Marcus & Millichap, Inc.: Form 10-Q for the period ended Sep 30, 2024

Unless the context requires otherwise, the words “Marcus & Millichap,” “MMI,” “we,” the “Company,” “us” and “our” refer to Marcus & Millichap, Inc., and its consolidated subsidiaries.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements, including our expectations regarding the long-term outlook of the commercial real estate transaction market and our positioning within it, our belief relating to the Company’s long-term growth, our assessment of the key factors influencing the Company’s business outlook, including the expectation for future interest rate cuts and likely impact of such cuts on commercial real estate demand, and the execution of our capital return program, including a semi-annual dividend and stock repurchase program. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

• general uncertainty in the capital markets, a worsening of economic conditions, and the rate and pace of economic recovery following an economic downturn;
• changes in our business operations;
• market trends in the commercial real estate market or the general economy, including the impact of inflation and changes to interest rates;
• our ability to attract and retain qualified senior executives, managers, and investment sales and financing professionals;
• the impact of forgivable loans and related expense resulting from the recruitment and retention of agents;
• the effects of increased competition on our business;
• our ability to successfully enter new markets or increase our market share;
• our ability to successfully expand our services and businesses and to manage any such expansions;
• our ability to retain existing clients and develop new clients;
• our ability to keep pace with changes in technology;
• any business interruption or technology failure, including cybersecurity risks and ransomware attacks, and any related impact on our reputation;
• changes in interest rates, availability of capital, tax laws, employment laws, or other government regulation affecting our business, in each case as may be impacted by the 2024 U.S. presidential election;
• our ability to successfully identify, negotiate, execute, and integrate accretive acquisitions; and
• other risk factors included under “Risk Factors” in our most recent Annual Report on Form 10-K.

In addition, in this Quarterly Report, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “goal,” “expect,” “predict,” “potential,” “should,” and similar expressions, as they relate to our Company, our business and our management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

Forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

The results of operations for the nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2024, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 27, 2024, including the “Risk Factors” section and the consolidated financial statements and notes included therein.

Overview

We are a leading national real estate services firm specializing in commercial real estate investment sales, financing services, research and advisory services. We have 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 September 30, 2024, we had 1,678 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 and nine months ended September 30, 2024, we closed 1,987 and 5,351 investment sales, financing and other transactions with total sales volume of approximately $12.0 billion and $31.2 billion, respectively. During the year ended December 31, 2023, we closed 7,546 investment sales, financing and other transactions with total sales volume of approximately $43.6 billion.

We generate 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 leasing, 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 September 30, 2024, approximately 84% of our revenue was generated from real estate brokerage commissions, 12% from financing fees and 4% from other real estate related services.

We divide commercial real estate into four major markets, characterized by price:

• Properties priced less than $1 million;
• Private client market: properties priced from $1 million to up to but less than $10 million;
• Middle market: properties priced from $10 million to up to but less than $20 million; and
• Larger transaction market: properties priced from $20 million and above.

We are the industry leader in serving private clients in the $1 million - $10 million private client market, which contributed approximately 62% and 65% of our real estate brokerage commissions during the three months ended September 30, 2024 and 2023, respectively, and approximately 63% and 67% of our real estate brokerage commissions during the nine months ended September 30, 2024 and 2023, respectively. The following tables set forth the number of transactions, sales volume and revenue by each commercial real estate market for real estate brokerage:

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Factors Affecting Our Business

Our business and our operating results, financial condition and liquidity are significantly affected by the number and size of commercial real estate investment sales and financing transactions that we close in any period. The number and size of these transactions are affected by our ability to recruit and retain investment sales and financing professionals, identify and contract properties for sale, and identify those that need financing and refinancing. We principally monitor the commercial real estate market through four factors, which generally drive our business. The factors are the economy, commercial real estate supply and demand, capital markets, and investor sentiment and investment activity.

The Economy

Our business is dependent on economic conditions within the markets in which we operate. Changes in the economy on a global, national, regional, or local basis can have a positive or negative impact on our business. Economic indicators and projections related to job growth, unemployment, interest rates, retail spending and consumer confidence trends can have a positive or negative impact on our business. Overall market conditions, including global trade, interest rate changes, inflation, job creation, and global events can affect investor sentiment and, ultimately, the demand for our services from investors in real estate.

