Marcus & Millichap, Inc.

Greetings and welcome to Marcus and Millichap's first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Evelyn Inferna with ICR. Thank you. You may begin.

Thank you. Good afternoon and welcome to Marcus and Millichap's first quarter 2020 earnings conference call. With us today are President and Chief Executive Officer Hessam Nadji and Chief Financial Officer Marty Louie. 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 could differ materially from those implied by such forward-looking statements due to a variety of factors, including but not limited to the COVID-19 pandemic, 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 and 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 1, 2019. Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. In addition, certain financial information presented on this call represents non-GAAP financial measures. J.D. J.D. along with the slide presentation you may reference during the prepared remarks. With that, it is my pleasure to turn the call over to Hessam Nadji.

Thank you, Evelyn. On behalf of the entire Marcus & Millichap team, good afternoon, everyone, and thank you for joining our call. We would like to extend our well wishes for health and safety to everyone. We, of course, find ourselves in a dramatically different landscape From the promising start to 2020, we had shared with you in February, critical aspects of executing real estate transactions such as property showings, inspections, appraisals, and even arranging for a notary became disrupted by mid-March as a result of the shelter-in-place mandate. Even with the onset of these impediments to our business late in the quarter, MMI achieved 19% revenue growth in the first quarter, including a 12% increase in financing fees on top of 42% increase in the first quarter of 2019. These results reflect last year's expanded client outreach and marketing initiatives coupled with ongoing hiring and acquisitions. Our transaction velocity in all segments proceeded at a healthy pace through mid-March when the effects of the pandemic and shelter-in-place began to constrain credit markets and real estate sales. At the onset of the health crisis, we executed a business disruption action plan comprised of five key components, including keeping our team safe and ensuring business continuity, intensified internal education and deal troubleshooting sessions, comprehensive special report and research content production, and large-scale client outreach, Decisive expense reductions to preserve the company's strong financial position, and last but certainly not least, a strategic plan to maximize growth in the recovery and beyond. I will highlight specific actions in a moment, but let me start by sharing that by March 15th, the entire organization had shifted to fully remote operations. This was achieved with extreme adaptability, collaboration, and through state-of-the-art technology and infrastructure investments completed over the past three years. We quickly adopted virtual property tours, video conferencing and collaboration tools to facilitate transactions. As a result, we continue to close transactions, market listings and secure financing in a very difficult environment. These efforts to solve problems amid a broad disruption may not make up for normal trading volumes, but they clearly reflect our commitment to our clients. Looking closer at the first quarter, our private client revenues increased 19% with strength across all property types, most of which benefited from our business development efforts in the second half of the year and the bottoming of interest rates in October of 2019. Revenue from larger transactions posted a 46% improvement driven by a mix of rebounding institutional sales by our IPA team and a number of larger sales executed by major private investors. We're also proud to report that our sales transactions increased nearly 15% in contrast to a market decline of 7% reported by RCA. Our financing volume rose 20%, driven by double-digit growth in both purchase and refinance transactions. Commission rate or cost of services as a percentage of total revenues increased 250 basis points as more senior professionals closed a larger portion of transactions during the quarter. This was a key factor in the disconnect between year-over-year revenue and earnings growth trends. The brokerage sales force expanded 5% or by 91 professionals over the past year. Our managers continue to recruit Our financing division, MMCC, remains a key component of our growth plan and has benefited from recent accretive acquisitions. Just after the end of the first quarter, we announced the acquisition of Metropolitan Capital Advisors in Dallas. The addition of this firm with a 28-year history of success and great reputation brought nine experienced originators and two managing partners to the MMCC roster. This expansion will complement our existing and successful MMCC presence in Texas, and add value for our entire team through numerous client and lender relationships. Notwithstanding the company's positive first quarter results, the pandemic and economic shutdown have impacted the real estate industry and our business dramatically and differently than past downturns, including the 2008-2009 global financial crisis. This is due to the physical impediments to conducting business I mentioned earlier, combined with as yet unknown economic impact on tenants, rent collections, and occupancies. This in turn is causing pricing uncertainty and constrained financing availability. There are clearly differences by property type. However, the result is an unprecedented business disruption adversely impacting our revenue production. This is undoubtedly temporary and will begin to ease as the economy reopens But the timing and stages of recovery in real estate transactions are very difficult to forecast. In the spirit of controlling the controllable, our plan is designed to bridge the company from the current state of business disruption to a recovery that could be unprecedented in its own right. I'm happy to report that our first goal of keeping the team safe and ensuring business continuity has gone extremely well with a stable virtual network Technical support and connectivity working in tandem. We continue to place health and safety ahead of all other matters as we prepare to bring our offices together again in person. Our internal education and troubleshooting efforts include weekly seminars featuring the most experienced managers, agents, and loan originators addressing specific topics and aspects of deal