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.

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.

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…

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…

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.

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?

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.

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?

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.

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?

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.

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.

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?

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.

Okay, great. Thanks so much for all the time.

Thank you, Blaine.

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

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.

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.