A “soft landing” remains the leading consensus economic forecast for the remainder of 2024 and into 2025, but economic readings in the second half of 2024 have been inconsistent. Upward revisions to job creation statistics during the summer months and adding 254,000 positions in September, together with a 20 basis point reduction of the unemployment rate curbed expectations of significant Federal Reserve rate reductions in the final two months of 2024. In addition, October labor strikes and a series of natural disasters could skew fourth quarter economic data, making it more difficult to determine a clear economic trend. Nonetheless, inflation still appears to be slowly trending lower. Prevailing Wall Street sentiment continues to predict modest Federal Reserve rate cuts in the final months of 2024. At the same time, inflation-adjusted core retail sales continued to exhibit moderate gains, up 1.3% on a year-over-year basis through September, and the Institute of Supply Chain Management (“ISM”) leading economic indices have delivered mixed readings. The ISM manufacturing index remains contractionary, while the ISM services index suggests economic growth in the service sector.

We believe this combination of economic trends will generate modestly positive economic growth through the remainder of 2024 and into 2025, but the growth is not expected to be substantial enough to reignite inflation.

Both the headline Consumer Price Index (“CPI”) inflation metric and the Personal Consumption Expenditure (“PCE”) index have sustained downward momentum, with CPI registering 2.4% and PCE reading 2.1% in September. While these trends have been positive, the Federal Reserve's preferred inflation metric, the core Personal Consumption Expenditure, has proven more sticky, hovering in the 2.6% to 2.7% range for five consecutive months. Following the 50 basis point rate cut in September and 25 basis point rate cut in November by the Federal Reserve, Wall Street metrics suggest the Federal Reserve will further reduce rates by 25 basis points at their next meeting. We believe that such a move could positively impact investor sentiment and bolster the flow of capital into commercial real estate.

Commercial Real Estate Supply and Demand

Our business is dependent on the willingness of investors to invest in or sell commercial real estate, which is affected by many factors beyond our control. These factors include the supply of commercial real estate, coupled with user demand for these properties, and the performance of real estate assets, when compared with other investment alternatives, such as stocks and bonds.

All four major property types demonstrated positive space demand in the third quarter of 2024, although each demonstrated unique nuances. Over 191,000 net apartment units were filled in the quarter, the strongest quarterly results since 2021. The demand modestly outpaced the record-level 163,000 apartment completions delivered in the quarter to reduce vacancy by 20 basis points to 5.6%. Robust apartment demand outpaced expectations and bolstered multifamily investor confidence.

The industrial vacancy rate increased in the third quarter of 2024 as elevated construction exceeded space demand of 22 million square feet. Industrial completions have been highly concentrated, with about half of the additions being delivered in seven metros areas. Although many retailers increased their inventories in anticipation of the east coast dockworker strike, warehouse industrial space needs have tapered significantly over the last two years. Retail vacancy rates remain near a record-low, with space absorption being restricted by limited space availability and nominal construction levels. Office vacancy rates decreased by 20 basis points to 17.0% on positive absorption of 26 million square feet, the strongest quarterly office space demand since 2021. Nonetheless, the office performance outlook remains in question as it is unclear when or if a sizable portion of workers will return permanently to the office.

Although the fundamentals of most property types remain sound, with the notable exception of urban office properties, both lending and investor activity remain below the pre-pandemic historical norm. The expectation gap between buyers and sellers has narrowed slightly, particularly after the Federal Reserve reduced rates in September, but the gap remains challenging. The demand for space will continue to be influenced by consumer and business sentiment as well as the broader economic outlook. However, should the Federal Reserve reduce rates in the fourth quarter, as expected, sentiment could continue to strengthen and space demand could increase.

Capital Markets

Credit and liquidity issues in the financial markets have a direct impact on the flow of capital to the commercial real estate market. Real estate purchases are often financed with debt, and as a result, credit and liquidity impact transaction activity and prices. Movements of interest rates in one direction, whether increasing or decreasing, could adversely or positively affect the operations and income potential of commercial real estate properties, as well as lender and equity underwriting for real estate investments. These changes directly influence investor demand for commercial real estate investments and what they are willing to pay. Furthermore, the use of debt or loan-to-value ratios can shift along with lender confidence and underwriting standards. At times of heightened uncertainty or liquidity issues, loan-to-values decline, requiring buyers to provide more equity and take more risk to close deals.

The capital markets remain at the heart of the commercial real estate transaction slowdown over the last two years. The combination of sustained higher interest rates with tighter lender underwriting, reduced loan-to-value standards and a broad-based reduction in the volume of available debt capital have restrained market liquidity. This has forced investors to recalibrate their underwriting. This widened the buyer/seller expectation gap and reduced trading throughout 2023 and thus far in 2024.