execution in a tough market environment. This has produced an exceptional array of best practices and training content benefiting the entire organization. Our advisory approach to client relationships is a cornerstone of the Marcus Millichap culture. Comprehensive client outreach campaigns are nothing new for us, but given the magnitude of this crisis, we have taken our client connectivity to yet another level as this third component of our plan. Since mid-March, we have produced over 50 special research reports, alerts, briefs, and videos to keep our clients up to date on the latest data and our perspective. We have held three special client webcasts with over 20,000 attendees, coupled with weekly outreach to a record number of investors and clients by our sales force. In the next 30 days, we will host 10 property-specific client webcasts, As our research division continues to produce real-time content. While this exceptional volume of advisory-based content may not immediately result in transactions during the market disruption, it reinforces our belief in long-term client relationships and will enable us to execute more transactions as the market recovery forms. Through this period, we recognize the advantage of having built ample cash reserves, At the same time, we strongly believe that preserving our favorable financial position through any crisis is crucial. Expense reduction, which is the fourth component of our plan, reflect this philosophy while providing sufficient support for our sales force. We've also allowed flexibility through employee furloughs to increase capacity and lead in the recovery once business conditions improve. In addition to reducing support staff and other controllable expenses, base salaries for the leadership team, management, and corporate employees have been reduced at varying levels. This reinforces our commitment to the firm, our sales force, and shareholders by doing our part. Offensively, we continue to attract highly experienced professionals and groups as we pursue strategic acquisitions. Underwriting, valuation, and deal structures have been adjusted to lower risk. We believe MMI will benefit from adding service and market coverage in strategic areas that will boost our business in the recovery and, most importantly, well beyond. The company's strong financial foundation and platform advantages are even more compelling to many quality individuals and firms during turbulent times. We're encouraged by active dialogue with a number of recruits and acquisition targets as a result. In addition, our investment in key technology upgrades, branding, and client outreach will continue given their strategic importance. This reflects our commitment to lead the recovery, gain share, and propel the firm forward stronger than ever. As we look forward, it is important to keep in mind a number of factors for the market and for MMI related to recovery and its prospects. From a market standpoint, the speed and magnitude of the government response has been unprecedented. Moreover, we believe banks' much stronger capital position prior to this crisis, as compared to the peak before the 2008-2009 financial crisis, will result in faster circulation of stimulus and liquidity injection throughout the economy. No amount of stimulus will fully compensate for an economic shutdown, and there will be residual damage to the economy and commercial real estate fundamentals. However, the fifth commitment to backstop the system and continue to provide liquidity will go a long way to minimize damage. Real estate transactions could increase well ahead of a broad and sustainable economic recovery. Let me explain that for just a moment. Investors' ability to assess post-shutdown occupancies and prospect for tenants' ability to pay a rent will help form clarity on valuations. It's the first building block. Coupled with some improvement in financing flows, this should generate more transactions as pent-up demand is released. This scenario is supported by record capital on the sideline and more owners needing to sell or recapitalize assets in the aftermath of the shock. Let's not forget that extremely low interest rates have yet to support the market as financing remains constrained right now, with lenders taking an extremely cautious stance. Historical precedents point to this scenario as evidenced by three-quarters of substantial real estate sales increases before jobs even turn positive coming out of the 2008-2009 crisis. We've added this graphic to our slide deck to illustrate the point. Let me reiterate that the timing of this cycle is extremely difficult to predict. I'm not suggesting that a jump in sales is around the corner, but a rebound will eventually occur, and we're doing everything possible to position to lead it. To this point, MMI's advantages in the recovery include our private client dominance, an active network of experts covering every major property type, our market leadership in 1031 exchange transactions, The integration of sales and financing into our client service delivery and our proven ability to connect institutional assets with private investors. We believe that record levels of client contact and connectivity through our research and advisory content during the business disruption will be instrumental in expanding our client base as the market recovers. We also expect departments and certain segments of the single tenant net lease business to lead the growth in sales as market clarity emerges. The fundamentals of these investments are expected to weather the economic shock better than other sectors, and MMI is well positioned to benefit from this, given our leading market position in both segments. Let me also emphasize that private investors' normal tendency and need to transact due to personal circumstances or financial hardship is currently hampered by a constrained transaction market. Again, we believe this is temporary. The entrepreneurial nature of our private client base and ample capital waiting to be deployed will eventually foster transaction velocity. Let me conclude my formal comments by expressing our appreciation to our clients for entrusting their real estate decisions and transactions to us. We thank our team for their unwavering commitment to our clients and the firm, as well as everyone on the support and management teams working tirelessly to usher the company through this period of disruption. Not only will we come out of this as we have in every other downturn since 1971, we will be stronger for it. I would now like to turn the call over to our CFO, Marty Lewis.