client business contributed 62% of brokerage revenue or $366 million versus 67% or $373 million last year. Middle market and larger transactions together accounted for 38% of brokerage revenue or $77 million during the fourth quarter compared to 31% last year. For the full year, middle market and larger transactions represented 34% of brokerage revenue or $203 million compared to 30% last year. Revenue in our financing business, including MMCC, was $31 million in the fourth quarter compared to $16 million last year, a 97% increase. Financing revenue for the full year increased 26% to $85 million compared to $67 million last year. Fees from refinancing accounted for 33% of loan originations in the quarter compared to 44% last year and for the full year refinancing fees were 38% of loan originations compared to 49% last year. Other revenue comprised primarily of leasing, consulting, and advisory fees was $6 million in the fourth quarter and $22 million for the full year compared to $6 million and $19 million respectively last year. Turning to expenses, total operating expense for the fourth quarter was $233 million, 27% higher than last year. For the full year, total operating expense was $729 million or 3% higher compared to the prior year. Higher absolute expenses were primarily due to an increase in variable costs directly attributable to higher revenue. However, as a percentage of revenue, total operating expenses decreased year-over-year in both the fourth quarter and the full year. Drilling down into expenses further, cost of services was $152 million or 63.2% of total revenue for the quarter, modestly lower than 63.4% in the prior year. For the full year, cost of services was $431 million or 62% of total revenue, an improvement of 100 basis points compared to last year. The decrease in cost of services, as a percentage of revenue, reflects a slower ramp-up of revenue in the first nine months of the year, resulting in senior producers hitting higher thresholds later in the year. SG&A in the fourth quarter was $76 million or 31.8% of revenue, an improvement of more than 13 percentage points compared to the prior year. For the full year, SG&A was $281 million or 40.4% of revenue compared to 44.1% last year. The improved expense ratios were attributable to a higher revenue base along with ongoing cost reductions partially offset by expenses related to talent acquisition and retention. In the fourth quarter, we returned to profitability and generated net income of $8.5 million or $0.22 earnings per share compared with a net loss of $10.2 million or $0.27 per share in the prior year. For the full year, net loss was $12.4 million or $0.32 per share, a significant improvement compared to a net loss of $34 million or $0.88 per share last year. Our near-term financial results are negatively impacted by expenses related to investments made in talent acquisition, technology, and brokerage support at a time of hampered revenue production. We continue to believe these investments will be accretive in the eventual market recovery. For the quarter, adjusted EBITDA was $18 million compared to negative $4.5 million in the prior year. For the full year, adjusted EBITDA was $9.4 million compared to negative $19.6 million in the prior year. The effective tax rate for the quarter was 26% and for the full year was 5%. Moving on to the balance sheet, we remain well-capitalized with no debt and $394 million in cash, cash equivalents, and marketable securities, an increase of $14 million in the quarter, after paying a $10 million dividend and funding new investments during the quarter. Last week, we announced that our board declared a semi-annual dividend of $0.25 per share or approximately $10 million payable on April 04, 2025, to shareholders of record on March 12, 2025. As Hessam mentioned, since initiating our dividend and share repurchase programs nearly three years ago, we have returned more than $170 million in capital to shareholders. Looking ahead to 2025, volatility in interest rates and the Fed's wait-and-see approach to further rate cuts given the strong economy and inflation concerns continue to pose challenges. We do see improving conditions overall as Hessam summarized, but weighted to the latter half of the year. First quarter revenue is expected to follow the usual seasonality trend and be sequentially lower than Q4. However, the strong performance in Q4 has impacted the normal flow of Q1 activity, so that sequential decline is likely to be a little bit more pronounced. Cost of services for the first quarter should follow the seasonal reset and be in the range of 59% to 61% of revenue. SG&A for the first quarter should reflect an increase year-over-year in absolute dollars consistent with higher agent support tied to improved revenue performance in 2024 and continued investments in central services to support sales producers. As we've discussed in the past, our tax rate is dependent on the relationship between expenses that are non-deductible for tax purposes and projected pre-tax book income for the full year and therefore can fluctuate greatly. We remain committed to helping clients navigate the external market environment, while internally we continue to drive operational efficiency through best practices across the organization. We are confident that the investments we are making in the platform position us well for long-term growth.