The 50 basis point rate reduction by the Federal Reserve in September improved investor sentiment, but the increase of the 10-year treasury rate following the rate cut has negatively impacted borrowing rates. Nonetheless, we believe that the sustained downward pressure on interest rates over the next year anticipated by most investors will ultimately occur, and many investors have reinitiated preliminary actions that may ultimately lead to transaction activity. At present, FedWatch has assigned a high likelihood that the Federal Reserve overnight rate will be in the 4.25%-4.5% range by year-end. However, numerous variables including the election, global geopolitical forces, job creation trends and other economic readings could still sway those expectations. Despite the broad consensus that the Federal Reserve will continue to reduce rates, there can be no certainty until each reduction takes place.

Investor Sentiment and Investment Activity

We facilitate investors buying, selling, and financing properties in order to generate commissions. Investors’ desires and need to engage in real estate transactions are dependent on many factors that are beyond our control. The economy, supply and demand for properly positioned properties, available credit and market events impact investor sentiment and, therefore, transaction velocity. In addition, our private clients, who make up the largest source of revenue, are often motivated to buy, sell and/or refinance properties due to personal circumstances, such as death, divorce, partnership breakups and estate planning.

The commercial real estate sector once again saw below average sales activity in the third quarter as investors contended with persistent headwinds including still-elevated interest rates, tightened lender underwriting and the buyer/seller expectation gap. Although some signs of recovery have emerged, including more exclusive inventory being brought to market, a sustainable recovery in trading volumes has yet to occur. We believe a significant volume of investment capital remains un-deployed waiting for economic, interest rate, financial market, geopolitical and commercial real estate pricing clarity. Should the Federal Reserve continue to reduce rates, it would support positive momentum, but finalizing the transaction process will take additional time.

Office properties, particularly those in the urban core, continue to face the greatest uncertainty and the greatest challenges in acquiring debt financing. In addition, signs of distress and the potential for additional foreclosures in this commercial real estate segment continue to rise. Apartment financing, underpinned by Fannie Mae and Freddie Mac, has generally been the most attainable, with typically lower interest rates than other property types. However, the rapid interest rate spike relative to the sector's very low cap rates and the large apartment development pipeline together with still-modest rent growth has impacted apartment sales. Defensive assets, such as single-tenant net lease properties backed by high-credit tenants, and medical office assets continue to receive buyer interest, but sales of these types of properties have also fallen as the flow of 1031 exchange capital coming from other property types has diminished. Ultimately, the market velocity will be dictated by a combination of the economic outlook, geopolitical forces, Federal Reserve action, interest rates and the narrowing of the buyer/seller expectation gap. As downward pressure on interest rates is applied, we believe commercial real estate investment activity could gain momentum.

Key Financial Measures and Indicators

Revenue

Our revenue is primarily generated from our real estate investment sales business. In addition to real estate brokerage commissions, we generate revenue from financing fees and from other revenue, which are primarily comprised of leasing, consulting and advisory fees.

Because our business is transaction oriented, we rely on investment sales and financing professionals to continually develop leads, identify properties to sell and finance, market those properties and close the sale timely to generate a consistent flow of revenue. While our sales volume is impacted by seasonality factors, the timing of closings is also dependent on many market and personal factors unique to a particular client or transaction, particularly clients transacting in the $1 million to $10 million private client market. These factors can cause transactions to be accelerated or delayed beyond our control. Further, commission rates earned are generally inversely related to the value of the property sold. As a result of our expansion into the middle and larger transaction markets, we have seen our overall commission rates fluctuate from period-to-period as a result of changes in the relative mix of the number and volume of investment sales transactions closed in the middle and larger transaction markets as compared to the $1 million to $10 million private client market. These factors may result in period-to-period variations in our revenue that differ from historical patterns.

A small percentage of our transactions include retainer fees and/or breakage fees. Retainer fees are credited against a success-based fee paid upon the closing of a transaction or a breakage fee. Transactions that are terminated before completion will sometimes generate breakage fees, which are usually calculated as a set amount or a percentage of the fee we would have received had the transaction closed.

Real Estate Brokerage Commissions

We earn real estate brokerage commissions by acting as a broker for commercial real estate owners seeking to sell or investors seeking to buy properties. Revenue from real estate brokerage commissions is recognized at the close of escrow.

Financing Fees

We earn financing fees by securing financing on purchase transactions or by securing refinancing of our clients’ existing mortgage debt. We recognize financing fee revenue at the time the loan closes, and we have no remaining significant obligations in connection with the transaction.

To a lesser extent, we also earn fees on loan performance, equity advisory services, loan sales, loan guarantees and ancillary services associated with financing activities. We recognize guarantee fees over the term of the guarantee and other fees when we have no further performance obligations, generally upon the closing of a transaction.

Other Revenue

Other revenue includes fees generated from leasing, consulting and advisory services, as well as referral fees from other real estate brokers, and are recognized when services are provided, upon closing of the transaction or when we have no further performance obligations.

