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Marcus & Millichap Inc (NYSE:MMI)
Q1 2021 Earnings Call
May 7, 2021, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Okay. Thank you for standing by. This is the conference operator. Welcome to the Marcus & Millichap First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Evelyn Infurna, ICR, for opening remarks. Please go ahead.

Evelyn Infurna -- Investor Relations, ICR Inc.

Thank you. Good morning and welcome to Marcus & Millichap's first quarter 2021 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, 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 filed with the Securities and Exchange Commission on March 1st, 2021.

Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that these 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 in 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.

Hessam Nadji -- President and Chief Executive Officer

Thank you, Evelyn. On behalf of the entire Marcus & Millichap team, good morning and thank you for joining our first quarter 2021 earnings call.

I'm pleased to report that the first three months of 2021 for MMI were characterized by solid year-over-year earnings growth, rebuilding of our pipelines, further addition of experienced professionals and outperforming the broader market once again. The momentum we saw in the second half of 2020 has continued into this year.

Solid top-line results, combined with ongoing cost containment, generated adjusted EBITDA growth of nearly 15% over the first quarter of last year. Total revenue was down just 3.5% from a record first quarter in 2020, which was up nearly 19% over 2019. Our revenue trend is also noteworthy, given the expedited progress made since January 1 in rebuilding our pipeline and inventory levels after a record fourth quarter.

Let me take a moment to acknowledge that these numbers reflect our clients' trust and our ability to help them solve problems, reposition portfolios and rapidly act on market opportunities. These results would not be possible without the extreme dedication, work ethic and expertise of our sales and financing professionals in a market environment still impeded by the pandemic.

Looking back, our pandemic response strategy clearly made a difference in the first quarter of this year. Our expanded research content, intensified investor outreach, comprehensive and frequent internal communications and training as well as investments in technology continued onward even as we speak. These initiatives help generate leads, bring clients closer to our sales force and opened opportunities.

We're proud of the record number of investors who attend our webcast and find our research content and advisory services of value. We also benefited from contributions by new talent added to the MMI platform through nine acquisitions since 2018, including four executed in 2020. The strategy to attract and hire experienced professionals, teams and companies to supplement our traditional organic growth has been very effective. This is largely due to the complementary market and property type coverage that drives our targeting. Even though our most recent acquisitions are still in ramp up mode, they're already generating client synergies, referrals and opportunity to expand service.

From a market perspective, support came from the passage of the stimulus, expansion of financing sources and high levels of liquidity. Investor sentiment is boosted by significant progress on the vaccine front, reopening of the economy and growing optimism in the pace of job growth. We saw progress on price discovery and improvement in our deal [Phonetic] ratios, closer bid-ask spreads and no shortage of buyers for well-priced assets. However, the market bifurcation by property type continues with the most stable segments of apartments, single-tenant net lease and industrial properties commanding strong values frequently at pre-COVID levels or higher.

Sectors hardest hit by the pandemic, including hotels, seniors housing, office and older shopping centers saw some progress during the quarter, but are still going through a recalibration. Building on last year's fourth quarter trend, institutional and larger private investors continued their reemergence into the market for larger asset. We have positioned MMI well through the maturing of our sales force and expansion of our IPA division over the past several years.

Revenue from larger sales valued at $20 million and above was up 5.1% year-over-year after a 46% jump in the first quarter of last year. These results support our continued diversification strategy into the larger deal segment as a natural supplement to our dominance in the private client market.

In the first quarter of last year, our private client revenue had increased 19% over the first quarter of 2019. This exceptional growth drove the 7.7% year-over-year decline in the first quarter of this year against the challenging comparison. We are as excited as ever about the long-term growth prospects in our private client segment, given its incredible size, vibrance and fragmentation, which create significant advantages for MMI as the market leader.

On the financing front, we continue to see progress in our strategy to elevate the experience level of MMCC financing professional and execute strategic acquisitions. I'm happy to report that 16.2% year-over-year revenue growth in the first quarter, including modest early contributions from Mission Capital and LMI, both of which were brought on board in the fourth quarter of 2020.

Our capital partnership network continues to expand as we completed nearly 500 financing transactions in the quarter with over 175 different lenders. Providing our clients with lending alternatives is an important value add when there is a disruption in the market or in the midst of an uneven recovery as we're seeing with certain asset classes today.

Turning to sales force growth. During the past 12 months, recruitment of sales and financing professionals has been challenging due to the limited in-person interactions and meetings. As expected and messaged on previous calls, we're experiencing higher than average attrition of newer regions and longer ramp-up due to a challenging market environment. As a result of these factors, we added 45 professionals for a growth rate of 2.3% over the last year. While we're having success with virtual career fairs and virtual interviews, we're eager to return to in-person recruiting practices in the near future. We're pleased with the addition of key experienced professionals strategically recruited in critical markets and we'll continue to build on the success.

