Marcus & Millichap Inc (MMI) 2020 Q4 法說會逐字稿

Thank you. Good afternoon and welcome to Marcus & Millichap's Fourth Quarter and Full Year 2020 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 responses to questions may contain forward-looking statements. Such words 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, COVID-19 pandemic, general economic conditions and commercial real estate market condition, the company's ability to retain and attract transactional professionals, the company's ability to retain its business philosophy and partnership culture amid competitive pressures, the company's ability to integrate new agents to sustain its growth, and other factors discussed in the company's public filings, including its annual report on Form 10-K to be filed with the Securities and Exchange Commission on or about March 1, 2021.

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 afternoon and is available on the company's website, represents reconciliation to the appropriate GAAP measures and explains why the company believes such non-GAAP measures are useful to investors.

Finally, 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 is my pleasure to turn the call over to Hessam Nadji.

Thank you, Evelyn. On behalf of the entire Marcus & Millichap team, good afternoon and thank you for joining our fourth quarter and year-end 2020 earnings call. I would like to extend our well wishes for everyone's continued health and safety.

I'm pleased to report that the most challenging year in recent memory was capped with a record fourth quarter with revenue of $250 million, an increase of 5% year-over-year and 58% from the third quarter. Swift controllable cost reductions contributed to an adjusted EBITDA of $37 million during the quarter, 14% above the prior year and 200% above the third quarter of 2020.

After the freezing of credit markets and the initial pandemic shock in the second quarter, the market environment showed sequential improvement in the second half of the year, which certainly contributed to our strong quarter. However, the essential drivers of our record quarterly results were the actions we deployed to combat the market disruption, starting in March of last year. This includes 31 webcasts, which drew an audience of nearly 140,000 investors, over 1,200 research publications and special reports, and over 20 special internal training and best practice sharing sessions, featuring 50 of our most experienced professional. These measures reinforce the company's position as a leading source of actionable market intelligence and advisory services.

Most importantly, the results reflect Marcus & Millichap's signature ability to help investors rapidly strategize, solve problems, execute on unique opportunities, and move capital across markets and product types. Having the largest investment brokerage sales force in the industry empowered with real-time research and MMCC's financing specialists brings efficiency and liquidity to our clients. This has been the company's defining value proposition throughout our 50-year history, which we're celebrating this year.

Let me illustrate my point with numbers. MMI's total fourth quarter transactions grew by just over 6% year-over-year, coming in at nearly 3,000 closings, including 642 financings with 383 separate lenders. Our financing specialists not only bring capital markets expertise to our sales force and clients, but they also have access to the most expansive network of active lenders targeted for each property and situation. The power of this combination was proven through our client results last year.

Nearly 45% of best and final buyers on our transactions in the fourth quarter came from out of state, illustrating the value of our market coverage and investor relationships. These numbers are especially noteworthy given that our team has been operating remotely in a still disruptive marketplace. This further highlights the importance of our technological investments over the past few years and specific tools that were implemented immediately in response to the pandemic.

Our team came together in a cohesive manner to live up to our promise of adding value for clients and protecting the firm's strong financial position at the same time during the challenging and unusual period. Last year was also an opportunity for us to live up to our founding principle of providing individualized management support for each agent, loan originator, and staff member, which we take great pride in.

We achieved solid results in all business segments during the quarter, with the biggest contributions coming from our financing division, private client single-tenant net lease sales, large apartment sales, including our IPA division, manufactured housing as well as office and industrial sales. These trends reinforce the strength of our private client foundation, the benefits of enhancing and growing MMCC over the past few years, and our strategy to diversify and expand coverage by property type and market.

Momentum grew significantly late in the quarter as many previously delayed or canceled deals and listings were revived and investors brushed to close deals by year-end. Key factors behind the heightened investor motivation to transact range from sector-specific improvement in price discovery to optimism from good news on vaccine development and record low interest rates, of course. In many cases, the acceleration of closing deals ahead of the change in administration was also a factor. Based on our informal surveys, they echoed concerns about possible tax law changes in the future.

