Marcus & Millichap, Inc. (MMI) Q2 2021 Earnings Report, Transcript and Summary

Greetings and welcome to Marcus & Millichap's Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference being recorded. I would now like to turn the conference over to your host, Tom Shearer. Thank you. You may begin.

Good morning and welcome to Marcus & Millichap's second quarter 2021 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 those words and similar expressions are intended to identify forward-looking statements. Actual results can differ materially from those implied by such forward-looking 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 and the competitive pressures, the company's ability to integrate new agents and sustain its growth and other factors discussed in the company's public financial filings, including its Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2021. Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance these 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 our 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.

Thank you, Tom. On behalf of the entire Marcus & Millichap team, good morning and welcome to our second quarter 2021 earnings call. We're very pleased to report the highest revenue and earnings quarter in the 50-year history of Marcus & Millichap. The key milestones for the second quarter include revenue of $285 million, over $32 million of net income, adjusted EBITDA margin of 17% as well as year-over-year revenue growth of 143%. More importantly, our revenue and earnings outpaced the second quarter of 2019 by 36% and 48% respectively. We take great pride in these results, especially relative to the pre-pandemic market environment, but I'd like to point out the importance of the foundation that has been built to make these numbers possible. In the second quarter, MMI closed nearly 3,300 total transactions, which is more than double the second quarter of 2020 and nearly 30% higher than the second quarter of 2019. For perspective, this is the result of exponentially more client interactions, financial analysis runs, buyer evaluations and lenders selections that our team delivered to maximize client value. For the first half of 2021, MMI closed over 5,600 transactions or approximately 45 transactions per business day. This includes just short of 4,000 brokerage transactions, which is by far more than any other firm according to third-party sources and reflects the expansive network of investor relationships, the expertise and commitment of our sales force, management and support personnel. These numbers also reflect best-of-class infrastructure and technology that helps us bring together the volume that I just discussed, of buyers and sellers, lenders and borrowers, and consumers of our research together, through one consistent client-driven platform. In light of a record-setting quarter, I'd like to express our thanks to our clients for trusting us with your real estate investment strategy and execution, as well as our financing services, not only over the past year, but throughout our 50-year history. I would also like to acknowledge the tireless work and persistence of our sales and financing professionals. They work closely with our clients to solve problems through incredible uncertainty a year ago, amid the worst period of the pandemic, and in seizing the market recovery since. In assessing the drivers behind the strong performance in the quarter, we're benefiting from several internal strategies, as well as favorable market dynamics. Let me first share our perspective on the internal drivers, before commenting on the market forces. Perhaps the most important internal factor is the productivity and client relationships of our tenured agents and loan originators. The focus on long-term relationships has always driven our business, but clearly stood out over the past year. As a result, resurrection of previously canceled or delayed transactions and listings continued in the second quarter, which will likely become less of a factor as the market moves past the effects of the market disruption. At the same time, we're benefiting from impressive incremental contributions from recently acquired companies, groups, and experienced professionals. This includes those brought on board in late 2020, who have had more time now to ramp up their business. We're seeing increasing client synergies and joint business opportunities emerge from these additions, since they are complementary to our existing team and market coverage. Our revenue diversification strategy continues to pay off, illustrated by strong growth in Middle Market and Larger Transaction, as well as our financing division, MMCC. To put numbers to it, our Middle Market and Larger Transaction revenue was up 23% and 65% respectively, during the first half of this year versus the first half of 2019, again, an important benchmark pre-pandemic. The expansion of our IPA division in particular, which is designed to service larger private and institutional investors, has been well received by the marketplace and shows up strongly in these numbers. MMCC increased its revenue by 64% year-over-year and 46% in the first half of this year over the same time in 2019. MMCC has emerged as a leading intermediary with access to the most competitive capital on behalf of our clients with nearly 1,200 financing closings in the first half of this year alone, and executed through 281 separate lenders. I'm happy to report that many of our tenured loan originators continue to grow their business and integrate with our sales force, while key acquisitions in markets and niches, that were previously not covered, are adding value in terms of client service and revenue contribution. This dual