Looking forward, we're encouraged by healthier market conditions and optimistic about our internal execution and growth strategy. Let me elaborate. From a market perspective, further improvement will be driven by still low interest rates, ample liquidity and expanding buyer demand for commercial real estate.

As we stated on previous calls, record cash savings point to the eventual release of pent-up demand by consumers and businesses alike. This is an important indicator that bodes very well in our view for rising levels of job growth and GDP expansion in the second half of this year and into 2022. While the stimulus is largely spurring economic momentum in the first half, the fundamental economic expansion should carry in the second half of this year.

Long-term interest rates appear to have stabilized at an attractive level, well below recent multi-year averages and still below pre-COVID levels. Even if inflation begins to drive rates higher, there is plenty of room before any adverse effect is felt in the marketplace. Most importantly, higher interest rates should generally coincide with higher occupancies and rents, keeping real estate valuations in relative balance.

There is a growing concern regarding the Biden administration's proposal for higher taxes, including potential changes to the current carried interest and 1031 exchange rules. These are early stage proposals and will very likely go through intense negotiations and changes in the months to come. Relative to prior periods of anticipated tax law changes, we have not yet seen a rush to sell assets. However, assuming the rhetoric and headlines continue to amplify concerns, it is likely that many investors will be motivated to take advantage of the current tax laws to transact sooner than they may have planned. This is particularly applicable to the tax deferment advantages of the 1031 exchange provision.

As the investment brokerage market leader, we are well positioned to facilitate this as we have done before. Over the past 20 plus years, we've seen many cycles of proposed elimination of the 1031 exchange paid due to the ultimate realization that doing so may actually cause more economic harm than raising net revenues. This is very similar to the current debate on the point of diminishing returns on higher capital gains tax rates, which further points to the fact that the current proposal are preliminary and subject to change.

Regardless of the ultimate outcome of the current tax proposals for MMI's planning, it is critical to point out that a large portion of transactions that involve a 1031 exchange would still occur, whether executed by private investors or institutions. For private investors, a myriad of factors drive transactions, including death, divorce, partnership breakups and inheritance as we have messaged many times in our various communication.

On the institutional side, business decisions, portfolio and fund-related factors and timing frequently influence transaction decisions as well. While some short-term market volatility may occur we've seen in past cycles of tax law changes, our long-term plan driven by significantly growing MMCC diversifying into various property types and the sheer size of the market we're able to capture gives us great confidence looking ahead.

We've worked diligently to build a strong balance sheet with a great capital position, providing flexibility to increase productivity, diversify coverage and expand client services. Our progress on strategic acquisitions and hiring validates our approach to sourcing like-minded experts with a strong cultural fit. These new individuals, teams and companies benefit from our platform and conversely bring immediate value to our existing sales force and clients. We're actively building on this and continue to see acquisitions, investment in technology and proprietary brokerage tools as a priority for capital deployment.

We are excited about the rest of this year, our long-term growth plan and look forward to sharing our progress with you in upcoming calls.

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

Steve DeGennaro -- Executive Vice President and Chief Financial Officer

Thank you, Hessam. Our financial and operating performance in the first quarter was extremely encouraging as we delivered nearly 15% year-over-year growth in both adjusted EBITDA and net income. The year-over-year improvement on those key metrics demonstrates our ability to complete transactions in a challenging market and the favorable impact of our rapid response to the pandemic through tactical cost controls. We expanded our margins during the quarter and expect to improve further in the quarters ahead. as our top-line continues to recover and we generate additional leverage in the business.

Total revenue in the first quarter was $184 million as compared to a largely pre-pandemic record-high revenue of $191 million in the first quarter a year ago. These results are particularly noteworthy following a record fourth quarter that resulted in reduced inventory and pipeline levels entering the quarter. Brokerage commissions for the first quarter accounted for approximately 88.5% of our total revenues and was lower by 5.3% year-over-year against a tough prior-year comparable that grew 19%.

Our private client business accounted for 65% of real estate brokerage revenue for the quarter or $105 million as compared to a record $114 million in the comparable prior period. It should be noted that critical segments of this price tranche, including apartments and single-tenant net lease, registered strong growth in the first quarter of last year, making the comparison challenging.

Brokerage revenue from our middle market transactions accounted for 13% of real estate brokerage revenue and was lower by 9% year-over-year. Our larger transactions represented 19% of brokerage revenue for the first quarter and grew 5.1% year-over-year, largely due to the strength of our IPA division in the quarter and on top of a 46% growth rate in the prior year, as Hessam noted.

