Greeting, and welcome to Marcus & Millichap's Fourth Quarter and Year End 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, operator. Good morning. And welcome to Marcus & Millichap's fourth quarter and year end 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 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 transaction 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 statements, 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 Web site, 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 Web site at www.marcusmillichap.com, along with the slide presentation you may reference during the remarks. With that, it is my pleasure to turn the call over to CEO, Hessam Nadji.

Thank you, Jacques. On behalf of the Marcus & Millichap team, good morning, and welcome to our fourth quarter and year-end earnings call. 2023 ended up as one of the most challenging periods for the commercial real estate industry. The residual effect of soaring interest rates and volatility caused a breakdown in valuations and pushed buyers and sellers alike to the sidelines. The impact of widened bid-ask spreads and severely restricted financing was illustrated by the lack of the usual fourth quarter investor urgency to close deals before year end. For the year, transaction and financing volumes declined by an estimated 55% market wide based on third-party sources. MMI's revenue for the fourth quarter was $166 million, up modestly from the third quarter and adjusted EBITDA loss came in at $4.5 million. For the year, revenue was just short of $650 million, a decrease of 50% for the prior year with an adjusted EBITDA loss of $20 million. While these results are extremely frustrating for our team, it is important to note that despite this challenging environment, MMI still closed roughly 7,500 transactions last year, once again more than any other firm. Our unique marketing system and culture of collaboration resulted in 44% of our closings going to out of state buyers, which highlights our ability to generate buyer interest locally and nationally, even in a disruptive market. Our ability to solve problems and uncover opportunities for our clients resulted in a movement of $12.6 billion across markets and product types. The company's financing experts at MMCC and IPA Capital Markets closed nearly 1,100 financing transactions with 350 separate lenders. Leveraging this vast network of lender relationships and real time information exchange among our originators are major advantages for our clients in this market. These numbers in the company's financial…

Thank you, Hessam. As previously mentioned, revenue for the fourth quarter was $166 million compared to last year's $262 million. For the full year, total revenue was $646 million compared to last year's record high of $1.3 billion. Revenue from real estate brokerage commissions for the fourth quarter was $145 million or 87% of total revenue compared to $236 million last year, a decrease of 39% year-over-year. For the quarter, total sales volume was $8.7 billion across 1,413 transactions, down 33% and 31% respectively. For the full year 2023, revenue from real estate brokerage commissions was $560 million and accounted for nearly 87% of total revenue compared to $1.2 billion last year, a decrease of 52% year-over-year. Full year sales volume was $30.8 billion across 5,475 transactions, down 55% and 40% respectively. Average transaction size during the fourth quarter was approximately $6.2 million compared to $6.4 million a year ago. For the full year, average transaction size was $5.6 million compared to $7.5 million in the prior year. The year-over-year decrease in average transaction size reflects a decline in property values as well as a lower mix of revenue coming from middle market and larger transactions due to the disproportionate impact of the market disruption on institutional business. Within brokerage, for the quarter, our core private client business contributed 66% of brokerage revenue or $95 million versus 62% last year. For the full year, the private client business contributed 67% of brokerage revenue or $373 million versus 58% last year. Middle market and larger transactions, which experienced strong growth over the past couple of years, together accounted for 31% of brokerage revenue or $44 million during the fourth quarter compared to 36% last year. For the full year, middle market and larger transactions represented 30% of brokerage revenue or $166…

[Operator Instructions] Our first question is from Jason Belcher with Wells Fargo.

So I'm just wondering if you can talk a little more about the different transaction size buckets for commission revenue, particularly as it relates to any potential recovery. Are you expecting any particular deal size bucket to lead that recovery? Can you just comment on that?

In most recoveries, the private client is the first to recover because of the entrepreneurial nature because they can afford to acquire smaller assets with all cash and then put financing on it at times when financing is constrained, and do creative things on the sell side like seller carry and basically work through a lot of market headwinds that we've seen in past cycles. In this cycle, because of the broad nature of the dislocation and because of the credit constraints that we're seeing among banks and credit unions, as I mentioned in my formal remarks, which are the primary source of smaller transactions, mid-cap, small cap transactions, are really hindering that private client recovery. Now having said that, of course, the magnitude of the transaction decline and the smaller price points is far less than the institutional segment or the $20 million plus segment. As far as predicting where it's going to come in first, I would still expect the private client segment to start showing an uptick because of the fact that the prices are readjusting, expectations are readjusting, more inventory is coming to market. And those factors usually feed the entrepreneurial nature of the sub $10 million, $15 million marketplace. What's interesting is that just in the last 30 days really since the beginning of the year, we're seeing a lot more institutional interest, especially in markets that have been impacted by some pockets of overbuilding or a big reversal from rent spikes in the last three years to rent declines in the last six months or so. And it's encouraging to see the pencils down attitude of institutions start to shift away to showing interest in getting back into the market. So I don't think the institutional market is going to be far behind, but I would still expect the private clients to lead the recovery.

And just to follow up there. You referenced an uptick in certain markets that had been depressed. Can you just share a few of those markets where you're seeing some encouraging green shoots there?