For 2020, total revenue was $717 million, down just 11% from 2019, while adjusted EBITDA was $76 million or 34.5% lower. Our earnings were impacted by the unexpected revenue decline and increased costs related to strategic investments in technology and talent. The company completed 4 acquisitions during the year, bringing the total to 9 transactions since 2018. And we were highly successful in attracting experienced professionals throughout the year. Our increased visibility and strength during the market dislocation were pivotal in making this happen.

While absorbing the costs associated with these strategic moves in a declining market are a short-term challenge, we strongly believe they will create significant value in the long run. Notwithstanding these challenges last year, MMI stayed the course on long-term investments while modestly growing our cash position at the same time.

Financing fees rose 43% in the fourth quarter year-over-year and 6.4% for all of 2020, setting a new record. These results reflect the expertise of our existing MMCC team, their collaboration with our investment sales force as well as the successful integration of the many accomplished individuals and companies added to the MMCC platform over the past few years.

On the headcount front, last year we added 76 total professionals to our sales force for a growth rate of nearly 4%. This was accomplished with heavy reliance on virtual recruiting and visual-based career fairs as the main vehicles for attracting and assessing new candidates. The net number was impacted by elevated dropout rates of newer professionals in a challenging market environment and accounts for our shift to experienced financing professionals on the MMCC front. Net hiring numbers will continue to reflect these factors for the foreseeable future. However, we are encouraged by the amount of interest we're seeing from several experienced professionals and groups that we are currently in discussions with.

We managed to keep transaction and volume decline for the year to 8% and 12.7%, respectively. In contrast, Real Capital analytics reported year-over-year transaction decline of an estimated 30% for the market, highlighting our ability to outperform by a wide margin during this unusual disruption.

Looking forward, we are excited to build on last year's platform improvements and opportunities for long-term productivity gains well beyond recovering from the pandemic. A new suite of technology upgrades and advancements are planned for this year as well as continued emphasis on internal training, sharing of best practices and adapting our elevated investor outreach initiatives to the evolving market dynamics. Our persistent focus on strategic acquisitions and attracting experienced talent continues unabated to augment the company's traditional organic growth model.

From a market perspective, we expect the continuation of the recovery that began in the third quarter of last year. However, the market recovery pattern is likely to be somewhat choppy with a slower sequential improvement in the first quarter and building momentum as the year progresses. The delay last year in the follow-up round of stimulus, which was finally approved in December, created a pause in a macroeconomic recovery. Additional stimulus already underway and prospects of yet another round of assistance, combined with still low interest rates, should begin to recharge the recovery over the next several months.

For us, a short-term challenge is replenishing pipelines of listing inventory in the aftermath of a record fourth quarter and Q1 contrast to our record pre-COVID first quarter last year. As we have experienced before, during times of business acceleration, our sales force's focus on transaction closings reduces bandwidth for new business development. Rebuilding inventory and pipelines after a record quarter is a temporary and natural part of the ebb and flow of our business and highlights the importance of viewing our results over the long term.

To this point, we believe our current efforts to replenish our pipeline of deals under contract and grow new listings, combined with the positive economic factors I outlined earlier, bode well for the second half of the year and an overall strong outlook for 2021. In addition, the eventual release of pent-up demand and unprecedented liquidity injected in the system should also be noted as likely key factors that support this outlook. To put this in perspective, consumer savings increased by an estimated $2.5 trillion during the pandemic due to consumers' inability to engage in normal activities.

Total federal stimulus to date, excluding any additional measures, is over 40% of GDP compared to just 6% in reaction to the 2008-2009 financial price. We added a couple of slides to our earnings presentation to help illustrate these trends.

There is no shortage of capital chasing real estate and we're seeing multiple examples of pre-COVID pricing in certain property segments and markets. However, the bid/ask spread and unrealistic expectations are still limiting further improvement in sell velocity in favorite asset classes such as apartments, single tenant, industrial, and self-storage.

