Greetings, and welcome to Marcus & Millichap's Second Quarter 2024 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. Welcome to Marcus & Millichap's second quarter 2024 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; 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, 2024. 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 call is being webcast. 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 second quarter earnings call. As anticipated, the company faced a challenging quarter due to the lingering impact of the higher for longer stance on interest rates by the Federal Reserve. Revenue for the second quarter came in at $158 million, with adjusted EBITDA of $1.4 million and net loss of $5.5 million. This primarily reflects the ongoing headwinds of bid/ask spreads and constrained financing. Marketing and closing time lines continue to be longer than usual, while an elevated portion of our deals had to be recalibrated multiple times before closing. Notwithstanding, the impact of these macro conditions on our team's productivity, a number of positive indicators we emerged in the quarter. Internally, these include measurable growth in our new inventory and price adjustments that are more reflective of the current market. We also saw a 23% sequential revenue gain over the first quarter, compared to just 5% sequential growth achieved in Q2 2023. Year-over-year revenue decline of less than 3% was also our lowest such comparison since the start of the market downturn in the third quarter of 2022. Externally, the passage of time has finally brought more realistic pricing and a growing sentiment that valuations are at or near bottom for most property types. We saw capital reentering the market gain momentum throughout the quarter, driven by price adjustments from peak and in comparison to replacement costs. Many investors are recognizing attractive entry points for assets, given the incredible difficulty many markets are showing and the higher cost of building. In many cases, investors are paying all cash or relying on short-term financing to secure well-priced opportunities with the goal of adding long-term financing when rates come in. Situational distress particularly…

Thank you, Hessam. As mentioned, total revenue for the quarter was $158 million compared to $163 million in the prior year quarter. For the six-month period, revenue was $287 million compared with $318 million last year. Revenue from real estate brokerage commission for the second quarter was $135 million and accounted for 86% of total revenue compared to $140 million last year, a decline of 3% year-over-year. Brokerage revenue was generated on total sales volume of $7.2 billion across 1,272 transactions down 5% and 11%, respectively, compared to last year. Year-to-date, revenue from real estate brokerage commission was $245 million and accounted for 85% of total revenue compared to $275 million last year, a decline of 11% year-over-year. Total sales volume year-to-date was $12.8 billion across 2,347 transactions down 13% and 12%, respectively, and mostly reflecting a more challenging first quarter this year. Average transaction size during the second quarter was approximately $5.6 million up 6% from $5.3 million a year ago, reflective of an increase in our revenue mix from middle market and larger transactions. Within brokerage for the quarter, Private Client contributed 63% of brokerage revenue or $85 million. This compares to 69% and $96 million last year. Transactions in this segment were down 19% in dollar volume and 14% in transaction count compared to last year. Year-to-date, Private Client contributed 65% of brokerage revenue or $158 million versus 68% and $187 million last year. Our middle market and larger transaction segments together accounted for 33% of brokerage revenue or $45 million during the second quarter compared to 28% and $39 million last year. These segments combined were up 8% in dollar volume and flat in lower transactions. Year-to-date, the middle market and larger transaction segments represented 31% of brokerage revenue or $77 million compared to 29% and…

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Blaine Heck with Wells Fargo. Please go ahead.

Great. Thanks. Good morning. Hessam, can you talk a little bit more about the relative kind of resiliency in transaction volume in different size segments, especially in the private market segment, which saw transaction revenue down 12% year-over-year, while the middle and larger market revenues grew pretty significantly. I think you mentioned difficulty in obtaining financing, but that seems to be affecting all of the size group. So just a little bit more on how that's playing out. And also how you think the trajectory of the recovery could differ there from the larger segments, if at all?

Good morning, Blaine. Happy to address that. As I've shared in the past, this particular market disruption has been especially difficult for the smaller transactions in the Private Client segment for two reasons, one, it has to do with the fact that we did have a banking crisis in spring of 2023, and that further pressured banks credit unions to pull out of the market or price themselves out of the market, which is really the bread and butter of financing sources for MicroCap transactions. That affected both the market and our business more than usual. And second is price discovery in that the degree of uncertainty that the market has been facing since the beginning of this disruption has been so severe, and the underwriting and the moving target of valuation has been such a hurdle for deal-making that we saw a much larger portion of our typical private client trading clients go on the sideline and wait for more clarity. That continues to play out. And there has been a resistance to selling at a discount, certainly for the first 12 months of disruption and even in the last six months or so, and that's slowly starting to change as the values reset. And usually, we see a little bit more rapid response to realism in most downturns. This one has been particularly slow. Those are the reasons the Private Client segment has been more challenged than what we've seen in previous cycles. On the middle market and the larger transactions, of course, they were impacted severity as well. What we're seeing is more assets come to market that are larger at more reasonable place, the prices and therefore, a bigger discount from where we've been. And because of some of the catalysts that I talked about in my formal remarks, bringing more product to market, bringing more of those sellers to market, we saw an uptick in those segments for the quarter. I anticipate that to continue. And for the private client portion of the business, they have to catch up as all the effects of lower interest rates, the price resetting, worked their way through the market. One last commentary, Blaine, analyzing all this all the time within the company's information and for the market, the single-tenant net lease segment, in particular, has been hit hard with the price dislocation and of course, financing, as I mentioned, through banks and credit unions. And that is a large component of our business, smaller apartments have become more stable in valuations after this painful period of the price adjustment, and we're starting to see that segment move a little quicker.