Operator, Operator

Thank you. At this time, we'll be conducting a question-and-answer session. Thank you. Our first question is from the line of Jason Belcher with Wells Fargo. Please proceed with your questions.

Jason Belcher, Analyst

Good morning. Hessam, just wondering if you can talk a little more about the different transaction size buckets for commission revenue, maybe touch on any notable changes in the types of buyers and sellers you're seeing or any specific changes in transaction terms you might have seen since the election or maybe even since the start of the new year?

Hessam Nadji, CEO

Happy to, Jason, good morning. Well, the biggest trend that should be highlighted is the continuation of capital coming into the larger transactions. We saw that start in the middle of last year and it's built further momentum. That's the combination of institutional capital actively looking for acquisition opportunities, looking at replacement costs and price versus the 2022 peak as the two main catalysts for why they are much more engaged in the marketplace today. The second reason behind that is a lot of entrepreneurial private investors that are also back in the market looking at some higher risk, higher return types of acquisitions. We're seeing some of that in the office sector. We are certainly seeing some of that in the shopping center sector and even some multifamily older vintage multifamily that a lot of institutions would stay away from, but private entrepreneurial investors would actually embrace that need either rescue capital or capital for deferred maintenance and so on within the older vintage workforce housing type of Class B and C assets. Other trends to note is that we are seeing new capital formation. There are new groups in just about every major metro that are actively now looking for acquisition opportunities, as well as a lot of our existing clients that we've done business with over the years being far more motivated by the fear of missing out frankly than being concerned about the fear of ongoing uncertainties. So the investor sentiment has definitely shifted. I would say that the election outcome helped that investor sentiment. But then in the last 30, 45 days, we've seen a little bit more of a pullback, just wait and see how the new administration's policies start to roll out and what really happens on the inflation front. Of course, we didn't get a friendly tape just a couple of days ago and that's the kind of concern that is keeping some investors on the sideline. Mostly on the seller side of the equation, as I mentioned in my comments, a number of our clients that were planning to bring products out to market have decided to hold off for just a bit. Having said all that, we're seeing incredible demand on the buy side and just a more cumulative need to sell or desire to sell now that we pretty much know that the kind of the baseline threshold for interest rates is going to be in that 4.25% to 4.75% range much more so than 3.5% to 4% at least in the foreseeable future.

Jason Belcher, Analyst

That's very helpful. Thank you for all that color. Shifting gears a little bit, wondering if you could talk a little bit about your exposure to the Greater LA market and what kind of impact you've seen from the recent fires there, especially as it relates to the multifamily transactions. Do you have any sense how much multifamily rents have increased or are expected to increase in the Greater LA area?

Hessam Nadji, CEO

Well, the wildfires were tragic in the way that the community was affected. Of course, we directly know countless displaced friends, associates, and related people to our business that really have required a lot of support, and we're glad to do our part to make that happen. From a market impact point of view, there are multiple ripple effects. The first and foremost at a more macro level is insurance, of course. We continue to have a lot of pressure on operating costs, not only insurance becoming a lot more expensive, it is just very hard to get policies issued, written and that has become a major obstacle in the local market. California is a big market for us. Southern California is a significant market for us. And part of the reason that the Q1 kind of pipeline is a little bit slower than it would have been has to do with some inventory being pulled from the market and more clients hesitating to bring products to market to see what happens. At a macro level, of course, that has an impact on the company, but not to any measurable way that would be of any concern. From a rebuilding perspective, there is where there is some direct correlation between market sentiment and some of the discussions around tariffs, materials costs, labor costs and frankly concerns around the local government's ability to organize a rebuilding effort, which is obviously going to be fraught with all kinds of obstacles and issues. It is creating a lot of pressure on rents. I'm not so convinced that that is sustainable and it's going to kind of reset the benchmark for rent growth in Southern California. It is definitely near-term increase, but questionable as to where those increases are going to be sustainable beyond the near-term, the reaction to the tragedies. At the same time, I have to say California in general and Southern California in particular are being viewed by the investment community as a bit of a diamond in the rough because these metros are hugely supply constrained and the tragedies make that even more acute. At the same time, that lagged in the recovery compared to many other metros and we are just getting the momentum on job creation, rent growth, and that has made the apples-to-apples comparison of a lot of California investments including Northern California by the way, much more attractive on a risk-adjusted basis prior to the tragedy. I don't think that that's going to be affected much. The macro view is still very favorable toward how pricing has reacted and why there are some attractive opportunities as an entry point throughout California.

