Marcus & Millichap, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Marcus and Millichap first quarter 2021 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 star then one 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, ICR, for opening remarks. Please go ahead.

Thank you. Good morning, and welcome to Marcus and Millichap's first quarter 2021 earnings conference call. With us today are President and Chief Executive Officer, Hossam Nagy, and Chief Financial Officer, Steve DiGennaro. 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 can differ materially from those implied by such forward-looking statements due to a variety of factors, including but not limited to 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, 2021. Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that these 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 morning and is available on the company's website, represents reconciliation to the appropriate GAAP measures and explains why the company believes such non-GAAP measures are useful to investors. Finally, this conference is being webcast. The webcast link is available in 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 Hassam Najee. Hassam?

Thank you, Evelyn. On behalf of the entire Marcus Millichap team, Good morning, and thank you for joining our first quarter 2021 earnings call. I'm pleased to report that the first three months of 2021 for MMI were characterized by solid year-over-year earnings growth, rebuilding of our pipelines, further addition of experienced professionals, and now performing the broader market once again. The momentum we saw in the second half of 2020 has continued into this year. Solid top-line results combined with ongoing cost containment generated adjusted EBITDA growth of nearly 15% over the first quarter of last year. Total revenue was down just 3.5% from a record first quarter in 2020, which was up nearly 19% over 2019. Our revenue trend is also noteworthy given the expedited progress made since January 1st in rebuilding our pipeline and inventory levels after a record fourth quarter. Let me take a moment to acknowledge that these numbers reflect our clients' trust in our ability to help them solve problems, reposition portfolios, and rapidly act on market opportunities. These results would not be possible without the extreme dedication, work ethic, and expertise of our sales and financing professionals in a market environment still impeded by the pandemic. Looking back, our pandemic response strategy clearly made a difference in the first quarter of this year. Our expanded research content, intensified investor outreach, comprehensive and frequent internal communications, and training, as well as investments in technology, continued onward even as we speak. These initiatives help generate leads, bring clients closer to our sales force, and open opportunities. We're proud of the record number of investors who attend our webcasts and find our research content and advisory services of value. We also benefited from contributions by new talent added to the MMI platform through nine acquisitions since 2018, including four executed in 2020. The strategy to attract and hire experienced professionals, teams, and companies to supplement our traditional organic growth has been very effective. This is largely due to the complementary market and property type coverage that drives our targeting. Even though our most recent acquisitions are still in ramp-up mode, they're already generating client synergies, referrals, and opportunity to expand services. From a market perspective, support came from the passage of the stimulus, expansion of financing sources, and high levels of liquidity. Investor sentiment is boosted by significant progress on the vaccine front, reopening of the economy, and growing optimism in the pace of job growth. We saw progress on price discovery and improvement in our died deal ratios, closer bid-ask spreads, and no shortage of buyers for well-priced assets. However, the market bifurcation by property type continues, with the most stable segments of apartments, single-tenant net lease, and industrial properties commanding strong values, frequently at pre-COVID levels or higher. Sectors hardest hit by the pandemic, including hotels, seniors' housing, office, and older shopping centers, saw some progress during the quarter but are still going through a recalibration. Building on last year's fourth quarter trend, institutional and larger private investors continued their reemergence into the market for larger assets. We have positioned MMI well through the maturing of our sales force and expansion of our IPA division over the past several years. Revenue from larger sales valued at $20 million and above was up 5.1% year over year after a 46% jump in the first quarter of last year. These results support our continued diversification strategy into the larger deal segment as a natural supplement to our dominance in the private client market. In the first quarter of last year, our private client revenue had increased 19% over the first quarter of 2019. This exceptional growth drove the 7.7% year-over-year decline in the first quarter of this year against the challenging comparison. We are as excited as ever about the long-term growth prospects in our private client segment given its incredible size, vibrance, and fragmentation, which creates significant advantages for MMI as the market leader. On the financing front, we continue to see progress in our strategy to elevate the experience