The office sector is showing a wide range of buyer/seller expectation gaps as the post-pandemic picture and the long-term impacts of virtual execution across countless industries is still unclear. The hardest-hit sectors, including hotels, older shopping centers and seniors housing, still need time for repricing, addressing loan performance and, in many cases, reuse strategies to emerge. MMI is poised to facilitate solutions in all of these sectors as well as the migration of capital to suburbs, and secondary and tertiary metros, which are sustainable trends boosted by the pandemic.

As we take on the next phase of growth opportunity for MMI, our experienced management team and proven ability to create value for investors will be leveraged internally and externally. We gained invaluable experience and executed platform improvements last year that will deliver value for years to come. We're here to see to it that this materializes as fast as possible. Our balance sheet remains a source of strength, allowing us to pursue strategic investments and tools, technology and complementary businesses.

In closing, we're proud of our team's performance in such a volatile year and we look forward to continuing to deliver best-in-class services to our clients and a return to earnings growth for our shareholders in 2021 and beyond.

Steve DeGennaro will now discuss our financial results in further detail. Steve?

Thanks, Hessam. We are pleased with our financial and operating performance in the fourth quarter. In many regards, our sequential results highlight the significant progress we have made since the start of the pandemic in the second quarter last year.

Total revenues in the fourth quarter rose 5.2% year-over-year to a record $250 million and improved 58% on a sequential quarter basis. This was driven by the continued rebound in transaction activity across all business lines as financing was more readily available, interest rates remained at historically low levels, and key investor motivations created more urgency to transact, as Hessam outlined.

Total revenues for the full year declined 11% year-over-year to $717 million as a result of the market disruption in the second and third quarters. In retrospect, our full year results were significantly better-than-expected back in early summer, which is a testament to our clients' trust and the commitment and hard work of all our agents, loan originators, and employees.

Revenue from brokerage commissions for the fourth quarter accounted for approximately 87% of our total revenues and were up modestly year-over-year and up 54% on a sequential-quarter basis to $217 million. The sequential strength is indicative of the continued recovery from the effect of the pandemic as well as the seasonal nature of our business, which typically sees an increase in the fourth quarter. The increase also reflects resurrection of previously canceled or delayed deals, a significant catch-up factor for many investors who had gone to the sidelines in Q2 and Q3 of last year, and the macro factors outlined earlier.

Our private client business accounted for 64% of our real estate brokerage revenue for the quarter were $139 million, a decline of 2% year-over-year, but an increase of nearly 42% on a sequential-quarter basis. Brokerage revenue from our middle market and larger transactions for the fourth quarter was up 6% year-over-year and surged 92% on a sequential-quarter basis. For the year, brokerage commissions accounted for 88% of our total revenues or $633 million.

Private client revenues accounted for approximately 67% of our real estate brokerage revenues, with the balance coming from our middle and larger markets transactions. The contribution from the private client market is consistent with historical patterns, underscoring the importance of this segment to our overall performance.

Moving on to MMCC. Financing fees in the fourth quarter rose 43% year-over-year and 72% sequentially as investors took advantage of record-low rates with more lenders active in the market. The growth in the quarter was primarily driven by a 28.4% increase in average transaction size, combined with a 10.3% increase in the number of transactions.

Purchase financing represented 48% of our production in the quarter as compared to 40% in the third quarter, further highlighting incremental improvement in the investment sales market and progress on the integration of MMCC with our investment sales force. For the full year, financing fees increased 6.4% to $71 million, reflecting a major comeback from the frozen credit markets during much of Q2 and the benefit of our ongoing efforts to improve MMCC's productivity as well as contributions from acquired companies.

Other revenues comprised primarily of consulting and advisory fees, along with referral fees from other real estate brokers, were $6.2 million for the quarter, up 75% from a year ago and up nearly threefold from the third quarter. For the year, other revenues rose 22.5% to $13.2 million. As a reminder, much of the revenue in this category is generated from our brokerage clients who utilize our team's expertise as advisers.

During the fourth quarter, we generated record total sales volume of $15.6 billion, comprising 2,978 transactions, representing year-on-year growth of 5% and 6%, respectively. Sequentially, sales volume and the number of transactions increased 72% and 39% respectively from the third quarter. The outsized sequential growth in sales volume was a result of the increase in our larger transaction business during the fourth quarter.

