Greetings, and welcome to Marcus & Millichap's Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Jacques Cornet. Thank you. You may begin.

Thank you, operator. Good morning and Welcome to Marcus & Millichap's Third 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 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 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 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 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 and -- 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 is 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 third quarter 2023 earnings call. The market challenges we've been facing this year continued on in the third quarter. The 10-year treasury yield briefly touched the psychologically key level of 5% and the Federal Reserve sent a clear signal of higher for longer in its interest rate outlook starting with inflation is proving to be more persistent than expected. Rate volatility, a restrictive lending environment, and the cumulative effect of the sharp increase in the cost of debt over the past 18 months, weighed heavily on sales and financing volumes. Revenue for the quarter came in at $162 million, down 50% over last year, with an adjusted EBITDA loss of $6.6 million. Revenue production remains hampered by the widened bid-ask spread, constrained financing, and interest rate volatility, disrupting deal closing. Transaction time-lines extended significantly beyond historical norms, and many deals fell out of contract multiple times, creating a drag on our team's productivity. The result was a 39% decline in the number of brokerage sales transactions and a 59% decline in volume during the quarter. Given the macro nature and scope of the capital markets disruption, all product types and price segments showed major declines. Our traditional advantage as a market leader in the private client segment remains intact. As Steve will cover in his remarks, the private client market has declined the least of all segments as smaller deals are more driven by personal circumstances, and easier to finance. As history has also shown time and again, the private investor will also likely lead in the recovery. On the other side of the spectrum, the severe drop-off in larger transactions is having an outsized impact on MMI's revenue trends, especially considering…

Thank you, Hessam. Hess mentioned, market conditions remain challenging due to the Fed's steep trajectory of rate increases implemented since last year and their continued higher for longer messaging. This has led to a significant decline in transactional activity due to a lack of price discovery between buyer and seller, increasingly restricted credit markets, and rate uncertainty. With that as a backdrop, let's get into the results. Total revenue for the quarter was $162 million compared to $324 million in the prior year. Year-to-date, total revenue was $480 million versus $1 billion last year. Revenue from real estate brokerage commissions for the third quarter was $140 million and accounted for 86% of total revenue compared to $293 million last year, a decrease of 52% year-over-year. For the quarter, total sales volume was $7.4 billion across 1,361 transactions, down 59% and 39%, respectively. Year-to-date, revenue from real estate brokerage commissions was $415 million and accounted for 87% of total revenue. compared to $934 million last year, a decrease of 56% year-over-year. Year-to-date sales volume was $22.1 billion across 4,062 transactions, down 60% and 43%, respectively. Average transaction size during the third quarter was approximately $5.5 million as compared to $8 million a year ago. reflecting the sharp decline of larger transactions. Within brokerage, for the quarter, our core private client business contributed 65% of brokerage revenue or $91 million versus 57% last year. Year-to-date, the Private Client business contributed 67% of brokerage revenue or $278 million versus 57% again last year. Middle Market and Larger Transactions, which experienced outsized growth over the past couple of years together accounted for 31% of brokerage revenue or $43 million during the quarter, compared to 41% last year. Year-to-date, Middle Market and Larger Transactions represented 29% of brokerage revenue or $122 million compared to 40%…

[Operator Instructions]. Our first questions come from the line of Blaine Heck with Wells Fargo. Please proceed with your questions.

Good morning, guys. Hessam, you all have a somewhat unique concentration in your business model where the transaction brokerage and financing businesses drive the vast majority of your total revenue relative to some of your competitors who have more diversification across revenue streams with other services like leasing and asset management. Clearly, there are times in which your structure is advantageous and levered to more healthy transactional markets, but does the slow [ph] market like this give you any desire to potentially diversify that revenue stream and get into some of those arguably more stable services? I know you mentioned making some investments in PropTech companies that might provide some of those services. But is there any desire to have some of those services in-house?