Operating Expenses

Our operating expenses consist of cost of services, selling, general and administrative expenses and depreciation and amortization. The significant components of our expenses are further described below.

Cost of Services

The majority of our cost of services expense is variable commissions paid to our investment sales and financing professionals and compensation-related costs related to our financing activities. Commission expenses are directly attributable to providing services to our clients for investment sales and financing services. Most of our investment sales and financing professionals are independent contractors and are paid commissions; however, because there are some who are initially paid a salary and certain of our financing professionals are employees, costs of services also include employee-related compensation, employer taxes and benefits for those employees. The commission rates we pay to our investment sales and financing professionals vary based on individual contracts negotiated and are generally higher for the more experienced professionals. Some of our most senior investment sales and financing professionals can also earn additional commissions after meeting certain annual financial thresholds. These additional commissions are recognized as cost of services in the period in which they are earned. Payment of a portion of these additional commissions are generally deferred for a period of three years, at our election, and paid at the end of the third calendar year. Cost of services also includes referral fees paid to other real estate brokers where we are the principal service provider. Cost of services, therefore, can vary based on the commission structure of the independent contractors that closed transactions in any particular period.

Selling, General and Administrative Expenses

The largest expense component within selling, general and administrative expenses is personnel expenses for our management team and sales and support staff, as well as business development, marketing, and expensing of forgivable loans over the retention period of our sales and financing professionals. In addition, these costs include facilities costs (excluding depreciation and amortization), staff related expenses, sales, marketing, legal, telecommunication, network, data sources, changes in fair value for contingent and deferred consideration and other administrative expenses. Also included in selling, general and administrative are expenses for stock-based compensation to non-employee directors, employees and independent contractors (i.e. investment sales and financing professionals) under the Amended and Restated 2013 Omnibus Equity Incentive Plan (the “Amended Plan”) and the Amended and Restated 2013 Employee Stock Purchase Plan (the “Amended ESPP”).

Depreciation and Amortization Expense

Depreciation expense consists of depreciation recorded on our computer software and hardware, as well as our furniture, fixtures and equipment. Depreciation is recognized over estimated useful lives ranging from three to seven years for assets. Amortization expense consists of amortization recorded on intangible assets amortized on a straight-line basis using a useful life between one and seven years.

Other Income, Net

Other income, net primarily consists of interest income, realized gains and losses on our marketable debt securities, available-for-sale, net gains or losses on our deferred compensation plan assets, foreign currency gains and losses and other non-operating income and expenses.

Interest Expense

Interest expense primarily consists of interest expense associated with the stock appreciation rights (“SARs”) liability, and our credit agreement.

Benefit for Income Taxes

We are subject to U.S. and Canadian federal taxes and individual state and local taxes based on the income generated in the jurisdictions in which we operate. Our effective tax rate fluctuates as a result of (i) changes in our annual effective tax rate applied to current pre-tax income (loss), (ii) the change in the mix of our activities in the jurisdictions in which we operate due to differing tax rates in those jurisdictions and (iii) the impact of permanent items, including compensation charges, qualified transportation fringe benefits, uncertain tax positions, meals and entertainment and tax-exempt deferred compensation plan assets. Our benefit for income taxes includes the windfall tax benefits and shortfall expenses, net, from shares issued in connection with our Amended Plan and Amended ESPP.

We record deferred taxes, net based on the tax rate expected to be in effect at the time those items are expected to be recognized for tax purposes.

Results of Operations

The following is a discussion of our results of operations for the three and nine months ended September 30, 2024 and 2023. The tables included in the period comparisons below provide summaries of our results of operations. The period-to-period comparisons of financial results are not necessarily indicative of future results.

Key Operating Metrics

We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We also believe these metrics are relevant to investors’ and others’ assessment of our financial condition and results of operations. During the three months ended September 30, 2024 and 2023, we closed 1,987 and 1,846 investment sales, financing and other transactions, respectively, with total sales volume of approximately $12.0 billion and $11.4 billion, respectively. During the nine months ended September 30, 2024 and 2023, we closed 5,351 and 5,599 investment sales, financing and other transactions, respectively, with total sales volume of approximately $31.2 billion and $31.7 billion, respectively. Such key metrics for real estate brokerage and financing activities (excluding other transactions) are as follows:

(1) Operating metrics exclude certain financing fees not directly associated to transactions.

Comparison of Three Months Ended September 30, 2024 and 2023

Below are key operating results for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 (dollars in thousands):

(1) Adjusted EBITDA is not a measurement of our financial performance under U.S. generally accepted accounting principles (“U.S. GAAP”) and should not be considered as an alternative to net loss, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss, which is the most directly comparable U.S. GAAP financial measure, see “Non-GAAP Financial Measure” below.

