MMI - Earnings call transcript Q3 2018 | Marcus & Millichap, Inc.

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Operator

Greetings, and welcome to the Marcus & Millichap’s Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Evelyn Infurna, Investor Relations.

Evelyn Infurna

Thank you. Good afternoon, and welcome to Marcus & Millichap’s Third Quarter 2018 Earnings Conference Call. President Officer, Executive Marty are and Hessam today Financial Chief Louie. us and Officer, Chief Nadji; With

growth factors, Before I questions and the professionals; turn company’s expect, these remember statements. XX, the and that the Form the ability agents report such believe, new company’s annual call over prepared Words and and factors commercial the to Securities limited culture estimate, Commission business remarks other similar and differ ability transactional including to to due anticipate, responses from ability and general implied in variations may, and partnership to as retain those intended been to with a materially its forward-looking to statements. integrate as statements attract not may forward-looking on words filings, market public the goal real filed forward-looking company’s our XXXX. and identify are estate Exchange sustain including, March contain philosophy variety will, its pressures; to competitive management, company’s its conditions XX-K, has which economic of by to, conditions; expressions could Actual discussed of on but such and retain please results amid

believes events forward-looking update upon new or of will expectations be to The as Although reasonable the attained. future no obligation company forward-looking that whether based such any expectations these otherwise. the undertakes a assumptions, reflected information, make statements are in assurance it can statement, company result no

this and GAAP company to presents and believes the which measures. company’s are the information investors. non-GAAP earnings useful is measures The release non-GAAP why explanations available presented earnings measures reconciliations In to on afternoon addition, on issued of this financial financial presentation, appropriate certain conference was such call the and represents of company’s this website, call

a my to slide being prepared Hessam. with the of during reference website, presentation on call with the is it’s the Investor over webcast you link remarks. this our pleasure Finally, now www.marcusmillichap.com, turn webcast. section to Relations along may call The And is available that,

Hessam Nadji

Thank call. you, good Marcus earnings Evelyn. you afternoon, third XXXX On behalf the Millichap for & team, joining quarter and entire our thank of

our wanted marked I fifth a leading moment public year in by the to as and also and October company. Before behalf In the in grown the importantly as of experience I take that skill to express trust team, to On first confidence and results, hard acknowledge our company substantially thanks, a our company. discuss and that and time, MMI. our numbers brand. XX and has want as I whose and the we thank foremost, to our define for their management work support clients, sales team commitment professionals financing a

value whom thank that in do. long-term to our we also shareholders create strive We we for everything

the excited build in very excellence our to client of service. about through We’re XX-year and on tradition innovation opportunity value-added brokerage

acquisitions in results XX these successfully in third our client the our of all The & second strong during to Millichap market still and investor As XX% We sentiment competitive for availability economic our relatively law, revenue find are debt changes clearly to flat of positive improved our our resulted elaborate sales months in work posted net numbers growth XX% once performance, of last on environment this X,XXX of XXXX. attributed heels in completed as noteworthy enhanced and initiatives strong the few a two marketing force on Coming during quarter, the team’s last over nearly again see relative months. the to result tax increase outreach segments, the I’m which report the in with platform. metrics, in well Marcus his Marty presentation. expanded market improvements the in by in as income. are and operating hard in the most to also investments rise year-over-year quarter as continued helped will transaction. quarter, quarter a the ongoing and improvement yields. We third healthy in We a sales pleased

noise rates, as gains the market believe in Client due reasons Private our gain. properties investment with broader demand estate renter interest business and to Private to consistent other in office incremental progress MMI’s as the investors are experiencing increased bid-ask of trailing we fragmented brokerage real this of According X.X% widest business On The spreads third-party total point strength seniors while contrast in appreciation revenue higher the XX.X% This with long-term opportunity spread, seen were Drilling home Retail the and to hand, self-storage, cited the in to heightened into hospitality, a year. efforts. and growth market. for grew growth multifamily segment of bid-ask our has volume, is rates. for sector housing. and and brokerage our leader. quarter segment about the commercial share frequently Client higher multifamily and sales interest are alignment year-over-year pickup nearly in during further to vast sales sales the property remains quarter, sources, diversification price X.X% transactions This accounted the XX% in the transactions continues commercial increase X.X% MMI months as indicate geopolitical in and caution. XX% for demonstrates highly consolidation our XX in in by as which overall same the transactions and This last and

revenue segments of the During we transaction. middle growth registered market these sustained in our market approximately quarter, recent Both XX%. year-over-year of growth larger and

our function clients model institutional in and Client company’s increasing strategy private a larger deals growth our Private of these to supplement is in the transactions participation our in with of Our growth business.

more higher the over which in long variable discussed the transactions be the from our we’ve As viewing of term. quarter-to-quarter, emphasizes can past, importance value business

bit albeit of higher off Our from the and as quarter, deals a the dive spread, and [ph] key corresponding lines internal time function metrics, rates Marketing buyers among during average were market a bid-ask particularly underwriting interest vigilance peak. expanded just lenders. and stable

is XX%. financing of This acquisition to the team, and lender Our year-over-year revenue growth Pinnacle posted MMCC, our relationships expansion of existing organic attributed financing Financial quarter business, hiring, recent of our in growth solid its among June. third

We with with Pinnacle Team Midwest in professionals key the offices company. the and of integration are the the pleased our financing throughout

markets. Pinnacle’s as with are synergies already well success experts lender it excited results, initial are relationships in we Our and about on as and this building replicating other showing

brokerage as and MMCC Lastly, which correlates remains company. a to a the the in compared purchase-related in in as opportunity experienced refinancings, for rise we the uptick financings financing, related transactions quarter. our focus growth major to with

been lenders key relationships ways our explore expand has team spending time strategy capabilities. management and to our our with grow financing Our updating to to business our

recent by encouraged We are developments.

