Marcus & Millichap, Inc.

Thank you for standing by. This is the conference operator. Welcome to Marcus and Millichap's third quarter 2020 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press the 1 followed by the 4 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Evelyn Inferna. Please go ahead.

Thank you. Good afternoon and welcome to Marcus and Millichap's third quarter 2020 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 variation 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 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, 2020. 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 The company's earnings release, which was issued this afternoon and is available on the company's website, represents reconciliation to the appropriate gap measures and explains why the company believes such non-gap measures are useful to investors. Finally, this conference is being webcast. The webcast link is available on 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.

Thank you, Evelyn. On behalf of the entire Marcus Millichap team, good afternoon and thank you for joining our third quarter 2020 earnings call. We'd like to extend our well wishes for health and safety to everyone on the call. I'm pleased to report significant progress in overcoming the COVID-19 market disruption. During the third quarter, MMI registered sequential increase of 35% in total revenue and transactions, or 552 more deals over the second quarter. The company's earnings advanced with pre-tax income of nearly $8 million and positive cash flow from operations of $24 million after essentially working hard to break even amid the initial shock of the pandemic. We executed over 2,100 transactions and $9.1 billion in volume, including 442 financing transactions closed with 182 separate lenders in the third quarter. As a key illustration of our ability to connect buyers and sellers, even in a disrupted market, 44% of our brokerage transactions were ultimately acquired by an out-of-state buyer. This is a testament to our vast buyer relationships and expansive market coverage. Above all, these numbers reflect our team's unwavering client commitment, problem solving, and execution skills, especially in a difficult market environment. Internally, several factors supported the quarter's improved momentum, starting with the resurrection of many deals and listings that had been delayed or canceled. Our investor education webcasts intensified direct marketing and business development campaigns. We're also instrumental in connecting our sales force with as many investors as possible. In all, we have conducted 25 market overview webcasts, attracting nearly 90,000 investors, that's 90,000 investors, and generated 121 research publications and video segments since the onset of the pandemic. The market environment became moderately more constructive during the quarter as many lenders reentered the market and expanded financing options for investors. The broad availability of debt at record low rates is clearly a big factor in the marketplace. Let me reiterate that financing is still very much sector-driven with tight underwriting and conservative assumptions, and many deals require creativity and compromise in bringing buyers and sellers together. The uptick in market sales during the quarter is also indicative of investors cautiously emerging from the initial shock of the pandemic and deploying capital into the best-performing sectors. This includes apartments, fast food and drugstore single-tenant assets, industrial, and to a lesser extent, office and self-storage properties. Apartments have benefited from better-than-expected rent collections, with the exception of newer, high-end properties in urban areas, which have been hit much harder than the suburbs. Trading of hospitality, seniors' housing, and lower-tier shopping centers, already affected by e-commerce prior to the pandemic, remain hampered. Market sales were still down by an estimated 40%, as reported by third-party sources today. as price expectation gaps and economic uncertainty keep buyers and sellers apart. By contrast, MMI's brokerage transactions were down by 13% in the third quarter on a year-over-year basis. We believe this points to share gains for MMI. Our potential for additional growth in virtually every segment as well as recent improvements in our internal metrics Such as the ratio of died transactions and reduced marketing timelines bode well for the near-term outlook. Let me reiterate the challenging operating environment that still limits personal interaction with clients as well as in-person training and management of our sales force. A full return to normal operations is clearly dependent on medical solutions to the pandemic and their wide acceptance by the public. Accordingly, we have been and remain prepared for the long haul. We are further expanding our virtual business execution while leveraging our management talent beyond geographic boundaries to train and support our Salesforce. Nevertheless, rebuilding our pipeline and inventory levels to recapture year-over-year growth and achieve new financial milestones will take time. As we have demonstrated since the onset of the pandemic, Thank you for joining us. and consultative due diligence services as well as debt and equity placement across all property types. Their loan sale and consulting clients include commercial and investment banks, hedge funds, special servicers, government agencies, and private equity firms. Their debt and equity team specializes in structured finance and equity advisory for institutions, developers, and private real estate investors. Mission Capital's expertise and client base are very complementary to MMCC's core mortgage brokerage business. Their ability to help expand our business with lenders while generating