Revenue

Total revenue was $168.5 million for the three months ended September 30, 2024 compared to $162.0 million for the same period in 2023, an increase of $6.5 million, or 4.0%. Total revenue increased as a result of increases in real estate brokerage commissions, financing fees and other revenue, as described below. See “Factors Affecting Our Business” for additional market information.

Real estate brokerage commissions. Revenue from real estate brokerage commissions increased to $142.0 million for the three months ended September 30, 2024 from $139.8 million for the same period in 2023, an increase of $2.2 million, or 1.5%. The increase was the result of total sales volume increasing by 14.7%, partially offset by a reduction of 22 basis points in the average commission rate earned during the three months ended September 30, 2024 compared to the same period in 2023. Private Client Market revenue decreased by 4.3%, while the combined Middle Market and Larger Transaction Market revenue increased by 15.1%.

Financing fees. Revenue from financing fees increased to $20.6 million for the three months ended September 30, 2024 from $17.3 million for the same period in 2023, an increase of $3.3 million, or 19.3%, resulting primarily from a 12.0% increase in total financing volume and a two basis point increase in the average fee rate during the three months ended September 30, 2024 compared to the same period in 2023.

Other revenue. Other revenue increased to $6.0 million for the three months ended September 30, 2024 from $5.0 million for the same period in 2023, an increase of $1.0 million, or 20.3%, resulting primarily from an increase in consulting fees.

Total Operating Expenses

Total operating expenses were $180.0 million for the three months ended September 30, 2024 compared to $177.5 million for the same period in 2023, an increase of $2.5 million, or 1.4%. The change was primarily due to an increase of $1.5 million in selling, general, and administrative expenses as described below.

Cost of services. Cost of services are variable commissions paid to our investment sales professionals and compensation-related costs in connection with our financing activities. Cost of services slightly increased to $104.7 million for the three months ended September 30, 2024 from $104.6 million for the same period in 2023. Cost of services as a percentage of total revenue decreased by 240 basis points to 62.2% compared to the same period in 2023 primarily due to our senior investment sales and financing professionals earning a lower amount of additional commissions.

Selling, general, and administrative expense. Selling, general and administrative expense for the three months ended September 30, 2024 increased to $70.7 million, from $69.2 million compared to the same period in 2023, an increase of $1.5 million or 2.1%. The increase was primarily due to an increase in personnel costs, partially offset by a reduction in marketing support costs provided to our investment sales and financing professionals.

Depreciation and amortization expense. Depreciation and amortization expense increased to $4.5 million for the three months ended September 30, 2024 from $3.6 million compared to the same period in 2023, an increase of $0.9 million, or 25.1%. The increase primarily relates to accelerated amortization of certain intangible assets resulting from changes in estimates.

Other Income, Net

Other income, net increased to $5.3 million for the three months ended September 30, 2024 from $4.4 million for the same period in 2023. The increase of $0.9 million was primarily driven by an increase in the carrying value of the assets held in the rabbi trust.

Interest Expense

Interest expense decreased by an immaterial amount for the three months ended September 30, 2024 compared to the same period in 2023, and primarily relates to interest expense on the Company’s SARs liability.

Benefit for Income Taxes

The benefit for income taxes was $1.0 million for the three months ended September 30, 2024, compared to $2.0 million for the same period in 2023. The effective income tax rate for the three months ended September 30, 2024, was 15.2% compared to 17.8% for the same period in 2023. The net decrease in the effective tax rate is primarily due to the relationship of permanent and other items, the change in the valuation allowance and the change in the state income tax benefit to pre-tax loss as presented in Note 10 – “Income Taxes” in the Notes to the Condensed Consolidated Financial Statements in Item 1, Part I of this Quarterly Report on Form 10-Q.

Comparison of Nine Months Ended September 30, 2024 and 2023

Below are key operating results for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 (dollars in thousands):

(1) Adjusted EBITDA is not a measurement of our financial performance under U.S. generally accepted accounting principles (“U.S. GAAP”) and should not be considered as an alternative to net loss, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss, see “Non-GAAP Financial Measure.”

Revenue

Total revenue was $456.0 million for the nine months ended September 30, 2024 compared to $479.7 million for the same period in 2023, a decrease of $23.7 million, or 4.9%. Total revenue decreased as a result of a decrease in real estate brokerage commissions, partially offset by increases in financing fees and other revenue, as described below. See “Factors Affecting Our Business” for additional market information.