strategy of supporting our existing team and adding experienced professional has proven to be effective and is being scaled by our new MMCC leadership team, announced at the beginning of this year. We're also making key investments in MMCC's infrastructure, its own system and marketing. We continue to transition the recruiting of financing professionals to experienced loan originators, while still investing in our own tenured teams. As we have managed consistently, these diversification initiatives are complementary and supportive of our industry-leading position in the Private Client segment. The company's second quarter Private Client revenue grew 123% year-over-year and 23% over the second quarter of 2019. Our Private Client revenue for the first half of 2021 was up 42% year-over-year and 17% over the first half of 2019, very important benchmarks. We also attribute a great deal of this year's results to our expanded client outreach, record attendance on virtual investor webcast, which have continued in 2021 by the way, and research content that had been elevated at the onset of the pandemic. Our content and advisory role has clearly strengthened the company's connectivity with investors as well as direct business leads. Last but certainly not least, our results were made possible by disciplined cost management while investing aggressively in a new generation of technology and marketing tools. These investments started in an earnest three years ago and positioned the company extremely well against the pandemic, with no business disruption, and foster new business generation into the recovery, as we speak. Our platform investments were not interrupted by the pandemic. This is a key reason why we continue to see success, and speaks to one of the most important founding principles, and that is to provide the best support tools and training for our team. Sales force growth remains impacted by the fallout of newer professionals from the market disruption, reflected in higher than usual terminations in this cadre, during the first half of this year. As we have indicated before, this is consistent with past downturn. Various initiatives to make MMI a viable choice for promising new talent continues unabated. At the same time, our strategy to augment our traditional organic growth model, through strategic acquisitions and recruiting experienced talent, has brought immeasurable contributions to our results. We expect this to continue, as recent additions moved further into the ramp-up period, as part of the Marcus & Millichap family. Our performance during the pandemic and since reaffirms our strategy and points to additional growth opportunities through all the channels I just summarized. From a market perspective, continued job growth, release of pent-up demand, record low interest rates, and ample liquidity are fueling a trading velocity resurgence. Record volume of capital is seeking commercial real estate as an attractive investment, powered by low-cost capital and a widely held view that real estate can act as an inflation hedge. In recent months, more investors have cited uncertainty related to future tax law changes as one of the motivations to trade, which has added some incremental urgency into the marketplace. We're seeing strong buyer demand across the spectrum with the safest segments of apartments, single-tenant net lease, and industrial continuing to attract record capital. Fundamentals are generally supporting valuation, especially given the expectation of new demand, raising future occupancies and rents going into the next 12 to 24 months. As a case in point, second quarter apartment rent growth was the highest in 20 years and most markets, including hard-hit urban areas, are reporting exceptional improvement in renter demand. Trading in recovery place, found in shopping centers, hotels, seniors housing and student housing, have bounced back by varying degree, with many investors realizing that truly distressed buying opportunities are rare indeed. An increasing number of opportunistic buyers are becoming more realistic on pricing and moving to lock in interest rates into the economic recovery. Although trading volumes are up measurably in the office sector, uncertainty regarding the future of office space used and remote work is still a headwind in terms of price discovery and investor confidence. Overall, Real Capital Analytics reports that 33% increase in the number of market sales during the first half of 2021, compared to our brokerage transaction increase of 46%, pointing to continued outperformance for MMI. Looking forward, I'm happy to report strong pipeline and improved metrics across the board. We expect market conditions to remain favorable in the foreseeable future, barring any unexpected external events. And retaining our best talent and supporting their productivity through additional advancements in technology, branding and expanded marketing are top management priority. We are reengaging in-person activities, training and events, as well as physical client interactions, with an eye on health and safety measures. Our strong balance sheet, gained knowledge and experience in targeting, acquiring and integrating strategically selected companies and groups position us very well to further scale our external growth strategy. As such, acquisitions and technology investments remain our top capital allocation strategy, as we build on the nine successful acquisitions we made since 2018. We're actively evaluating a number of quality targets, particularly in the financing arena and look forward to sharing more details, as these opportunities evolve. And with that, I will pass the call to Steve to discuss our financial results in further detail. Steve?