Jason Belcher, Analyst

Thank you. Thank you for all of that. I guess, you guys have referenced exploring some external growth opportunities as well as other strategic initiatives on technology or talent recruiting and development. Any discussions on the external growth front or strategic initiatives internally that you could share more on specifically?

Hessam Nadji, CEO

Yes, it's a bit frustrating in that there are groups out there we've been actively talking to and have made offers to that would have been great strategic fits for us and we would have been a great growth platform for them. The near-term concerns around performance, obviously profitability is very important to us and being able to acquire entities that are accretive and value-added pretty much from the get-go is an important consideration for us. So valuation has been a little bit of the obstacle as has been the terms of what the sellers had been expecting in guaranteed value versus our comfort zone. But those discussions are still ongoing in a couple of cases. And in retrospect, some of the deals that we've passed on have turned out to be really good decisions to be direct about it because of the market uncertainty outweighing our desire to just grow and bring entities into the MMI platform. And looking forward, we are not giving up on those kinds of targeting approaches of actual companies and platforms. In the meantime, we continue to have a lot of success in attracting experienced individuals and teams that are joining the firm at a pretty steady flow. We are adding resources to continue to build on that momentum. Another channel of investment and diversification for us has been partnering with other firms and investing in some other firms that we believe are very complementary to our platform and to our clients. Examples that I've highlighted before are equity multiple, which is essentially a very well-established tech-heavy platform for raising equity and investment management, which has become a really good source of solutions for many of our clients and we have introduced them to many of our agents. They're a good partner in that arena for us and growing in that channel. Archer is another example of a really AI-oriented startup that is a data consolidator and basically a platform for modeling net operating incomes and property profiles and submarket profiles that can make our underwriting broker opinions of value and client probability assessment much, much more efficient. So, not only are we going after core business investment opportunities and acquisitions, adjacent business line acquisition opportunities, but also in terms of investments in technology-oriented outfits that can be complementary to the business. Organically, we've grown the auction business from scratch in the last 2.5 years coming up on 3 years very successfully. Our acquisition and integration of Mission Capital, which brought a very well-respected brand within the loan sale and loan advisory business has been very successful, especially as the cycle turns to where a lot of lenders and investors are selling loan pools and need our advice on valuing those. So, there's just a variety of examples of how we've already added complementary functions to the firm and are using our strong balance sheet to continue to pursue them.

Jason Belcher, Analyst

Thanks for that update, Hessam. Maybe just one for Steve as well, switching gears to capital allocation. It looks like Q4 was a kind of a quieter quarter on the share repurchase front. Maybe you could talk a little about how you think about balancing the different capital allocation buckets going forward in terms of share repurchase versus dividend growth versus other investment opportunities?

Steve DeGennaro, CFO

Yes, Jason, happy to take that. And you touched on the fact that our strategy, as you would imagine, is multi-pronged. It's not only investments for long-term growth in technology, M&A, dividends, and share repurchases. We were a little bit quiet on the repurchase side, although we continued to distribute dividends. We continued our pattern of semi-annual dividend declarations, paid that in October. The Board just earlier in the week announced a dividend coming up here for the first quarter. As we look at how we make those allocation decisions, we dial them up, dial up and down opportunistically, specifically as it relates to repurchases. I think we said this last quarter; at a time when we are not generating as much cash flow, we'll be a little bit more opportunistic in how we engage in repurchasing shares. And although we did generate quite a bit of operating capital this quarter, so we'll revisit that and of course, the dividends are I would expect that pattern to continue although that's up to the Board to decide on a periodic basis. But importantly, we continue to invest very, very heavily internally in technology. I think Hessam mentioned investments in our central support functions, which is a way to generate efficiencies across underwriting and proposal preparation and marketing for our agents, pulling that back into a central function. So, heavy investment there over the last two years and we're really starting to see the fruits of those investments.

Jason Belcher, Analyst

Great. Thanks very much for taking my questions.

Steve DeGennaro, CFO

Thanks, Jason.

Hessam Nadji, CEO

Thanks, Jason.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the floor back to management for closing remarks.

Hessam Nadji, CEO

Thank you, operator, and thank you everyone for joining our call. We look forward to seeing many of you on the road and to have you back on our next quarterly update. The call is adjourned.

Operator, Operator

Thank you. This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.