Real estate brokerage commissions. Revenue from real estate brokerage commissions decreased to $386.9 million for the nine months ended September 30, 2024 from $415.2 million for the same period in 2023, a decrease of $28.3 million, or 6.8%. The decrease was the result of total sales volume decreasing by 3.4% and a reduction of seven basis points in the average commission rate earned for the nine months ended September 30, 2024 compared to the same period in 2023. Private Client Market revenue decreased by 11.8%, while the combined Middle Market and Larger Transaction Market increased by 3.6%.

Financing fees. Revenue from financing fees increased to $53.3 million for the nine months ended September 30, 2024 from $51.0 million for the same period in 2023, an increase of $2.3 million, or 4.5%, resulting primarily from a 6.5% increase in total financing volume, partially offset by a decrease of six basis points in the average fee rate.

Other revenue. Other revenue increased to $15.8 million for the nine months ended September 30, 2024 from $13.5 million for the same period in 2023, an increase of $2.3 million, or 17.4%. The increase was primarily driven by increases in leasing fees during the nine months ended September 30, 2024, compared to the same period in 2023.

Total Operating Expenses

Our total operating expenses were $495.6 million for the nine months ended September 30, 2024 compared to $521.9 million for the same period in 2023, a decrease of $26.3 million, or 5.0%. Cost of services decreased by $21.5 million and selling, general, and administrative expenses decreased by $5.7 million, as described below.

Cost of services. Cost of services are variable commissions paid to our investment sales professionals and compensation-related costs in connection with our financing activities. Cost of services decreased to $279.7 million for the nine months ended September 30, 2024 from $301.2 million for the same period in 2023, a decrease of $21.5 million, or 7.1%. The decrease was primarily due to decreased commission expenses driven by the related decreased revenue noted above. Cost of services as a percentage of total revenue decreased by 150 basis points to 61.3% compared to the same period in 2023 primarily due to our senior investment sales and financing professionals earning a lower amount of additional commissions due to lower revenue.

Selling, general, and administrative expense. Selling, general and administrative expense for the nine months ended September 30, 2024 decreased to $204.6 million, from $210.3 million compared to the same period in the prior year, a decrease of $5.7 million or 2.7%. The decrease was primarily due to a reduction in marketing support costs provided to our investment sales and financing professionals, partially offset by an increase in compensation-related costs.

Depreciation and amortization expense. Depreciation and amortization expense increased to $11.3 million for the nine months ended September 30, 2024 from $10.3 million compared to the same period in 2023, an increase of $1.0 million, or 9.6%. The increase primarily relates to accelerated amortization of certain intangible assets resulting from changes in estimates.

Other Income, Net

Other income, net increased to $15.7 million for the nine months ended September 30, 2024 from $14.1 million for the same period in 2023. The increase of $1.6 million was primarily driven by increase in interest income as a result of rebalancing the Company's investments to take advantage of higher yields and an increase in the carrying value of the assets held in the rabbi trust.

Interest Expense

Interest expense decreased by an immaterial amount for the nine months ended September 30, 2024 compared to the same period in 2023, and primarily relates to interest expense on the Company’s SARs liability.

Benefit for Income Taxes

The benefit for income taxes was $3.6 million for the nine months ended September 30, 2024, compared to $4.9 million for the same period in 2023. The effective income tax rate for the nine months ended September 30, 2024 was 14.7% compared to 17.1% for the same period in 2023. The effective income tax rate decreased primarily due to the relationship of permanent nondeductible items to projected pre-tax loss for the full year as the impact to the effective tax rate that were caused by other items were largely offsetting.

Non-GAAP Financial Measure

In this Quarterly Report on Form 10-Q, we include a non-GAAP financial measure, Adjusted EBITDA. We define Adjusted EBITDA as net loss before (i) interest income and other, including net realized gains (losses) on marketable debt securities, available-for-sale and cash, cash equivalents, and restricted cash, (ii) interest expense, (iii) benefit for income taxes, (iv) depreciation and amortization, and (v) stock-based compensation. We use Adjusted EBITDA in our business operations to evaluate the performance of our business, develop budgets and measure our performance against those budgets, among other things. We also believe that analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate our overall operating performance. However, Adjusted EBITDA has material limitations as a supplemental metric and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. We find Adjusted EBITDA to be a useful management metric to assist in evaluating performance, because Adjusted EBITDA eliminates items related to capital structure, taxes and non-cash items. In light of the foregoing limitations, we do not rely solely on Adjusted EBITDA as a performance measure and also consider our U.S. GAAP results. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net loss, operating income or any other measures calculated in accordance with U.S. GAAP. Because

Adjusted EBITDA is not calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies. A reconciliation of the most directly comparable U.S. GAAP financial measure, net loss, to Adjusted EBITDA is as follows (in thousands):

(1) Other includes net realized losses on marketable debt securities, available-for-sale.

