Greetings and welcome to the Marcus & Millichap’s First Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. And it is now my pleasure to turn the conference over to your host, Jacques Cornet. Thank you, sir. You may begin.

Thank you. Good morning and welcome to Marcus & Millichap’s first 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; the company’s ability to retain and attract transaction professionals; the company’s ability to retain its business philosophy and partnership culture amid competitive pressures, company’s ability to integrate new agents and sustain its growth and other factors discussed in the company’s public filings, including its annual report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2023. Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company’s earnings release, which was issued this morning and is available on the company’s website, represents a reconciliation of 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 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, Jacques. On behalf of the entire Marcus & Millichap team, good morning, everyone, and welcome to our first quarter 2023 earnings call. As anticipated, MMI faced a challenging first quarter due to the market disruption caused by the Fed’s interest rate shock. The repricing of real estate and ensuing bid-ask spread was exacerbated by bank failures which elevated lender caution and further reduced liquidity during the quarter. Revenue came in at $155 million, resulting in adjusted EBITDA loss of $7.4 million and net loss of $5.8 million. Expensing of capital invested in various growth initiatives over the past several years, particularly talent acquisition and business development pressured earnings significantly. Revenue production was hampered by a general lack of investor motivation to sell at reduced prices and elevated uncertainty, keeping many buyers on the sidelines. Reduced loan to values and frequent repricing of debt by many lenders challenged our key metrics, including an increase in our deal ratio and extended marketing and closing time lines. These forces impacted all business segments and price points but were pronounced in larger transactions as many institutions remained on the sideline and many private investor deals priced above $10 million simply did not pencil out. First quarter sales transactions in the broader market fell by an estimated 46%, with a volume decline of 55% to 60% based on preliminary data from Real Capital Analytics and CoStar. This marks the second consecutive quarter of severe decline in trading activity, which reflects the broad nature of the current market dislocation. Marcus & Millichap’s brokerage transactions declined 40% for the quarter and reflect execution of nearly 1,300 brokerage transactions, which is a testament to our team’s creativity and commitment to help clients execute even in a tough market. Our results was particularly impacted by larger sales,…

Thank you, Hessam. Before delving into the details, I want to provide some historical context. If you recall, the first quarter of 2022 was a record first quarter, and the fourth best overall quarter in the company’s 52-year history where revenue increased 74% over the first quarter of 2021, creating a high watermark and even tougher comparable for Q1 2023. The outsized results a year ago were driven by an urgency in the marketplace to transact in anticipation of rising interest rates. Today’s market conditions are much different and reflect 10 consecutive rate increases totaling 500 basis points as well as the failure of three regional banks in recent weeks that has tightened credit markets significantly. With that as a backdrop, let’s move to first quarter results. Revenue for the quarter was $155 million compared to $319 million in the prior year quarter. Breaking down revenue by segment, real estate brokerage commissions for the first quarter were $135 million and accounted for 87% of total revenues compared to $287 million last year, a decrease of 53% year-over-year. This represents total sales volume of $7.1 billion across 1,279 transactions, which is down 59% and 40%, respectively. To again add perspective, the $17 billion in sales volume in the first quarter of last year was far and away the largest first quarter in our history. Average transaction size was approximately $5.6 million, down from $8.1 million a year ago, reflective of the mix shift to fewer active institutional buyers given the current market environment. Within brokerage, our core private client business accounted for 67% of brokerage revenue or $91 million. This compares to 56% and $161 million last year. Our middle market and larger transaction segments, which have accounted for outsized growth over the past couple of years, together accounted for 29%…

Thank you, sir. [Operator Instructions] And the first question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Great. Thanks. Good morning out there. So you guys clearly have a great vantage point into the investment sales market and recent trends. So I wanted to ask for a little more color on what trends you might be seeing and which deals are most likely to trade in this environment from a real estate sector standpoint, a geographical region standpoint? And any other characteristics like in-place debt or others that might be important. I guess just where is the sweet spot in the market for getting a deal done today?

Good morning, Blaine. There is a lot of variation across the country and by property type. What’s unusual is the drop-off in multifamily trading activity because multifamily for so many years has been the darling of the industry and the most stable asset class during market disruptions. What’s happened there is the gap between the interest rate shock and the rapid and dramatic increase in the cost of debt versus the lowest cap rates in the industry that were basically held by apartments and industrial properties. And those ironically had the biggest shock in valuation resets and maturing loans having the challenge of having to secure new debt in this environment. So that really affected the trading volumes in an unusual way. But I will tell you that we are starting to see stabilization and we’re starting to see very creative financing solutions that are restarting transactions, at least coming back into the pipeline might be a while before they close. And that comment is really about many of our deals that got postponed or canceled during the first quarter on the multifamily side. From an institutional perspective, multifamily has always been hit – has also been hit very hard because of the pencils down approach really starting in the fourth quarter, but showing up in the numbers significantly in the first quarter. Lots of institutions are just completely recalibrating the buy-sell decision based on the same factors that I talked about, but at a larger scale, of course. And looking at the other property types, what’s interesting is the interest in retail is as strong as ever. Our trading activity on retail was down significantly as well. But because retail is far ahead of any other product type in the reinvention and reimagining that’s been going on for 10…

Yes. Very helpful. Thanks for all that color Hessam. On the share repurchase front, where you guys have increased your allocation, can you just give us an update about how you are thinking about that relative to other opportunities for capital allocation? How do you would think about relative pricing or yields with regard to where your stock is trading versus external acquisition opportunities and maybe when it makes sense to shift from one to the other?