We continue to focus on attracting, retaining, and improving the productivity of investment, sales, and financing professionals. For the year, we increased the combined team by 3.8% to 2,097. While this is below our stated target, it does not reflect a slowdown in our overall hiring efforts. In fact, we continue to target new and experienced talent.

Total operating expenses for the quarter were $220 million, up 4.4% year-over-year primarily due to an increase in cost of services that accompanies higher year-over-year revenues. On a sequential-quarter basis, we saw a 45% increase in total operating expenses, primarily due to a 61% increase in cost of services driven by the surge in transactions in the fourth quarter. For the year, total operating expenses were lower by 6.6%, primarily reflecting lower cost of services, in line with total revenues for the year.

Cost of services was $161 million for the quarter or 64.2% of total revenues, 100 basis points lower than the fourth quarter of 2019 and 130 basis points above the third quarter of 2020. The decrease as a percentage of revenue compared to the prior year reflects lower commission rates in line with lower annual production levels and broader contribution from less experienced professionals. The increase sequentially reflects seasonal escalation in commission splits based on cumulative annual production.

For the full year, cost of services was $448 million or 62.5% of total revenues, an increase of 60 basis points year-over-year due to a higher mix of revenue closed by senior agents in the first half of the year.

SG&A in the fourth quarter increased 5.9% year-over-year and 13.5% on a sequential quarter basis, primarily due to higher performance-based incentive compensation and marketing and other support costs for our sales force. It also includes transaction and operating costs related to the acquisition of 2 businesses during the quarter. These increases were largely tied to our strong revenue growth in the fourth quarter and were partially offset by reductions in controllable expenses.

We continue to contain costs in balance with sufficiently supporting our platform. For the full year, SG&A rose just 69 basis points despite absorbing transaction-related and operating costs of 4 businesses we acquired during the year, which demonstrates the effectiveness of our cost containment efforts. As expected, these acquisitions are going through an enculturation and revenue ramp-up period. However, every one of the businesses has already added value through referrals and client synergies. We are confident they will be highly valuable in both financial and nonfinancial ways.

For the quarter, we generated $0.59 earnings per diluted share as compared to $0.52 last year. For the year, earnings per diluted share was $1.08 as compared to $1.95 a year ago, reflecting the significant disruption that the pandemic had on our business and continued long-term investments on our part. Our tax rate for the quarter was 26.8% as compared to 31.3% in the fourth quarter of last year, primarily due to a shift in the blended state tax rate to lower tax jurisdictions. For the year, our tax rate was 27.8% as compared to 28.4% in 2019.

Adjusted EBITDA for the quarter improved to $37 million or 14.8% of revenue, an increase of 13.6% over the fourth quarter of 2019 and more than triple the $12 million we delivered in the third quarter. For the full year, adjusted EBITDA declined 34.5% year-over-year.

Moving on to the balance sheet. We finished the year in a strong cash position with approximately $449 million of cash, cash equivalents, and marketable securities. This equated to $11.30 per diluted share. Our cash position and stellar balance sheet provides stability in times of extreme market dislocation, and at the same time give us the flexibility to pursue acquisitions like the 4 we made in 2020, including Mission Capital and LMI Capital, which both closed in the fourth quarter. As we have shared previously, selective and accretive acquisitions are our primary focus for capital allocation.

Given our strong financial and market presence, we are well positioned to scale our acquisitions. We are in active dialogue with potential targets and remain sensitive to underwriting economics and valuations given the market environment.

Turning now to the outlook for 2021. Looking back at last year, the overall market saw a gradual improvement from the lows in the second quarter where transactions were down approximately 55% year-over-year according to third-party sources. Activity improved in the third and fourth quarters with transactions down an estimated 40% and 30% respectively. In each of those quarters, we significantly outperformed the overall market. Looking forward to Q1, we believe the overall market will continue its recovery, but at a lower pace, given a still hampered economic and transactional environment, and a tough comparison to Q1 of 2020, during which the market environment was robust, pre-COVID and MMI at a record first quarter.