Liquidity and Capital Resources

Our 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 our Credit Agreement (as defined herein). In order to enhance yield to us, we have invested a portion of our cash in money market funds and fixed and variable income debt securities, in accordance with our investment policy approved by the Board of Directors. Certain of our investments in money market funds may not maintain a stable net asset value and may impose a discretionary liquidity fee. To date, the Company has not experienced any restrictions on its ability to redeem funds from money market funds. Although we have historically funded our operations through operating cash flows, there can be no assurance that we can continue to meet our cash requirements entirely through our operations, cash, net of restricted cash, cash equivalents, and proceeds from the sale of marketable debt securities, available-for-sale or availability under our Credit Agreement.

Cash Flows

Our total cash, cash equivalents, and restricted cash balance increased by $1.9 million to $172.7 million at September 30, 2024, compared to $170.8 million at December 31, 2023. The following table sets forth our summary cash flows for the nine months ended September 30, 2024 and 2023 (in thousands):

Operating Activities

Cash flows used in operating activities were $34.9 million for the nine months ended September 30, 2024 compared to $87.1 million for the same period in 2023. The $52.2 million decrease in cash flows used in operating activities for the nine months ended September 30, 2024 compared to the same period in 2023 was primarily due to decreased payments for bonuses and deferred compensation and commissions in the current year compared to the same period in prior year. The larger bonus and commission payments made in the 2023 period primarily related to amounts accrued in 2022. The cash flows from operating activities are also affected by the timing of certain cash receipts and payments.

Investing Activities

Cash flows provided by investing activities were $55.3 million for the nine months ended September 30, 2024 compared to $128.7 million for the same period in 2023. The $73.4 million decrease in cash flows provided by investing activities for the nine months ended September 30, 2024 compared to the same period in 2023 was primarily due to a net decrease of $74.9 million in net proceeds from sales and maturities of securities in 2024 compared to the same period in 2023. Net proceeds from marketable debt securities, available-for-sale during the nine-month period ended September 30, 2023 were used to fund operations, dividends and stock repurchases.

Financing Activities

Cash flows used in financing activities were $18.3 million for the nine months ended September 30, 2024 compared to $53.3 million for the same period in 2023. The decrease of $35.0 million in cash flows used in financing activities for the nine months ended September 30, 2024 compared to the same period in 2023 was primarily due to a decrease of $34.4 million in stock repurchases in 2024 compared to the same period in 2023.

Liquidity

We believe that our existing balances of cash, cash equivalents, cash flows expected to be generated from our operations, and proceeds from the sale of marketable debt securities, available-for-sale will be sufficient to satisfy our operating requirements for at least the next 12 months and the foreseeable future. If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could prevent us from funding acquisitions or otherwise financing our growth or operations. As of September 30, 2024, cash, excluding restricted cash, cash equivalents, and marketable debt securities, available-for-sale, aggregated $338.3 million.

Credit Agreement

Our credit agreement with Wells Fargo Bank, National Association (as amended, the “Credit Agreement”) provides for a $10.0 million principal amount senior secured revolving credit facility that is guaranteed by all of our domestic subsidiaries and matures on June 1, 2025. The Company maintains a $10.0 million restricted cash balance in support of the Credit Agreement. The Company is monitoring covenant compliance on a regular basis to ensure continued compliance with the Credit Agreement. Our ability to borrow under our Credit Agreement is limited by our ability to comply with its covenants or obtain necessary waivers. See Note 12 – “Commitments and Contingencies” of our Notes to Condensed Consolidated Financial Statements in Item 1, Part I of this Quarterly Report on Form 10-Q for additional information on the Credit Agreement.

Off Balance Sheet Arrangements

The Company, in connection with the Strategic Alliance with M&T Realty Capital Corporation (“MTRCC”), has agreed to provide loan opportunities that may be funded through MTRCC’s agreement with Fannie Mae, which requires MTRCC to guarantee a portion of each funded loan. On a loan-by-loan basis, the Company, at its option, can assume a portion of MTRCC’s guarantee obligation to Fannie Mae of loan opportunities presented to and closed by MTRCC. As of September 30, 2024, the Company has agreed to a maximum aggregate guarantee obligation of $226.0 million relating to loans with an unpaid balance of $1,356.3 million. The maximum guarantee obligation is not representative of the actual loss we would incur. The Company would be liable for this amount only if all of the loans for which it is providing a guarantee to MTRCC were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement. As of September 30, 2024, the Company has recorded an allowance for loss-sharing obligations of $1,222,000 and pledged $678,000 in a restricted bank account in support of the guarantee obligation.

