Release Date: May 08, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Marcus & Millichap Inc remains the top investment brokerage firm by number of transactions, demonstrating strong market reach and investor access.
- Despite market challenges, the company closed over 1,300 transactions in the quarter, including 234 financings with 121 separate lenders, showcasing its problem-solving capabilities for clients.
- The company is seeing positive momentum on buyer tours and offers on realistically priced assets across all property types and markets, indicating a potential increase in transaction activity.
- Marcus & Millichap Inc continues to invest in business development, client outreach, and branding to maintain a strong presence in the industry.
- The company has a strong balance sheet with no debt and substantial cash reserves, providing financial stability and flexibility.
Negative Points
- Revenue for the quarter was $129 million with an adjusted EBITDA loss of $10 million, reflecting a challenging market environment.
- The transaction market remains depressed due to prolonged interest rate volatility, which is disruptive to real estate valuations and transaction closings.
- Listings are taking longer to market and many deals are falling out of contract due to financing issues or repricing, which is time-consuming and limits bandwidth for new business developments.
- The turnover rates for newer individuals remain elevated, posing challenges to building momentum in traditional organic growth.
- Despite ongoing efforts, the bid-ask spread in the market and near-term risks in underwriting and valuation assessments are making external growth and acquisitions challenging.
Q & A Highlights
Q: Hey, good morning, guys. I just stepping in for Blaine here I just wanted to go back to your comment on the current environment. Clearly, the transaction market is depressed, but the transactions that are happening today to provide some color on what percent is driven by some distress and then versus those that are turning natural?
A: Good morning. Happy to answer that. It's Hessam here. We're seeing more and more situations where sellers are having issues with operations or maturing loans that require fresh equity in order to get refinanced or recapitalized. And that's really the definition of distress that we're seeing more than the typical wholesale large portfolio dispositions by lenders that you would typically categorize as distress. And very little of that is really affecting the market and much more so of the situational examples are driving the market. Overall, the distress is becoming a bigger factor, but really not the driving force in the current real-time transaction activity. The bulk of the market is simply driven by both the personal circumstances, the private investor, bringing product to market or some middle market and institutional investors deciding to punt on certain assets that they don't believe will perform to their expectations going forward and just have the typical seller motivation that is bringing product to market a year ago. At this time, there was so much more uncertainty related to the timing of this downcycle and what the Fed would or wouldn't do and that pushed a lot of people to the sideline with the passage of time. We're seeing the natural kind of realization that the cycle is not going to go away overnight. And therefore, if there is a reason to sell a property might as well bring that product to market and redeploy the equity or get out of a situation that is very likely to underperform.
Q: I know that that's helpful. Could you talk about what product product-type could see the most distressed. We're hearing multi-family potentially and an office obviously. But so just interested in kind of your thoughts there.
A: What we're seeing on the product type comparison is that retail continues to have favor. If anything at all there is to be said about retail is the 15 previous years of recalibrating the shortage of new construction conversion of retail to other uses and reduction of essentially supply has repositioned shopping centers, in particular, much better today than any time we've seen in the last 20 years. At the same time, tenant demand appears to be at the highest level we've seen in that same time period. And the combination is really driving a lot of interest in shopping centers. That's a outlier in terms of positive momentum for transaction activity, plus retail and other certain other property types like hospitality or even office didn't have a tight spread between cap rates and interest rates before the Fed tightening. Therefore, there was more of a margin of absorbing the negative leverage that has significantly impacted multifamily and industrial where they which were the two property types with the lowest cap rates prior to this tightening cycle. That's where we've seen the biggest valuation disruption and uncertainty on pricing. And on the multifamily side, we are seeing a rebound in tenant demand in occupancies after a soft period in 2023 and part of 2022, which is a very positive sign. But you're right in that we're seeing more examples of maturing loan problems, especially because the last three years were driven by very aggressive financing by a lot of debt funds. And that are terming out, as I mentioned in my comments, and those situations need some kind of a solution, whether it's raising equity or recapping or a sale. And we're actively working with our clients across the country on numerous examples of those kinds of transactions. The fundamentals of multifamily are still solid. There's a housing shortage. The home affordability index is up showing the widest gap between renting versus owning. So the fundamentals are there and the pockets of overbuilding that we're seeing throughout the country. Multifamily are really limited to about eight to 10 metros and therefore, the industry is still doing well. I think it's going to take some time for the re pricing of multi-family to really it. This is where part of our results have been hampered more than usual because the private client multifamily, the private client, single-tenant retail as more affected in this cycle because of the interest rate shock in that normally we have the Fed coming in to the market as sort of a rescue when there is a recession or a credit market problems in this cycle is, of course, the reverse where the Fed has caused the disruption in valuations where we are actually successful in many, many office sales. And the key factor in office is that the book is being judged by cover in that distressed office is really limited to older urban product suburban product is much better off than urban product. And we've sold both distressed and well-performing office assets in the quarter throughout the country, and industrial is holding up.
Q: Got it. Thank you for the color on. And then you talked about experiencing higher turnover given the current environment. So how should we think about your brokerage count as we progress through the year?
A: Well, first, a little bit more details on on what is happening in that we've gone from the pandemic to a post pandemic, major market reversal to the upside and then a very dramatic market shift downward because of the interest rate shock. So the last three to four year period has provided nothing resembling a typical market environment in which we train people. We Mentor people, they learn the fundamentals of brokerage underwriting client contact and they basically start to develop their production and their brokerage career. This disruption both on the way down on the way up and down the way back down is the primary reason that skillset aren't developing in a way that we're used to seeing through our excellent training and market-leading ways of mentoring new people into the business. That's what's causing the disruption. And that's a lot of the people that you would typically bring in after, let's say, two years of this initial training and mentorship would become productive or would become a standalone new additions to our sales force. And we're still attracting at the top of the funnel, a phenomenal volume of both interns, fellows and new agent candidates. What is causing causing the challenge is the higher turnover rate of people that have been through the training, but are not able to function because of the market challenges and headwinds and the lower transaction velocity is just making it very hard to break into the business. So that's a little bit more color on the mechanics of what were the challenges we do expect this to be an obstacle to overcome. We're taking a variety of different initiatives, both on the top of the funnel to bring in more candidates. We have implemented a new version of a screening test and a screening process for our management team. We've added recruiters and that are helping them with the bandwidth and available time in order to reach and reach out to more candidates. And so all of that we're confident will make a major difference. But I think the biggest difference will come from the market, essentially a satellite and being able to provide a
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