Our record performance in the fourth quarter and the corresponding depletion of inventory and pipeline, which will take time to rebuild, will be somewhat of an added short-term challenge for us. Positive vaccine news and additional stimulus funding should lead to good news for the economy and bodes well for the second half of the year.

Cost of services was exceptionally high during the first half of 2020 due to the initial challenges brought on by the pandemic. However, we believe the cost of services in the first quarter of 2021 will be impacted less and be closer to long-term historical trends in the range of 59% to 60%. The quarterly cadence of SG&A throughout 2021 should be similar to the fourth quarter of 2020. The exception is the first quarter where expenses will be approximately 5% to 7% lower than the fourth quarter due to the postponement of key events due to the pandemic. Lastly, we expect our tax rate to be approximately 29% to 31%.

With that, we can now open up the call for Q&A. Operator?

(Operator Instructions) Our first question comes from the line of Blaine Matthew Heck with Wells Fargo.

I'm interested in the pretty significant increase you guys saw on the average size of deals, both on the brokerage and finance sides of the business. Is that just reflective of maybe some of the segments of the market being more active than others at this point, just seeing more volume in kind of that mid and large-sized deal segment than in the private client market segment? Or is it more indicative of kind of a shift towards those larger deals for MMI in the future?

It's Hessam. I'll take that one. It reflects the catch-up that we observed in the fourth quarter from larger clients, especially a lot of our institutional clients that our IPA division works with. We'd gone on the sideline in the second and third quarters and came back into the market much more aggressively in the fourth quarter. So there was certainly a pandemic related 22-related factor in that. And having said that, as you know, we are hiring more experienced brokers. We've definitely shifted toward attracting more experienced loan originators. And with the additional experience that we are bringing on to the firm, those individuals tend to do larger deals. So there is a very gradual structural movement toward the larger deals as our sales force matures and outside talent joins the company as well as this cyclical factor we saw last year because of the pandemic.

Okay. Great. That's helpful. And then can you just talk about the opportunities that you guys see in front of you with respect to acquisitions? I mean, clearly, you guys got a large one past the finish line this quarter with Mission Capital and then also tacked on LMI. Does that kind of give you enough to digest for now? Or are you continuing to pursue other acquisitions? And if so, any color you guys can give on kind of the size of potential acquisitions? Are they going to be similar to Mission in large or kind of smaller like the other ones you've done over the past few years?

Sure, Blaine. First of all, let me give you a follow-up thought on your first question. You and I have talked about this before, but I just want to reiterate it, in that the shift toward attracting and acquiring more experienced talent and doing larger deals is not overshadowing our private client dominance, the importance of that business, our commitment to that business and the growth opportunity left in that business, it's significant. So it's -- we're not really shifting strategies or doing one in favor of the other. We're just pursuing all of our growth opportunities, including in our core private client business, which has ample runway ahead of us, in just about every product type. So I just wanted to emphasize that point.

And as it relates to acquisitions, certainly the integration and successful enculturation of the companies we have acquired is a very high priority. And it takes time and bandwidth, as you can imagine. But just like my previous comment about a dual strategy, that process doesn't keep us out of the market from sourcing and approaching and targeting additional targets. We're actively doing both. We've shown that we can target very quality firms and groups, bring them on board and help them improve their game while adding to the MMI platform. We're going to build on that and we are actively doing that. The advantage that we have is the management team that is out there in the field, they're very familiar with the best of the best in their local markets and where they have capacity deficits or holes that we can fill through these acquisitions. They're the best source of that ground-up, grassroots kind of targeting, and they're doing a great job of pointing out really good acquisition targets. We're actively talking to a number of them.

And of course, we are now set up better as a company, having done a number of deals, having brought in M&A experienced executives; Steve, of course, right here on the call with me, Evan Denner, who has extensive M&A experience and capital markets experience, now heading up our MMCC division, which is a big focus for acquisitions. And Mark Cortell, head of our legal -- all of our legal activities, who comes to us with extensive M&A experience from outside of real estate. This talent and this intellectual capital is now on board. Part of the strategy behind that was to be able to scale and improve our efficiencies in the way that we acquire additional firms into the future.