distressed property sales leads will add value to our clients and our current sales and financing teams. In August, we introduced a major upgrade to the Marcus Millichap website with a special focus on making it easier for investors to search our inventory, connect with our professionals, and access our expansive content. This came on the heels of rolling out brokerage tools in virtual execution of our brokerage model and a major upgrade to our internal pipeline tracking system earlier this year. In short, we are leveraging the market disruption to strategically execute offensive measures that improve the firm for the long term. Now, taking a closer look at the quarter's results, we saw sequential gains in all market segments, particularly our private client business in apartments and single tenant net lease. Middle market and larger transactions also experience healthy movement. However, the higher price points remain somewhat more volatile than usual in contrast to the easier to finance private client assets. Financing revenue rose by 23% sequentially and declined just 2.5% from the same period in 2019. While refinancing continued to be a meaningful contributor, we did see an improvement in purchase finance volume. The strength of MMCC last quarter points to the successful integration of our acquisitions and the increasing productivity of our financing teams. MMCC remains a key component of our growth plan. On the recruiting front, we grew our brokerage sales force by 74 professionals over the past year, while our financing team declined by 20 as we shift toward more experienced financing professionals. The overall decline sequentially was expected and reflects a significantly more challenging market environment for newer professionals. As we have messaged before, this is very similar to past downturns. However, regardless of the headwinds against breaking into the business, we're supporting our newer sales professionals through intensified education, business planning, and management guidance. While the company's headcount trends will remain challenging for some time, History tells us that many of today's newer professionals who persevere through this period will be future market leaders. Looking forward, we are steadfast in executing the plan set forth at the beginning of the pandemic. This includes careful scrutiny of capital and resource deployment given the level of uncertainty in the marketplace, focus on assuring smooth operations, extensive internal support and communication, to make sure our team is as productive as possible. Maintaining high-frequency quality client outreach, especially as investors formulate strategies going into 2021. Strategically investing in technology and brokerage tools that advance our services and productivity. And last but certainly not least, leveraging the market disruption to scale our acquisitions. Since the launch of our acquisition initiative in mid-2018, MMI has completed the acquisition of seven companies. These have added valued members to our team who are contributing to our results. These numbers do not include the hiring of experienced agents. We believe the market disruption enhances our ability to add accomplished individuals, teams, and companies who come to know MMI's benefits. As such, acquisitions and platform investments remain our top capital deployment strategies. From a market perspective, plenty of lingering risks and uncertainties lie ahead, and investor sentiment is still fragile. We could face more economic constraints due to virus outbreaks and strained healthcare systems and or further delays in the next round of stimulus, which is badly needed. These factors directly impact tenants' ability to pay rent. At the same time, we cannot underestimate Positive factors and vast growth opportunities for MMI, including the following. First, Federal Reserve has declared its commitment to low interest rates and economic support for an extended period. This comes after the unprecedented liquidity injection from which the markets are already benefiting. Second, over half of the jobs that were lost in the first few months of the pandemic have been recovered. It may take time for many industries to stage a comeback and some jobs may never come back. However, the economy is already showing a shift toward innovation and resilience. Third, the release of pent-up demand upon a widely deployed medical solution to the virus should not be underestimated. As uncertain as the timing may be, we expect a sizable jump in consumer and business activity likely to occur sometime in the next 12 to 18 months as we truly recover from COVID-19. Fourth, record capital on the sideline is still looking to be deployed. In a global marketplace, commercial real estate provides the full gamut of risk-reward investment opportunities, which we believe will attract more private, client, and institutional capital to our business. And last and certainly, again, not least, although the full ramification of the election outcome on the economy will take time to assess, the general trend should be favorable for our business. Additional stimulus and focus on a medical solution are very much likely to be top priorities. All of these dynamics spell countless opportunities and some pain ahead for real estate investors. MMI is well-positioned and prepared to be the ideal trusted advisor in crafting and executing the best solution one client at a time. Our theme since the onset of the pandemic has been control the controllable. To this end, we remain agile, dedicated to supporting our team, and committed to our clients, especially as the market improves. Most importantly, we have substantial financial strength and a dominant brand Powering our offensive stance. Let me now welcome our new CFO, Steve DeGennaro, to his first earnings call. Steve?