Moving on to MMCC. Financing fees in the first quarter rose 16.2% year-over-year as investors took advantage of a favorable refinancing environment with ample liquidity and buyers moved to close purchases in a somewhat volatile rate environment. Refinancings were 57% of total financing transactions, spurred on by a 10-year treasury yield that was near 1% early in the quarter. The growth in the quarter was also supported by our recent acquisitions.

Other revenues comprised primarily of consulting and advisory fees, along with referral fees from other real estate brokers, were relatively comparable at $3.3 million for the quarter compared to $3.5 million in the first quarter of 2020. During the first quarter, we generated total sales volume of $12 billion across 2,332 transactions, representing year-on-year growth of 1.6% and 3.6% respectively.

Brokerage transactions decreased 1.7% compared to an estimated 25% transaction decline for the market as reported by Real Capital Analytics, which indicates continued share gain once again. Our consistent outperformance as compared to the broader market points to the strength of our brand and the benefit of servicing a broad client base spanning from private individuals to large institutions. The value added brokerage capabilities of the firm was founded on stand out, particularly in times of market dislocation, which we've clearly experienced over the past year.

We continue to focus on attracting, retaining and improving the productivity of investment sales and financing professionals. For the quarter, we increased the combined team by 2.3% year-over-year to 2,038 professionals. We anticipate that our recruitment efforts will ramp as in-person interactions become the norm with the rollout of the vaccine.

Total operating expenses for the quarter were $164 million, lower by 4.3% year-over-year. Cost of services was $109 million for the quarter or 59.3% of total revenues, 30 basis points lower than the first quarter of last year. The decrease in commission rates reflects a higher proportion of transactions closed by our more senior investment sales and financing professionals at the start of the pandemic in the first quarter last year. As the year progresses, we should see an increase in cost of services as a percent of revenue as graduated commission splits based on cumulative annual production for senior brokers come into play.

SG&A in the quarter decreased 5.8% year-over-year, primarily due to reductions to in-person sales events, specifically our annual sales recognition event as well as other controllable expenses. While the event-related expense reductions supported year-over-year earnings growth, it should be noted that they were offset by absorbing the operating expenses of newly acquired firms whose revenue contribution is yet to be fully realized, given the normal ramp-up time. In short, continued expense management was a critical factor in the first quarter and remains a major focus.

We do expect to see operating leverage from the acquired businesses as they build their pipelines on the MMI platform and build their revenue to historical levels. For the quarter, we generated $0.37 earnings per diluted share as compared to $0.33 per share last year. Our tax rate for the quarter was 28.8% as compared to 31.2% in the first quarter of last year, primarily due to the effect of certain permanent items and a shift in the blended state tax rate to lower tax jurisdictions.

Adjusted EBITDA for the quarter improved to $25.7 million or 14% of total revenue, an increase of 233 basis points or 14.8% over the first quarter of 2020.

Moving now to the balance sheet. We finished the quarter in a strong position with approximately $423 million of cash, cash equivalents and marketable securities on hand. This equated to $10.55 per diluted share. The decrease in cash during the quarter was due to normal seasonal distributions for bonuses, retained earnings payouts for agents and sales force expansion and support.

Our clean capital structure and ample reserves were an important asset in light of the uncertainty of the past 12 months. It also provided us with the agility to selectively add accretive and complementary businesses, experienced brokers and teams. Our capital allocation focus remains on adding businesses like those acquired over the last 12 months as well as productive brokerage teams that can enhance geographic or product type coverage. We are in active dialogue with potential targets and remain sensitive to prudent underwriting economics and valuations, given the market environment.

Turning now to the outlook for the remainder of 2021. We believe the overall market will continue its recovery at an incrementally stronger pace as widespread vaccinations, the ripple effect the last stimulus, ample liquidity in the marketplace and an improving economy should enhance transaction velocity and support improvement in real estate fundamentals. As a result, we believe revenue in the near-term should reflect movement toward our historical seasonality trends.

Cost of services for the second quarter should trend within our historical range of 61% to 63%. The quarterly cadence of SG&A for the remainder of 2021 should be moderately above the fourth quarter of 2020 due to our improved outlook for the remainder of the year. Lastly, we expect our tax rate to continue to be in the 29% to 31% range.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question comes from Stephen Sheldon with William Blair. Please go ahead.

Stephen Sheldon -- William Blair -- Analyst

Thanks. Good morning. Great to see the continued traction with larger deals. I guess how much of that has been due to higher productivity compared with increased head count within the IPA group and how are you thinking about your potential to continue, I guess, growing market share in that category as we think about the next couple of years?