I'll give you two examples. One is a supply constrained market that for many years has been a preferred market with a lot of buyer demand and the other is more of a high beta market. The first one that's interesting to point out is the San Francisco Bay Area. And because it lacked into job recovery, it lacked in the rent recovery despite being a very supply constrained region didn't see the kind of benefit from investor demand that we saw in other markets in '21, '22. And yet, on an apples-to-apples basis market like that is now a diamond in the rough in many ways and we're seeing a lot more investor interest in that market than many others. The other example is Phoenix, of course, or even in markets like Atlanta where you see a lot of construction and the absorption of those units have been strong when the employment market was on fire with the pullback of some of the momentum on jobs and some overbuilding, we've seen a reversal there. And therefore, the price correction has been more pronounced and the kind of volatility from peak to a trough has been more dramatic. Nonetheless, again, interest is picking up even in a market like Phoenix that's been through a lot of ups and downs. Because over the long term if you're looking at replacement cost and really look at the price per unit trend that we're seeing, this is a great window of acquisitions. And for long term investors that believe in growth markets like Phoenix they're seeing that benefit now. Conversely, in a market like the Bay area or even Southern California, because they're so supply constrained, they're seeing that benefit. And again, with price adjustment that makes it very competitive now on a replacement cost basis to be a buyer in this market.

And just one more follow-up there, if I may. On these markets where you're starting to see increased interest. Could you just comment on any particular property sectors that might be leading the way there?

We continue to see retail as a come back asset and, in some ways, a preferred asset. The consumer remains very strong, retail is way ahead of the curve and having reinvented itself because of e-commerce over the last 10 or 15 years. There has been a major pullback in new construction for well over 10 years now in retail and the power of destination retail, entertainment and experiential retail are out in the marketplace in full force. We're seeing more retailers expand that perhaps in the last 15 to 20 years. And there is pricing power on behalf of the owners. I'm very involved with ICSC as a trustee and it's fascinating to see the confidence level of major retailers looking to expand into brick-and-mortar. And brick-and-mortar has been rediscovered as an essential part of retail. And so it's really interesting to see that evolution go full circle with brick-and-mortar retail. So lots of interest there. Prices have adjusted in a way that you're starting to see the kind of alignment between buyers and sellers because, again, they're further ahead of the curve. And the cap rate spread to interest rates wasn't as dramatic as apartments and industrial. So in the multifamily marketplace, which is usually the most stable, we're seeing more of a dislocation and a drop in trading activity because of that tight cap rate band to interest rates before the tightening cycle began. That delivered a very significant valuation disruption for multifamily. And the market is sifting through it. At the same time, you have a lot of maturing loans from debt funds and short term financing options that are terming out, and so that's creating some pressure. And of course, you have pockets of overbuilding. But I really think all of this is temporary and…

Switching gears a little bit. I think you mentioned investment in technology initiatives in the quarter. Can you talk a little bit more about what that was related to and what kind of benefit you hope to get from that?

There is an initiative for internal proprietary system development, we've done a great deal of it over the past three years. And all of that effort is around the productivity level of the back office that basically supports our sales force, whether it's the underwriting process, the proposal preparation process before an agent goes out to meet with a prospect, and shifting from that back office internal productivity to then the marketing of our listings. We have done quite a bit of work on our Web site that's geared towards ease of finding our inventory. We introduced an application not too long ago called My MMI that enables investors to register with us, tell us what they're looking for, save their searches by property type, price range, geography. And as our system basically does a real time search to match that criteria, the buyer is alerted and the listing agent is alerted and we make the kind of linkage between potential investors and our listing brokers much, much more efficient. That application now has well over 100,000 investors registered in it. They also get notifications of our research content and upcoming industry and Marcus & Millichap events. And so that's an example of an application we introduced and we continue to refine. And then our marketing center within our internal proprietary inventory system called MNet is a fantastic automation example of making it really simple for our brokers to launch e-mail campaigns of new listings and to be able to monitor the interest level that is coming in from our Web site from various screened out potential investors, potential buyers and being able to get a touch with them very easily. Knowing who's looking at what product type, what interest level they have also makes the targeting of our new…

And Jason, just to elaborate on the last two, those proptech investments, those started out as commercial relationships. We liked what we saw as we evaluated the technology for the internal and synergistic reasons that Hassan elaborated on. We like the opportunity and at that point, decided to make those investments in each of those firms.

And then lastly, maybe one more for you, Steve. Just switching gears to the income statement. I noticed your interest income and other line jumped a little higher this quarter. Just curious if that was mainly driven by higher interest rates on your short term investments or if there was something else behind that?

Yes, that's exactly it, higher rates, obviously, we've got $400 million plus on the balance sheet between cash and our various investment vehicles. We did, during the quarter, elect to swap out some shorter term, lower rate investments for some longer term vehicles, still well within our investment policy. But swapping out cash that was earning 1% to 2% for a little bit longer time horizon earning above 5%. So we're active in that regard, obviously, with the strength of our balance sheet, we're never pressured to sell anything, even if it happens to be below market. And it gives us the opportunity to swap lower performing vehicles for higher performing.

And just on that, the longer time horizon vehicles. What kind of duration are we looking there one year, two years?

Yes, in that range, I think the max we go out is something like 30 months.

There are no further questions at this time. I'd like to hand the floor back over to Hessam Nadji for any closing comments.

Thank you, operator. And thank you to everyone who joined the call. We look forward to seeing you on the road, and having you back on our next earnings call. Thank you very much.

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