Good morning, Blaine. Absolutely. And that desire has been there during the stronger macro environment trend as well as the current market conditions that we're facing. So, it's not really unique to a reaction to the challenging market that we face today. It's been part of the company's long-term strategy for some time. And most of our exploration in terms of M&A outside of the brokerage world has been focused on those types of services and those types of complementary services that bring value to our existing sales force and our existing clients. So, part of the criteria we've used in exploring those have to do with synergies and additional service lines that would benefit our product clients as well as middle market and institutional clients. So, we examined those opportunities as much about their diversification benefits; hopefully, margin benefits and so on from an accretion perspective, but also from a service expansion and client capturing and repeat business perspective. So, the long answer and the short answer to your question is absolutely, it's been a focus, and we are as focused on it in this period as ever.

Great. Thanks. And I don't know if I missed this, but can you give us any sense of kind of the size of those investments and potential returns you're expecting on your investments in those platforms?

Well, in terms of the investments themselves, they kind of give us an entry point into some of these really interesting platforms that we believe have a lot of growth ahead of them. And -- but again, it comes back to the synergies and client benefits we can bring as well as benefits from our own sales force. And with a combination of three different areas. One is productivity gains; new business generation gains and the repeat business opportunities to our clients who we know need some of these services and are not getting it currently. So, the return on that investment is going to be measured by both how well the companies do, of course, and us as investors in those companies. But also, the incremental additional business we're going to gain from having access and partnerships with these firms, which is very difficult to quantify.

Yes, Blaine, this is Steve. I'll add a little bit there. And I want to point out that we're not all of a sudden getting into the venture investing business. Each of these relationships started on the commercial side and looking at the benefits that they can bring to our business, our clients, our agents, as Hessam has indicated. We like what we saw on those fronts. There was an opportunity to invest in each of them. We did that -- within our diligence, we did that. I will point out, though, that neither of these investments are of a size or percentage ownership that would require their quarterly operating results to impact ours, which if you're -- on the -- from a technical standpoint, means the investment was less than 20%.

Okay. Great. That's helpful color. Switching gears, clearly, the transaction market remains deeply depressed. But of the transactions that are occurring, I guess, what percentage or portion would you say are driven by some form of distress that's kind of forcing sellers to [indiscernible] versus those that are occurring a little bit more naturally?

As I mentioned, Blaine, in my prepared remarks, we're starting to see situations that are unique to the owner, unique to the lender as opposed to large waves of distress being marketed or portfolios of distress, whether they're loans or assets. being brought to market or even being really prepared to be brought to market. It's one-off situations that are starting to happen, and we anticipate to see a lot more of them. as more loans come due over the next two years. And frankly, as some players continue to need recapitalization. We're seeing a significant increase in the need for recaps in order to stay active in certain assets that are having either refinancing issues or operating issues. As a percentage of our closings in the third quarter, it wouldn't have been significant, but I can clearly share with you that this bucket of transaction catalysts is on the rise measurably.

Got it. That's really helpful. Can you talk a little bit more about how the market dislocation and depressed transaction market is kind of affecting your recruiting efforts? And I guess, how we should think about what broker count should look like as we move forward into 2024?

Sure. The market condition around in experienced professionals being hired, trained, and transitioned into productive producers for us is still very challenged for the same reasons we've talked about for a while now, the early post-pandemic, in that the very tight labor market which is starting to loosen to some extent based on today's jobs report, of course, as well as the disruption, the significant swing since the pandemic of a severe market shutdown and the downturn in 2020, a big comeback in '21, '22 and then an interest rate induced dislocation has made the usual process of bringing inexperienced people onto the business, training them, having them work with a mentor and transition them into productive individuals has really been disruptive. And we're still, if you will, reacting and pivoting to the ripple effects of that three-year disruption in the normal cadence of our new agent and originator hiring. But the trends are moving in the right direction. The additional initiatives that we've implemented are paying off, whether it's our fellowship program, our internship program expanded kind of channels for reaching out to sales professionals from other industries, and a lot of flooding the zone in helping the newer professionals that are within the firm already. get more training, get more support, and make it to the other side. But I don't want to underestimate just how difficult it is as a new professional to make it in this market. What we do know is that those who started in 2008, 2009 with us, maybe even in 2010 and really struggled for the first few years are some of our top performers now because they really learned the business in a healthy foundational way that has given them an advantage as a career. And we're really advertising that and using those best practices to do everything we can to help our newer professionals right now. Complementing that with experienced professional hiring teams, boutique firms has been very successful. And we continue to build on that. This year, we've brought a number of market-leading teams on board. We designed that effort in a way to be complementary to our existing coverage and our existing team, so we avoid as much overlap as possible. so that we're not cannibalizing current opportunities that are already being pursued. And that strategy is very much alive and kicking and a high priority for us.