Hessam Nadji -- President and Chief Executive Officer

Good morning, Stephen. Good to have you on the call. It's a combination of both the factors that you just mentioned, additional teams coming on board with us and the productivity of our existing teams. As we have shared before, the larger business segment is more volatile for you do have more of a choppy pattern over quarter-to-quarter or year-over-year, but what we're really encouraged about is the fact that the new talent that we've brought in over the past 18 to 24 months has been treated [Phonetic] very well to the MMI platform, collaborating with other IPA and non-IPA frankly, producers and bring in a very consistent service delivery to our larger clients.

And we are very confident that there is plenty of additional opportunity to recruit more teams and through technology and constant improvement to our support systems, our underwriting, our client outreach programs that are particularly targeted to institutions both through IPA and frankly the more senior agents of Marcus & Millichap are going to bring more and more growth opportunity to us. Their productivity is a key part of why we think this segment of the business is a very important one for us. It also weighs heavily toward our retention as our agents spend more time with the company and mature and begin to do some larger deals. Our ability to compete at that level becomes very important for retention and, of course, having expanded the platform for larger deals over the past several years through IPA, we've become a lot more attractive as an alternative for many experienced folks out in the marketplace.

But let me emphasize again. It really is a complementary strategy to our private client focus and the two really go hand-in-hand. And that part of the appeal for many of the teams that have joined us is the fact that they can have a private client business and team members can execute smaller transactions and private client type of marketing through the Marcus & Millichap brand and have the more senior team members and the key principles focus on institutional business through IPA.

Stephen Sheldon -- William Blair -- Analyst

Got it. Yeah, it makes sense. So, normal pipeline question, I guess, I'd call it. You talked last quarter about the PD [Phonetic] pipeline although it seems like that may have recovered quickly, whereas the pipeline sit now and then I guess secondarily on the potential tax changes, when would you expect the proposed tax changes to potentially drive some more urgency within the market?

Hessam Nadji -- President and Chief Executive Officer

Sure. I'll take the first part of your question. Firstly, the pipeline looks solid. We've seen continued improvement even in the last 30 days. And we're very encouraged by that looking into the rest of the second quarter and of course, the rest of the year. And so, I will say that it is on a very positive track. Of course, we don't share the specifics on the pipeline itself, but it's -- let me just say very encouraging.

Related to the timing of when some of the noise around tax law changes may or may not affect decision making for our clients is very hard to predict. There is a lot of concern. We're getting a lot of questions from our clients. We're going to be hosting several webcasts around this topic as we always do to bring perspective from experts -- subject matter experts from the industry to our client base. But I will say that most people realize that we're at a very early stage of this debate and discussion and that experience tells us these things go through lots of changes before they're finalized. Nonetheless, we take it very seriously and we're preparing it [Technical Issues] that's why my comments, my prepared comments really address the fact that no matter what happens, we have a long-term growth plan. We have a diversification plan and we have plenty of capture opportunity even in our core private client business.

And there might be some shifts and changes in a quarter or two of some recalibration, but long-term real estate is a very compelling investment. It has become even more compelling because of COVID in the way that the lack of overbuilding showed up the quick recovery in some of the segments, have already begun to show up and the fact that on a yield perspective, it is still competitive versus alternative investments in a low interest rate environment. So all those positives are not just going to vanish overnight.

Stephen Sheldon -- William Blair -- Analyst

Great, thanks. And then, I guess, the last one for me. Just I think you made a comment that you'd expect kind of the normal seasonality trends to play out. As we think about the second quarter, do you typically see a sequential uptick in the second quarter relative to the first at both revenue and adjusted EBITDA? No, you don't provide guidance, but are you seeing anything out there that would change the normal season seasonal pattern from the first to the second quarter?

Steve DeGennaro -- Executive Vice President and Chief Financial Officer

Yeah, Stephen. This is Steve, I'll take that. And that's the traditional seasonality that we've historically experienced is what we were referring to. And so, we, at this point, given what we see, that's where we see Q2 trending. We've got, of course, a little less visibility into the outquarters. But for Q2, we would expect to see us approaching the normal seasonality that we've experienced over the last many number of years.

Stephen Sheldon -- William Blair -- Analyst

Good to hear. Thank you very much.

Hessam Nadji -- President and Chief Executive Officer

Thanks, Stephen.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Hessam Nadji for any closing remarks.

Hessam Nadji -- President and Chief Executive Officer

Thank you, operator. And thank you everyone for joining our call. And we look forward to having you back next quarter. The call is adjourned.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Evelyn Infurna -- Investor Relations, ICR Inc.

Hessam Nadji -- President and Chief Executive Officer

Steve DeGennaro -- Executive Vice President and Chief Financial Officer

Stephen Sheldon -- William Blair -- Analyst

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