Having said that, we're not targeting large firms instead of small firms or small firms instead of large firms. We're out there looking at strategic fits of all sizes that will benefit MMI for the long term. And so you're going to see us be active in the full spectrum of size, but really driven by what our needs are, which specialty we need help in and how we can grow MMCC much faster, of course. And the pipeline is active. And that's all I can say about that in terms of the eminent deals around the corner. It just takes time, as you know, and we're in discussions with many players.

(Operator Instructions) Our next question comes from the line of Stephen Sheldon with William Blair.

On the outperformance relative to industry trends the last few quarters and the market share gains, I guess is there a way to frame what -- you talked a lot, I think, about some of the internal initiatives happen. But what has been more impactful than others and really helped you drive those market share gains? And how does that influence what you plan to do as we think about 2021 and 2022?

Thanks for your question. The interesting thing that we've observed is the success we've had in diversifying the platform over the past few years. The fact that we are now a bigger participant in larger transactions through our IPA division certainly is noteworthy in answering your question. The fact that we have successfully built and are now exporting the best practices of a number of industrial teams around major metros that have had great success is part of the answer to your question. We have done a better job of attracting office specialists that have joined the firm in the last 18 months that are bringing that added expertise and bandwidth to the firm. So it's a gradual process, but you can kind of feel their contribution help us in the kind of results that you saw last year in outpacing the market.

Now of course, on the apartment side, on the single-tenant net lease side as it relates to retail, our historical dominance plays a very important role, especially at times of market dislocation, not only as a -- somewhat of a safety net because there's always a steady level of trading in that private client apartment and single-tenant retail and small strip center or shopping center retail because of death, divorce, partnership breakups and all the personal drivers that dominate the private client world, but it also helps us as the market recovers. Because we have such a strong brand and such strong presence, we're able to capitalize that and take share. So it's a combination of all of those factors.

Got it. That's helpful. And then, I guess, just given what you're seeing in the business right now and the expectation for trends to pick up in the second half of 2021, how are you thinking about your recruiting efforts? Are you going to focus even more than you maybe have historically on trying to grow producer headcount above the normal ranges you've discussed, kind of ahead of that expected improvement demand? I guess, just how are you thinking about adding here?

Well, we've been very excited and focused on attracting and adding experienced agents and teams and loan originators for the past couple of years, that goes on unabated. It's -- we've never slowed it down. We have no intention of slowing it down. And we've made some progress. There's more progress to be made. And I do think the strategy is helping us and will pay off even more when the eventual release of pent-up demand, both on the economic side and then drill to the investment side really materializes. We haven't really seen that yet. And we do expect that to start to show up in the second half of the year, assuming the vaccine is successful and so on.

So the strategy isn't really changing. It's been a high priority. It's going to stay a high priority. But I think what's important to message is that our visibility has increased. The fact that we were a very stable and focused platform during the worst of the pandemic last year and we're proactive in rolling out new technology, rolling out the new website and being out there in front of record number of clients really helps solidify the advantage of Marcus & Millichap to a lot of folks we've been talking with who weren't quite convinced that they wanted to come onboard yet who pulled the trigger because they saw what we're made of. And I really think that tailwind is going to help us not just in 2021, but in general, and we're certainly out there capitalizing on it.

But let me make sure I also emphasize the importance of the productivity, retention, and the care of our existing sales force. Again, we're a story of multiple simultaneous strategy. Focusing on hiring talents from outside the company does not discount or diminish our focus on our current talent. We've had a lot of loyal people who have been here for a long time and a lot of newer people that are struggling, who we're obligated to support and help. And so I just want to make sure that the emphasis isn't only placed on the external growth factors, but also the retention and the caring and support and productivity of our existing sales force. They're really both important strategies.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Hessam Nadji for closing remarks.

Thank you, operator, and thank you, everyone, for joining our call and for the questions that came through. We are excited about 2021 and look forward to having you on our next earnings call. Thanks a lot. This adjourns our session.

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