Thanks, Hessam. In the second quarter, we delivered all-time record revenue, adjusted EBITDA and earnings per share. While year-over-year comparables are extremely favorable, due to the impact of COVID on results in the second quarter of last year, we are most pleased with the significant growth in all areas of the business compared to the pre-pandemic second quarter of 2019. I will provide both year-over-year and 2019 comparisons, given the market disruption and to provide better perspective on our performance. Total revenue in the second quarter was $285 million, which exceeded our previous record quarter of $250 million in the fourth quarter of 2020 by 14% and also marks the first time a record quarter is falling outside the fourth quarter. For the first half of 2021, total revenues were $469 million, up 52% year-over-year and up 27% compared to the same period in 2019. Brokerage commissions for the second quarter accounted for 89% of total revenues or $253 million and grew 145% over the second quarter of 2020 and 34% compared to the second quarter of 2019. Brokerage commissions for the first half of 2021 increased 51% year-over-year and 25% over the same period in 2019. Our Private Client business remained strong and a competitive advantage, accounting for 63% of brokerage revenue for the quarter or $158 million. This is more than double the second quarter of 2020 and up 23% compared to the second quarter of 2019. Despite our leading position in the Private Client segment, we believe the fragmentation and size of this dynamic business provides further growth opportunity. Our Middle Market business accounted for 17% of brokerage revenue or $42 million and was up more than threefold year-over-year and up 55% compared to the same period in 2019. Our larger transactions business represented 18% of brokerage revenue for the second quarter and grew 176% year-over-year and 74% over the second quarter of 2019, principally due to strengthen our IPA division, as a Hessam explained, including a large multi-state portfolio of retail properties. Brokerage revenue from these businesses combined for the first half of 2021 accounted for 33% or $138 million, up 73% year-over-year and 43% over the same period in 2019. Contributions from these businesses have made a meaningful impact and reflect recent strategies to diversify and attract experienced brokers. Moving on to MMCC, financing fees in the second quarter rose 122% year-over-year and 59% compared to 2019. MMCC growth was fueled in part by several key acquisitions made in the last year as well as the exceptional performance of our tenured financing professionals. Refinancings were 52% of total financing fees and as expected, represented a lower percentage of transactions compared to prior year, due to higher sales activity in the current quarter. Financing fees for the first half of 2021 were up 64% year-over-year and 46% compared to the same period in 2019. Other revenues, comprised primarily of consulting and advisory fees, along with referral fees from other real estate brokers, were $4 million for the quarter, compared to $1 million in the second quarter of last year and up 21% compared to 2019. Other revenues, comprised primarily of consulting and advisory fees along with referral fees from other real estate brokers, were $4 million for the quarter compared to $1 million in the second quarter of last year and up 21% compared to 2019. Other revenues for the first half of 2021 increased 47% year-over-year and 38% compared to the same period in 2019, to $7 million. In the second quarter, we generated total sales volume of more than $17 billion across 3,285 transactions, representing year-on-year growth of 151% and 107% respectively. Compared to the second quarter of 2019, total sales volume was up 34% and total transactions were up 30%. For the six months ended 2021, we generated total sales volume of more than $29 billion across 5,617 transactions representing year-over-year growth of 57% and 46% respectively. Compared to the same period in 2019, total sales volume was up nearly 29% and total transactions were up over 25%. Brokerage transactions increased 117% year-over-year in the second quarter and 46% year-over-year for the first half of 2021. We continued to outperform the broader market, which is a testament to the strength of our brand, our platform and our value-added brokerage and financing capabilities. This was true when the market was soft in the depths of the pandemic and is true today, as we capitalize on a strong macro-environment. Total sales force headcount decreased by 26 year-over-year to 1,935 investment sales professionals and 87 financing professionals for a total of 2022. As Hessam, alluded to turnover of newer professionals increased due to the market dislocation and it was amplified by limited physical interactions. Record revenue and a continued focus on expense management and execution in the business created significant operating leverage in the quarter. Total operating expenses were $243 million, an increase of 103% year-over-year, but far less than the 143% revenue growth during the same period. For the first half of 2021, total operating expenses were $407 million, a 40% increase compared to a revenue increase of 52%. Cost of services was $179 million or 62.7% of total revenues, 10 basis points lower than the second quarter of 2020 and 170 basis points higher than the same period of 2019. For the first half of 2021, cost of services was $288 million or 61.4% of revenue, up 50 basis points year-over-year and up 210 basis points compared to the same period in 2019. The increases are due to outperformance of revenue thresholds by our senior agents who were reaching higher commission splits earlier than our usual seasonal patterns. SG&A in the second quarter increased 42% year-over-year and 15% year-over-year for the six months ended 2021, primarily due to an increase in performance-based compensation reserves tied to record earnings and absorption of operating costs related to newly acquired firms. For the quarter, we generated $0.78 earnings per diluted share compared to essentially breakeven in the second quarter of last year and $0.54 per share in Q2 2019. For the first six months, earnings were $1.16 per diluted share compared to $0.33 and $0.93 respectively for the same period in 2020 and 2019. Our tax rate was 26.4% and 27.2% respectively for the three and six months ended June 2021 compared to 28.4% and 31.1% for the same periods last year. This was primarily due to change in the relationship of permanent, non-deductible items to pre-tax income and improvement in our Canadian business. Adjusted EBITDA for the quarter jumped to a record $48 million or 16.9% of total revenues compared to 3.5% in the second quarter of 2020 and up 160 basis points compared to 15.3% in the second quarter of 2019. Moving now to the balance sheet, we finished the quarter in a historically strong position with $475 million of cash, cash equivalents and marketable securities, which is an increase of $52 million in the quarter and equates to $11.84 per diluted share. During the pandemic, our significant cash reserves were an important asset for the stability of our business and at the same time allowed us to close four acquisitions in the middle of a challenging operating environment. As Hessam mentioned, we are actively working to build on this track record and pursuing additional acquisition opportunities, as well as investments in technology and platform improvements, as our capital allocation priorities. Turning now to the outlook for the remainder of 2021. Absent unexpected macro events, we believe that favorable market conditions and positive fundamentals will continue in the near term and potentially through the end of the year. As a result, revenue in the second half of 2021 should reflect historical semi-annual patterns. Cost of services for the third quarter should follow the normal trend and increased sequentially over the second quarter to the 63.5% to 65% range. SG&A for the remainder of 2021 should increase modestly from second-quarter levels due to the return of in-person events, related travel, and salary adjustments for support staff. Lastly, we expect our full year tax rate to be in the 26% to 27.5% range. With that, we can now open up the call for Q&A. Operator?

