Business Overview

Marcus & Millichap, Inc. (NYSE: MMI) is a leading national real estate services firm specializing in commercial real estate investment sales, financing services, research and advisory services. The company has been the top commercial real estate investment broker in the United States based on the number of investment transactions for more than 15 years.

As of March 31, 2024, MMI had 1,722 investment sales and financing professionals that are primarily exclusive independent contractors operating in more than 80 offices, who provide real estate brokerage and financing services to sellers and buyers of commercial real estate assets. During the three months ended March 31, 2024, the company closed 1,564 investment sales, financing and other transactions with total sales volume of approximately $9.7 billion. For the full year ended December 31, 2023, MMI closed 7,546 investment sales, financing and other transactions with total sales volume of approximately $43.6 billion.

MMI generates revenue by collecting real estate brokerage commissions upon the sale, and financing fees upon the financing of commercial properties, by providing equity advisory services and loan sales, loan guarantees and by providing consulting and advisory services. Real estate brokerage commissions are typically based upon the value of the property and financing fees are typically based upon the size of the loan. During the three months ended March 31, 2024, approximately 85% of the company's revenue was generated from real estate brokerage commissions, 11% from financing fees and 4% from other real estate related services.

The company divides commercial real estate into four major markets, characterized by price: properties priced less than $1 million; the private client market (properties priced from $1 million to up to but less than $10 million); the middle market (properties priced from $10 million to up to but less than $20 million); and the larger transaction market (properties priced from $20 million and above). MMI is the industry leader in serving private clients in the $1-$10 million private client market, which contributed approximately 67% of its real estate brokerage commissions during both the three months ended March 31, 2024 and 2023.

Financials

For the full year ended December 31, 2023, MMI reported annual revenue of $645.9 million, a net loss of $34.0 million, annual operating cash flow of -$72.4 million, and annual free cash flow of -$81.8 million.

In the first quarter of 2024, the company reported revenue of $129.1 million, a net loss of $10.0 million, and adjusted EBITDA loss of $10.1 million. Real estate brokerage commissions decreased 18.9% year-over-year to $109.5 million, while financing fees decreased 9.1% to $14.4 million. The decreases were primarily driven by a 13.8% decline in the number of transactions and a 7.9% decrease in average transaction size.

The company's financial results in the first quarter were impacted by the challenging commercial real estate market environment, with overall market sales volume dropping 19% compared to the prior year period. The interest rate volatility and uncertainty have disrupted real estate valuations, marketing of listings and transaction closings. MMI's productivity and revenue have been hampered as listings take longer to market and many deals continue to fall out of contract due to financing issues or repricing.

Outlook

Looking ahead, MMI expects the market recovery to be pushed out at least to the second half of 2024, as the shift toward higher-for-longer interest rates by the Federal Reserve has prolonged the disruption in the commercial real estate market. The company's cost of services as a percentage of revenue for the second quarter is expected to be sequentially higher than the first quarter, following the usual seasonal pattern. Selling, general and administrative expenses are expected to be largely in line with the first quarter, reflecting the benefit of cost actions previously taken.

The company's effective tax rate may fluctuate significantly from quarter to quarter, as it is highly dependent on the level of non-deductible expenses and the variability of pre-tax income for the full year.

Geographic Breakdown

During the three months ended March 31, 2024, the company's Canadian operations represented 4.4% of total revenue, compared to 2.9% in the same period of the prior year.

Liquidity

As of March 31, 2024, MMI had $346.3 million in cash, cash equivalents, and marketable debt securities, available-for-sale. The company has a credit agreement with Wells Fargo Bank, National Association that provides for a $10.0 million principal amount senior secured revolving credit facility, which matures on June 1, 2024.

The company's primary sources of liquidity are cash, cash equivalents, and restricted cash, cash flows from operations, marketable debt securities, available-for-sale and, if necessary, borrowings under its credit agreement. MMI believes that its existing balances of cash, cash equivalents, and restricted cash, cash flows expected to be generated from its operations, and proceeds from the sale of marketable debt securities, available-for-sale will be sufficient to satisfy its operating requirements for at least the next 12 months and the foreseeable future.

Risks and Challenges

MMI's business and operating results are significantly affected by the number and size of commercial real estate investment sales and financing transactions that it closes in any period. The number and size of these transactions are affected by the company's ability to recruit and retain investment sales and financing professionals, identify and contract properties for sale, and identify those that need financing and refinancing.

The company's business is dependent on economic conditions, commercial real estate supply and demand, capital markets, and investor sentiment and investment activity, all of which can have a positive or negative impact on its operations. Changes in interest rates, availability of capital, tax laws, employment laws, or other government regulation can also affect the company's business.

Additionally, MMI faces competition in attracting and retaining qualified senior executives, managers, and investment sales and financing professionals, as well as the potential impact of forgivable loans and related expense resulting from the recruitment and retention of agents.

Strategic Initiatives

Despite the current market challenges, MMI remains steadfast in its strategy to stay on offense and position the company to lead in the eventual recovery. This includes ongoing investments in business development efforts, client outreach, branding, and ensuring that the company remains prominently in the center stage at key industry events.

The company is also pursuing strategic acquisitions, attracting additional experienced individuals and teams, and returning capital to shareholders through a balanced capital allocation strategy that includes dividends and opportunistic share repurchases. During the first quarter of 2024, MMI repurchased 16,900 shares of common stock for $0.6 million.

Conclusion

While the current commercial real estate market environment remains challenging, MMI is well-positioned to navigate these headwinds and capitalize on the eventual recovery. The company's strong balance sheet, diversified business model, and strategic initiatives focused on talent acquisition, technology investments, and client engagement provide a solid foundation for long-term growth. As the market conditions improve, MMI's production capacity and technological advancements are expected to play a key role in accelerating the company's growth into the next cycle.