I will go first and ask Steve to weigh in as well. Those are of course, very important considerations. We spent a lot of time thinking through them and discussing it with the Board. To us, there is almost as important, if not slightly more important, bigger picture driver behind this. And that is the fact that we have always wanted to get to a point where we have a very diverse and sustainable capital allocation strategy. We wanted the company to be in a position to be able to maximize shareholder returns, be on the offense on acquisitions. We know how important it is for us to accelerate our external growth and scale it as much as possible. And at the same time, be very strong defensively, be able to withstand any kind of a market turbulence, including the one we are experiencing right now, and at the same time, have the firepower to keep investing in the platform. We know that the biggest return we achieve on an ongoing basis, investing in the platform, making our own sales force more productive and of course, adding more talent. We feel strongly that we are in a position to be able to do all of those things without really having to sacrifice one in favor of another. And that’s why it’s been important to us to find that balance and essentially create value for every one of those buckets, if you will. So, that’s my broader commentary. Steve, anything to add?

I think I would reiterate just that, that we look at – between those three prongs of diverse capital allocation strategy, internal investment, M&A and return of capital to shareholders, the strongest pull for us certainly is those internal investments, the greatest return there. M&A at the right price, and we can speak a little to that. As we said on prior calls, there has been and continues to be a bid/ask spread on that front. I think it’s getting better or closing. And that still leaves us with ample of opportunity to return capital to shareholders. We have been active. We said when we initiated the program back in August of last year that we would be active participants where appropriate. I think we have done a good job at that, and I think we have done a good job at balancing those three, although on the M&A side, nothing to report as of yet.

Okay. Great. That’s very helpful. We noticed that you guys added a slide on commercial real estate debt maturities in your presentation this quarter and I appreciate your earlier commentary on the topic. But can you give us a little bit more color on what you are seeing and hearing in terms of lender and borrower discussions around potential workouts for looming maturities or alternatively for sales or distress transactions? And also, what sectors other than office seem to be seeing the most stress and which sectors appear to be best positioned?

Sure, Blaine. We added that slide because we get so many questions about it, and there is so much concern about maturing loans that we wanted to also kind of go one layer deeper and show the breakdown of rent growth over the past 5 years by property type. And looking at that chart, you can just immediately see the fact that the story is so different by property type, where industrial rents have increased almost 50%, apartment rents are up 35% over the past 5 years. Even hospitality and retail posted 15% to 20% rent growth. Also the fact that the values at the time of the issuance of these loans 5 years, 7 years ago were significantly lower than they are today, even with a price correction from our recent peak, let’s say, a year ago. So, what is happening in the marketplace, the concern is really being overreaction to judging the whole book by the cover because of all the headlines related to office space. If you isolate the fact that office properties have had hardly any rent growth in the last 5 years and falling because renewal leases are signing back up for a smaller footprint at a lower rent or leaving low-quality buildings and in favor of the Class A higher quality buildings, you can obviously conclude there is going to be major gaps in valuation and property operations as the office volume rolls over this year, which is, by the way, the largest segment of maturities for 2023, as shown on the top part of the chart that we added. So undoubtedly, there have to be rescue capital. There would have to be some level of a price reduced distress sale when it comes to office buildings. We are seeing a little bit of…

Okay. Great. Very helpful. Last one for me. We noticed a pretty significant decrease in the marketable debt securities balance on your balance sheet this quarter from around $253 million at year-end to $133 million at March 31st. Can you just talk about that decrease, whether that was due to sales or maybe a reduction in the value of those assets?

Yes. Blaine, this is Steve. Not a reduction in value. From our standpoint, our investment portfolio, of course investment grade, very much managed in accordance with our stated charter that’s reviewed both internally and with our Board. Just we view or I view our cash balance in totality, cash and as well as both long and short-term marketable securities and in aggregate, that balance did come down during the quarter. And overwhelming majority of the change from 12/31 was due to deferred payments related to outperformance over the last couple of years. We use, as I think you are aware, a deferred commission program where a certain portion of the commissions are paid currently. And then another portion is deferred is a great long-term incentive tool for folks as well as the outperformance of last year more recently and variable comp paid to management. So, we look at the cash balance in totality. Nothing unusual there, no write-downs and no need – and I know it’s a big part of the news lately, but no need for us to be selling long-term assets in order to meet short-term needs.

Alright. Great. Thanks so much for all the time.

Thanks Blaine.

Thanks Blaine.

At this time, there are no further questions. Now, I would like to turn the floor back over to the Marcus & Millichap management team for any closing comments.

Thank you, operator and thank you for joining our call. We look forward to seeing you on the road and look forward to our next earnings call. The call is adjourned.

Thank you everyone. This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.