Marcus & Millichap, Inc.

Greetings. Welcome to Marcus and Millichap's second 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. Please note this conference is being recorded. I will now turn the conference over to your hosts, Evelyn and Fiona. Thank you. You may begin. Thank you.

Good afternoon and welcome to Marcus and Millichap's second 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 responses to questions may contain forward-looking statements. Words such as may, will, expect, believe, estimate, anticipate, predict, 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, Thank you very much. Thank you very much. Finally, this conference is being webcast. The webcast link is available on the investor relations section of our website, www.marcusmillichap.com, along with the slide presentation you may reference during the prepared remarks. With that, it's my pleasure to turn the call over to Hessam Nadji. Hessam?

Thank you, Evelyn. On behalf of the entire Marcus Millichap team, good afternoon and thank you for joining our second quarter 2020 earnings call. We extend our well wishes for health and safety to everyone on the call. As expected, the health crisis and corresponding economic shock created a major disruption in the commercial real estate transaction market during the second quarter. Uncertainty regarding occupancies and rent collection challenged asset valuations, while physical impediments such as the inability to inspect or tour properties and meet with investors made it difficult to bring buyers and sellers together. Conditions were further aggravated by lender caution and tightened underwriting. Based on preliminary estimates from Real Capital Analytics, transactions in the marketplace dropped by 60% year-over-year. For the quarter, MMI's revenue of $117 million reflected a 44% decline, while a 41% reduction of controllable costs contributed to adjusted EBITDA of $4.2 million and positive net cash flow from operations during this very challenging period. This was achieved despite a 180 basis point increase in our commission rate due to a larger share of revenue coming from our more senior brokers, similar to past market disruption. Revenue was supported by the residual momentum of our record pipeline prior to the pandemic and resurrection of a number of transactions that had been canceled or delayed in the earlier part of the quarter. Examples include creative solutions such as seller financing and contract modifications to accommodate buyers for short-term uncertainty. Notwithstanding our disappointment and frustration with these results, we take some encouragement in meeting our primary goal of preserving the company's strong balance sheet while marching forward with strategic infrastructure investments, As we shared on our last call, we moved the company to remote operations immediately after the pandemic hit and delivered a series of tools and technology to enable business continuity seamlessly and rapidly. This would not have been possible without technology and infrastructure enhancements made over the past three years, which highlight the importance of these ongoing investments. We also launched a comprehensive internal training and education program to help our brokers with deal mechanics, securing financing, and basically doing whatever it takes to execute for our clients. We pivoted our research content to capture real-time incoming data and massively escalated traditional investor webcasts the company has become very well known for. This resulted in the production of 90-plus research publications, and 20 Market Overview webcasts, which drew over 80,000 investors in the quarter. These initiatives, coupled with our broker's skills, generated nearly 1,600 total transactions for the quarter in one of the most difficult periods for the U.S. economy and real estate markets in modern history. Our broker's transaction decline of 41% was significantly less than the overall market decline and suggests market share gains. Thank you very much. I'm happy to report ongoing hiring through virtual means, contributing to the addition of 83 professionals, or 4%, to our sales force over the past year. This includes a number of experienced individuals and teams that have chosen MMI this year because of our platform advantages and brokerage support. We continue to pursue strategic acquisitions with adjusted underwriting and risk assessment to accommodate for current market conditions and are highly encouraged by active discussions with quality target firms. The closing of Metropolitan Capital in April reflects our commitment to expand the platform through creative complementary firms, particularly on the financing side of the business, which is a major component of our growth plan. Even in the early stages of Metropolitan's integration, referrals and business opportunities have been created because of their addition to the MMI team. During the quarter, Our private client brokerage revenue declined 45%, and larger transaction revenue declined 37%, reflecting the overall challenge created by the obstacles I summarized in my opening remarks. We continue to believe and experience firsthand private investors' fundamental need and motivation to buy, sell, exchange, and refinance real estate. As more clarity and price discovery emerge, we expect transaction velocity to improve markedly, Although the timing of this process is difficult to project, this includes many private investors acquiring larger institutional assets, which has been one of the key elements of our strategy to grow our institutional division, IPA. Overall uncertainty in the market has impacted the bid-ask spread across the board, but the price expectation gap varies significantly by property type. Single tenant and necessity retail, most apartments, with the exception of recently built luxury units in urban markets, sell storage assets and industrial, are faring best, and shopping centers, seniors housing, and hotels have the widest price gap in the marketplace. Occupancy and rent collection have been better than expected, particularly for apartments, industrial, and office properties. But the length and scope of the economic headwinds still pose a high degree of asset performance uncertainty. We believe the ultimate catalyst to recovery will be a medical solution to the pandemic, but the timing