Blaine, this is Steve. One additional point there, in addition to those larger assets coming to market at more reasonable prices, institutional buyers have got stockpiles of cash and don't necessarily need financing or if they do, they've got cash to put down in the near-term and potentially refinancing in the future.

Great. Very helpful color. And it seems as though you have more optimism that the transaction market is on the road to improving in the near future than you have in past calls. Can you talk about maybe weather distressed transactions are part of that potential surge? Or are we kind of past the breaking point for some of those potentially distressed sellers and maybe less distress than was expected is actually going to occur?

Sure. Happy to address, Blaine. We definitely see more distressed situations come to market. We expect more of that will occur looking forward. But the real needle mover is not going to be distressed in large volume. What we're seeing is more client-driven, asset-driven distress that is becoming more and more common across the country and across different property types, particularly office, of course, multifamily, because a large portion of the market had been very aggressively underwritten with short-term debt. And to some extent, older shopping centers are still having some issues even though the multi-tenant retail segment is clearly on recovery, as I mentioned in my formal remarks. Therefore, the real needle mover going forward on transaction activity is going to be lower interest rates and the resetting of values, which on a more broad scale, we believe will bring more product to market and more realistic pricing along with that product coming to market. What's really important to keep in mind, though, is that the Domino effect of lower interest rates, the price reset and more realistic kind of time lines by a lot of our clients bringing the product to market take time to ripple through the process for our business. We do have a multi-month process for marketing assets, selecting the right buyer, securing the financing and closing. So it's not an immediate effect. There's a ripple effect. And the Domino process that we had hoped would start by April, May, June of this year, with the Fed starting to ease, clearly got delayed. And therefore, the second half of the year projections that the industry had, and we certainly shared with a lot of optimism that the Fed would act much sooner, it just simply got delayed.

Okay. Great. That's helpful. Just shifting gears, can you 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 really how you think about that recent performance that you mentioned, these groups are having, which maybe the breadth versus the optimism, it seems you have for increased transactions going forward. I guess is the issue just that they are asking for valuation based on normalized operations even though there's kind of a risk to that forecast, maybe just explain that a little bit more?

Sure, happy to. We have seen more reasonable valuation expectations. There has definitely been a movement on that. Where we have been very challenged in several conversations is the mix between the guaranteed portion of valuation and the uncertainty related to near-term forecast. Looking back at some of these conversations a year ago and the fact that we were uncomfortable moving forward with what appeared to be a best and final with some of the groups we were talking to, turn out to be the right decision for the firm in that had we bought into some of their optimism and some of their forecasting based on pipelines, by the way, verified pipelines. The near-term impact on the company would have been negative. Of course, we're thinking long-term, we're thinking about one plus one equals three and how cultures fit and what the synergies are and so on and so forth. But nonetheless, in this highly uncertain environment, we've really been the guardians of the company's capital and our shareholders' capital in a way that just didn't get to a point of comfort with the near-term risk and the guaranteed portion of those valuations. And that's where we're still, to some extent stuck, but what's encouraging is the interest some of these targets continue to have in being a part of our organization. And a lot relationships have been developed through these multiple dialogues over the past 12 to 18 months that we're still very much keeping alive. There will come a time where these expectations on our side and their side, should come into alignment. Unfortunately, we just haven't gotten to that point yet to where we can announce some deals. But the effort is clearly there. I can tell you that.

Great. So I guess, lastly, that begs the question: how do you feel about share repurchases? You didn’t do any during the quarter. Was that more a function of just trying to keep liquidity for other potential transactions, or more of a pricing issue? I guess any color there would be helpful.

Yeah, Blaine, this is Steve. Of course, share repurchases, along with dividends, are a significant part of our capital allocation strategy, along with technology investments and other areas in the platform. And I guess I would say that how we allocate capital is constantly evolving. In times like this, when we're not generating as much cash as we would in normal times, we dial those elements up and down. Share repurchases are a perfect example. We're a little bit more opportunistic there. And we've just chosen to be out of the market at the moment, as we direct our investments to other internal opportunities. Of course, we continue to pay a dividend. We paid a dividend in April, and the Board just declared another dividend payable in October. So it's really about moving the levers and dials, and as it specifically relates to repurchases, being opportunistic.

All right. Great. Very helpful. Thanks guys.

Thank you.

Thank you, Blaine.

As there are no further questions, I would now hand the conference over to Hessam Nadji, President and Chief Executive Officer, for closing comments.

Thank you, operator, and thank you, everybody, for joining our call. We look forward to seeing many of you on the road, and to have you back on our next earnings call. This session is adjourned.

Thank you. The conference of Marcus & Millichap has now concluded. Thank you for your participation. You may now disconnect your lines.