Material Cash Requirements

There have been no material changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023 through the date the condensed consolidated financial statements were issued, other than commitments that are already disclosed in the accompanying notes to the condensed consolidated financial statements.

Inflation

Our commissions and other variable costs related to revenue are primarily affected by real estate market supply and demand, which may be affected by uncertain or changing economic and market conditions, including inflation/deflation arising in connection with and in response to various macroeconomic factors and impact of increased interest rates on the broader economy.

The annual CPI inflation rate in the U.S. peaked at 9.1% in June 2022, the highest annual inflation rate since November 1981, then fell to 3.1% in November 2023. In the first quarter of 2024, the headline CPI inflation rate trended upward to a reading of 3.5% in March 2024, but it has since been reduced to 2.4% and most economists believe that the current trend will continue. In 2022 through 2023, the Federal Reserve increased the federal funds rate to the 5.25%-5.5% range in an effort to combat inflation, which has had an adverse impact on commercial real estate transactions. The inflation volatility in the first quarter of 2024 raised questions about whether and when the Federal Reserve will reduce interest rates. At the beginning of the year, there were broad expectations that the Federal Reserve would make several rate cuts in 2024, but expectations have been pared back. The significant 50 basis point reduction of the overnight rate in September was positively received by investors, boosting sentiment, but questions about the pace of future reductions remain. The volatility of the 10-year treasury rate following the Federal Reserve's overnight interest rate reduction remains a headwind for investors, but many investors have reinitiated preliminary transactional activity such as requesting broker opinions of value and touring assets as they reassess the market.

Critical Accounting Estimates

We prepare our financial statements in accordance with U.S. GAAP. In applying many of these accounting principles, we make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our condensed consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and our actual results may change based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. There were no significant changes in our critical accounting policies, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 27, 2024.

We maintain a portfolio of investments in a variety of fixed and variable debt rate securities, including U.S. Treasuries, U.S. government sponsored entities, corporate debt, asset-backed securities and others. As of September 30, 2024, the fair value of investments in marketable debt securities, available-for-sale was $176.3 million. The primary objective of our investment activity is to maintain the safety of principal and to provide for future liquidity requirements while maximizing yields without significantly increasing risk. While some investments may be securities of companies in foreign countries, all investments are denominated and payable in U.S. dollars. We do not enter into investments for trading or speculative purposes. While our intent is not to sell these investment securities prior to their stated maturities, we may choose to sell any of the securities for strategic reasons including, but not limited to, anticipated capital requirements, anticipation of credit deterioration, duration management, yield management and because a security no longer meets the criteria of our investment policy. We do not use derivatives or similar instruments to manage our interest rate risk. We seek to invest in high quality investments. The weighted average credit rating of our portfolio investments (exclusive of cash, cash equivalents, and restricted cash) was A+ as of September 30, 2024. Maturities are maintained consistent with our short-, medium- and long-term liquidity objectives.

Currently, our portfolio of investments predominantly consists of fixed interest rate debt securities; however, a portion of our investment portfolio may consist of variable interest rate debt securities. Our investments in fixed interest rate debt securities are subject to various market risks. Changes in prevailing interest rates may adversely or positively impact their fair market value should interest rates generally rise or fall. Accordingly, we also may have interest rate risk with variable interest rate debt securities as the income produced may decrease if interest rates fall. Contraction in market liquidity may adversely affect the value of portions of our portfolio and affect our ability to sell securities in the time frames required and at acceptable prices. Uncertainty in future market conditions may raise market participant’s expectations of returns, thus impacting the value of securities in our portfolio as well. The following table sets forth the impact on the fair value of our investments as of September 30, 2024 from changes in interest rates based on the weighted average duration of the debt securities in our portfolio (in thousands):

Due to the nature of our business and the manner in which we conduct our operations, we believe we do not face any material interest rate risk with respect to other assets and liabilities, equity price risk or other market risks. The functional currency of our Canadian operations is the Canadian dollar. We are exposed to foreign currency exchange rate risk for the settlement of transactions of the Canadian operations as well as unrealized translation adjustments. Historically foreign exchange rate risk has not been material.

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f), including maintenance of (i) records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, and (ii) policies and procedures that provide reasonable assurance that (a) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, (b) our receipts and expenditures are being made only in accordance with authorizations of management and our Board of Directors, and (c) we will prevent or timely detect unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Our management, with the supervision and participation of our chief executive officer (“CEO”) and chief financial officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q, based on the criteria established under the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on such evaluation, our management has concluded that as of September 30, 2024, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes from the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2023.