Okay. Great. That's helpful. Last one for me. Can you just give us a little bit more color on any additional external growth opportunities you guys might be exploring? How far along any of those discussions might be? And given that you didn't repurchase shares this quarter, although, as Steve mentioned, you guys have been active since then. I guess just how should we think about your preferences between those two options for capital deployment?

I'll take the first part of your question first. As I mentioned in my prepared remarks, we have been actively pursuing external growth through acquisitions for some time now and had advanced discussions with some targets that didn't work out predominantly because of a valuation and purchase terms gap that we still felt brought too much near-term risk and midterm risk to the company. Those that did not work out have been more than replaced by new activities and new discussions, pretty advanced discussions with others that fall in the same category of external growth, and with time, we are seeing a little bit more realistic price expectations and terms expectations, not because the targets that we're talking to are distressed in any shape or form. but because this realism is setting in just as much as it is for real estate owners, by the way, it's the same process and the same curve, if you will. And so, we're encouraged by that quite a bit, and we are doing everything we can to continue to build that pipeline. Our preference, of course, would be to deploy as much capital for external growth and long-term growth and expanding the platform as much as possible. not just because of diversification, although that's very important, but also recognizing, Blaine, that within our core business, brokerage, and finance, there's plenty of room for growth. There's plenty of opportunity for additional boutiques, additional groups where we don't have that coverage to be added to the company and the success stories that we've had with numerous firms that have joined us over the past five years are the reason to do more of it. both for the sellers as well as us. So that's the preference. But I think the benefit of our current capital deployment strategy is the fact that we work very hard for several years to position the company to have such a fortress balance sheet to have multiple strategies deployed at the same time. We're returning capital to shareholders through our dividend policy and share buybacks. We're pursuing acquisition opportunities. And as importantly, we're investing in ourselves. We are doubling down MMI in this period. That is for sure. So, the fact that there was no buybacks in one particular quarter is not signal any change to the overall strategy. That just happened to be the dynamics for that particular quarter. and we have optionality. So, as we pursue these external growth opportunities, hopefully, as they scale and some exciting things come together, that's where we'd love to see the capital deployed first and foremost as well as, as I said, doubling down on ourselves in technology investments, a talent acquisition that wouldn't be considered necessarily M&A.

Yes. And Blaine, really, the only thing for me to add that was very comprehensive is pointing out that between the dividend and the share repurchase program, we've returned over $150 million to shareholders over the last 18 months, and it is that very balance sheet that we've built up over the years that's allowed us to do that while also still being able to make investments both internally and externally.

Okay. Great. Just a follow-up here for Hessam, you talked about a valuation gap on some of those deals that fell out. Can you give us any better sense of how far off you were from an agreeable price? Was this closer to 5% off or 25% off?

It's somewhere between, Blaine. And it really was maybe about a turn with a multiple turn of what we felt may have a fair market value versus what the sellers would have liked and or the combination of the guaranteed value and earn-out. where some folks would like to take more chips off the table, and we would like to see the opposite because we're not really looking to be anybody's retirement plan. And we're targeting groups and entities that have a lot of runway and would benefit from an exciting growth path in the future that will be much, much more rewarding with Marcus & Millichap than without or with any other platform. And so, if we don't see those characteristics in a deal, we're not just looking to buy market coverage. We really want to find complementary services, complementary folks that are like minded, that are similar in culture, and are aggressive about future growth. And I would say those are as important criteria for us as any financial metrics.

Okay. Great. Thanks for all the commentary.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to CEO, Hessam Nadji, for closing remarks.

Thank you, operator, and thank you, everybody, for joining our third quarter call. We look forward to seeing you on the road and look forward to our next earnings call. Have a great day.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.