of this is very difficult to speculate. In the meantime, we've adjusted and tailored business plans, client outreach programs, research content, and internal training to bridge the firm from the current environment to a robust recovery, however long that may take. These actions are geared toward meeting clients' needs within each property type as we bring solutions one transaction at a time. Revenue from our financing division, MMCC, declined 28.4% year-over-year for the quarter with refinancing accounting for 66% of loan origination fees. It is noteworthy to mention that we closed 381 financing transactions in the quarter with 122 separate lenders. MMCC's expansive network of lenders and our originators' ability to pivot and access the right capital sources for each situation is showing up as a major advantage in the market. Lender risk tolerance is driven by property type and sponsor, but it is encouraging to see gradually improving capital flows. We have seen a marked improvement in financing availability and easing underwriting on a selective basis over the past few weeks. Our financing account reduction continues to be driven by the shift toward more experienced professionals and recent expense reduction measures related to trainees and analysts in light of lower production volumes. Now, looking forward, we see several factors impacting the market and our business. For starters, interest rates are at historical lows and will likely remain so for some time. Record volumes of capital on the sidelines, more owners needing to sell real estate assets and more lenders reentering the market are the building blocks of a significant boost in trading volumes. Again, the timing remains uncertain. Government action and stimulus has been unprecedented and we believe will play a key role in the recovery. To put this in context, the first sizable stimulus was injected into the system 13 months into the 2008-2009 financial crisis compared to just seven weeks this time around. In terms of size, Government action accounted for 6% of GDP in the 2008-2009 crisis versus over 30% in response to the current health crisis. This will help shore up the market and eventually contribute to the next growth cycle. In the short term, a systemic solution to the health crisis and lifting of economic impediments are unlikely. Therefore, the transactional market environment is likely to remain relatively unchanged, and we have responded accordingly. Building on the theme of controlling the controllable, which I shared with you on our last call, our strategy remains on track. First and foremost, our client outreach remains a top priority. Our team's creativity and knowledge in identifying what I call hidden gems in real estate are a major focus as we help our clients think beyond the current crisis. For example, what are the merits of suburbs in contrast to downtown investments, and where is the best risk-adjusted return? There's the exodus from urban centers we currently see as secular change or a short-term response to a crisis. Is now the time to be contrarian and buy hotels or shopping centers, as many investors are actively considering? Second, internal education and support to our sales force also remains paramount. One of the biggest advantages of our platform is the extensive information and knowledge sharing present today, and on a continual basis, Our most experienced brokers have been generous with their time and energy in sharing their pearls of wisdom on a steady stream of webinars covering every aspect of brokerage in this market. Expense management will remain a top priority. Type controls deployed last quarter will remain in place until more certainty on revenue growth emerges. We remain committed to maximizing productivity and leveraging the current situation to to make fundamental improvements in all aspects of the company. Our cost containment plan is nimble and updated real-time as we stand ready to deploy resources as the recovery begins to take shape. Last but certainly not least, we're carefully deploying capital towards strategic investments in technology, new tools, and acquisition. We believe this will not only elevate our market leadership in the eventual cyclical recovery, but significantly strengthened the Marcus Millichap platform for the long term. Before I turn the call over to Marty, I would like to extend my personal thanks to our clients who put their trust in the MMI team every day and count on us to help them execute in this market. I would also like to thank and acknowledge the passion and commitment of our entire team at a challenging time. We are proud of everyone's willingness to do more, work harder than ever, and think and act for the long term. Lastly, I'm happy to announce that after an extensive search, we have selected Steve DeGennaro as the incoming CFO for MMI, effective August 17th. Steve brings an extensive background as the finance executive in the technology sector. His career highlights include serving as CFO of a public company that he helped grow from $60 million in revenue to $500 million and was eventually sold to Intel, co-founding a telecom startup, extensive capital raising, and mergers and acquisitions. Most recently, Steve was Executive Vice President, Chief Financial Officer of InTouch, a remote healthcare provider which was recently acquired by Teladoc in a billion-dollar transaction. He began his career at KPMG, where he specialized in helping clients prepare and execute IPOs, among other accounting and finance responsibilities. In short, Steve brings a growth and technology-oriented skill set and mindset to the leadership team in line with our long-term growth plan, which we're very excited about. As I shared with you when we announced the CFO search several months ago, we are very fortunate to have Marty Louie transition to the new role of Senior Vice President, Corporate Initiatives. The additional management bandwidth we will gain because of Marty's 16-year history with the firm and his relationships throughout all of our support departments will be very helpful in executing our ever-expanding list of growth initiatives and projects. On behalf of the entire firm, I would like to thank Marty for his years as our CFO, his work ethic, and dedication to the company and our shareholders. With that, I will turn the call over to Marty. Marty?