Thank you. [Operator Instructions] Our first question comes from Blaine Heck with Wells Fargo. Please proceed.

Thanks. Good morning. On previous calls, you guys have discussed some challenges in hiring due to having to conduct the - recruiting virtually and we noticed that the number of professionals decreased from the first quarter. Have you guys found that, as cities opened during the quarter, hiring has become easier or are there still some hurdles to overcome there?

Hi, Blaine. Good to have you on the call. It is easing and we're seeing some improvement in the whole continuum of both recruiting and interviewing and selecting individuals and in some states, actually, making sure that the real estate departments are operating again and issuing real estate licenses, which is another hurdle we've had to overcome because of the pandemic. So it's easing. We're definitely seeing an improvement and most of the challenges that we face with the numbers, as we had set the expectation last year, has to do with the fallout rate of the newer professionals that just can't really break through the market interruptions. That, of course, is easing very rapidly, because the market is improving and we do have extensive training and different support mechanisms in place to help folks, but it's inevitable for the fallout rate to go up in a market environment that we faced over the last 12 months.

Okay. That's very helpful. And then I'm interested in the pretty significant increase you saw in the average size of deals, both on the brokerage and financing sides of the business. Is that just reflective of maybe some segments of the market being more active than others at this point? You're seeing more volume in the mid and large-sized deals than in the Private Client segment or is it maybe even more indicative of a shift toward those larger deals for MMI in the future?

Well, it's a combination of both, Blaine, and that we did see the institutional marketplace pretty much shut down in the second quarter of last year and part of the third quarter of last year and there has been a significant release of those activities that were delayed or actually canceled. A lot of transactions were actually canceled that have come back to the marketplace. And institutions are fleshed with a lot of capital that their clients want to put to work. So there is definitely a market factor. But as I have shared with you before, a lot of our targeting of established teams and senior level experienced brokers in various segments where we don't have coverage, inherently, bring to the experts who do larger transactions. So the combination of those two factors and the same-store improvement of our IPA division, more senior Marcus & Millichap brokers that are doing larger deals, all added to the results.

Clear. Okay. That makes sense. Last one for me. Can you just talk a little bit more about the opportunities that you guys see in front of you with respect to acquisitions? I think you guys have made some solid purchases in the past few years and have grown the business thoughtfully. But it seems like large needle-moving acquisitions have been a little elusive for you guys. So can you just talk about what you see out there now and whether the timing might be right for a larger acquisition?

Sure, Blaine. One of the things I want to clarify is that there has been no resistance or concern about acquiring a larger entity that fits all the different criteria that we have for ourselves, which is mainly driven by cultural fit and making sure that the specialty or market area that the target covers is not in conflict with our existing coverage, so that we don't disrupt or cannibalize existing success, and, of course, making sure that the synergies are there and the accretion is there. If those criteria are basically met, we would acquire any sized firm. We don't really have a limitation. The nature of our business is such that the fragmentation, especially in the Private Client business, has driven a kind of a little bit of a limit as to how many firms have organized to become a scaled platforms that we can go acquire. Obviously, that's one of our competitive advantages. There are no other Marcus & Millichap's out there or even close. So by the inherent nature of the fragmented marketplace, the deals tend to be small to mid-size transactions, both on the financing side and on the brokerage side. Now having said that, we are in conversation with a number of different entities that have gone very well and we continue to pursue those. And some of them are on the larger end of the scale compared to the kinds of transactions that we've already done in the last three years.

Great. Thanks for that. That's helpful.

Thanks for being on the call, Blaine.

[Operator Instructions] There are no further questions in queue, at this time. I would like to turn the call back over to management for closing comments.

Thank you very much, operator, and thank you to everyone for joining our call. We look forward to interacting with you between now and next quarter and having you back for our third quarter earnings call. The call is adjourned.

Thank you. This does conclude today's teleconference call. You may disconnect your lines at this time and have a great day.