level of MMCC financing professionals and execute strategic acquisitions. I'm happy to report a 16.2% year-over-year revenue growth in the first quarter of including modest early contributions from Mission Capital and LMI, both of which were brought on board in the fourth quarter of 2020. Our capital partnership network continues to expand as we completed nearly 500 financing transactions in the quarter with over 175 different lenders. Providing our clients with lending alternatives is an important value add when there is a disruption in the market or in the midst of an uneven recovery as we're seeing with certain asset classes today. Turning to Salesforce growth, during the past 12 months, recruitment of sales and financing professionals has been challenging due to limited in-person interactions and meetings. As expected and messaged on previous calls, we're experiencing higher than average attrition of newer agents and longer ramp-up due to a challenging market environment. As a result of these factors, we added 45 professionals for a growth rate of 2.3% over the last year. While we're having success with virtual career fairs and virtual interviews, we're eager to return to in-person recruiting practices in the near future. We're pleased with the addition of key experienced professionals strategically recruited in critical markets and will continue to build on this success. Looking forward, we're encouraged by healthier market conditions and optimistic about our internal execution and growth strategy. Let me elaborate. From a market perspective, further improvement will be driven by still low interest rates, ample liquidity, and expanding buyer demand for commercial real estate. As we stated on previous calls, record cash savings point to the eventual release of pent-up demand by consumers and businesses alike. This is an important indicator that bodes very well in our view for rising levels of job growth and GDP expansion in the second half of this year and into 2022. While the stimulus is largely spurring economic momentum in the first half, a fundamental economic expansion should carry the second half of this year. Long-term interest rates appear to have stabilized at an attractive level well below recent multi-year averages, and still below pre-COVID levels. Even if inflation begins to drive rates higher, there's plenty of room before any adverse effect is felt in the marketplace. Most importantly, higher interest rates should generally coincide with higher occupancies and rents, keeping real estate valuations in relative balance. There is a growing concern regarding the Biden administration's proposal for higher taxes, including potential changes to the current carried interest and 1031 exchange rules. These are early stage proposals and will very likely go through intense negotiations and changes in the months to come. Relative to prior periods of anticipated tax law changes, we have not yet seen a rush to sell assets. However, assuming the rhetoric and headlines continue to amplify concerns, it is likely that many investors will be motivated to take advantage of the current tax laws to transact sooner than they may have planned. This is particularly applicable to the tax deferment advantages of the 1031 exchange provision. As the investment brokerage market leader, we are well positioned to facilitate this as we have done before. Over the past 20-plus years, we've seen many cycles of proposed elimination of the 1031 exchange fade due to the ultimate realization that doing so may actually cause more economic harm than raising net revenues. This is very similar to the current debate on the point of diminishing returns on higher capital gains tax rates, which further points to the fact that the current proposals are preliminary and subject to change. Regardless of the ultimate outcome of the current tax proposals for MMI's planning, it is critical to point out that a large portion of transactions that involve a 1031 exchange would still occur, whether executed by private investors or institutions. For private investors, a myriad of factors drive transactions, including deaths, awards, partnership breakups, and inheritance, as we have messaged many times in our various communications. On the institutional side, business decisions, portfolio and fund-related factors, and timing frequently influence transaction decisions as well. While some short-term market volatility may occur, as we've seen in past cycles of tax law changes, our long-term plan, driven by significantly growing MMCC, diversifying into various property types, and the sheer size of the market we're able to capture gives us great confidence looking ahead. We have worked diligently to build a strong balance sheet with a great capital position, providing flexibility to increase productivity, diversify coverage, and expand client services. Our progress on strategic acquisitions and hiring validates our approach to sourcing like-minded experts with a strong cultural fit. These new individuals, teams, and companies benefit from our platform and conversely bring immediate value to our existing sales force and clients. We're actively building on this and continue to see acquisitions, investment in technology, and proprietary brokerage tools as our priority for capital deployment. We are excited about the rest of this year, our long-term growth plan, and look forward to sharing our progress with you in upcoming calls. Steve DeGennaro, our CFO, will now discuss our financial results in further detail. Steve?