to This The financing a previous sales individuals to our addition position provider great our Moving X.X% record. experience of employment continues force, market market professionals XX growth XXX track in the of with represented over the tight brokerage and on further the including many challenge. the months, industry. as past be solidifies and investment largest a

overcoming Marcus training third additions with with existing throughout acquisitions, in benefits to in quarter. quarter are our Similar clients acquisitions brand and these respect in management proprietary of by & our the the cultural North McGill Commercial presence and the enhance technology, exciting market and value candidates that recruiters Primecorp to made to we connect our in Millichap sales to America in-house We Canada, and Conversely, the from coverage local our industry-leading comprehensive will business models of two compatibility support. acquisition late Realty benefit These companies and programs. to growing to fourth this mentorship our and MMI our With and Commercial management they significantly leveraging early Pinnacle, platform platform, our the demonstrate immediate and Canada. bring force. greatly

We excited growth for contribution. and are their very future

performance fourth for still thanks be not well rent on recent basis, commercial estate low, interest Looking noted during we a estate This this ago. increases strong a MMI, historically our At encouraged bodes also of to expansion, but investments. performance, hyperinflation. economy fundamentals, of a the the for time, should and healthy same are to and challenging rising year we’re real anticipate ongoing overleveraging that today’s rates reflection loan ahead, It be strictly combination strong and given are growth. comparative lack real the quarter a healthy by a more

For MMI, our strategy growth is unwavering.

results and We brand. balance in turn the in will continue and directly to focus companies coverages. in I growth synergistic detail. will acquisition priority us continue of training the and to Marty? our our positions sheet the same remains services top on expands our over investing of development the and strong our retention time, tradition our productivity and terms deployment. now teams discuss recruiting, extremely Millichap through of market high-quality and platform At to the call by Marty organic force Marcus of sales capital This that more well & client

Marty Louie

our discussing across our of greater be quarter million for total $XXX with and in I’ll accounted commissions, Hessam. third third driven during estate which revenues XX% revenue, by XX.X% results million, to grew segments. XX% year-over-year Thanks, real $XXX grew nearly the to strong detail. all quarter brokerage Total market

XXXX. by year-over-year Client Client quarter, of transactions basis Private the on on This transactions. quarter Private X.X% in driven the the side, X% revenues third the brokerage during X.X% On is of increase grew for number in a brokerage top increase the

business on, vigilant to flat our strategic at time. We behind the In expanded investments factors in and generally a that recent remain environment. addition where and expenses business market marketing crucial given same these necessary we development touched in to the our strategies business to investments technology, grow the grow containing Hessam believe making are results

During aided and by the year-over-year by quarter, grew comparisons. transactions market easy segment the middle XX%, revenue

a increased transactions respectively. However, revenue this We quarter. revenue XX% during XX%, the larger and year’s tough grow transaction XX%, saw accomplished and by year-over-year segment and respectively, transactions comparison the while and XX% prior outcome third market which

transactions market mentioned to improvement. these depending have the in of There that we past, timing transactions. be no were upon large variable, this quarter’s As more the tend extraordinarily drove segments

X.X% year-over-year rose Total for prior financing sales fees more an the During by primarily Financial QX, the expanded headcount XXX from executed deal size million from professionals than $XX.X XX% year. driven quarter, XX% as to average to our billion. XX.X% $XX we origination Pinnacle Group, those quarter of by volume in financing by growth for which which or reported to Revenue our as transactions, sales the represented MMCC larger generated total. in X,XXX increase in XX We from includes force, lender relationships. well growth our grew

expect higher messaged in grew and still SG&A. Total million, operating have of to is consulting some to prior XX.X% force driven quarter million. quarter which from for higher sales revenue, third growth advisory as brokers, fees, services experienced of referral towards of comprised we we expenses increased $X.X Cost $XXX of Other the million volatility the other individuals. we revenue As primarily headcount with transaction to fees as and $XXX in calls, along estate year-over-year the a by more real and services during result XX.X% overall cost mix. increased shift

cost year. who are This basis XX.X% a revenues, are of higher on market increased commission executed As splits. of middle is primarily in larger strong percent by typically last by from growth points our transactions, our total to of and to which agents XX QX services due senior

agents’ growth a fees of averaged to to SG&A the stocks-related completion growth been points our offices of million of XXXX compensation, of first and costs associated driven XX.X% emerging development, with $XX.X acquisitions, markets. in an year associated basis and the during costs our by – acquisitions, services the recent our extension a company and As as of and due lease related our the under point for existing investments of business to costs primarily first reference, costs ago. force XX.X% cost supporting and compensation lower quarter due in strategic the with Act or sales than X year-over-year increased Jobs XX audit of stock-based years to stable months five professional has renewal

Excluding we year-to-date year-over-year. XX% grew expenses basis, stock-based a to the XX.X% have compensation, for of SG&A quarter. been On a growth leverage able to

growth However, stock-based SG&A compensation, when XX%. was excluding

per earnings share diluted XXXX. per to increased diluted to diluted by $X.XX $X.XX XX.X% the year-over-year share compared share For XXXX, third quarter per in

XX.X% Our result Act. the versus higher than effective the of XXXX the was Jobs XX.X%. rates and last as tax Tax expected Year-to-date, lower rate our year. in at a for Tax Cuts effective enactment rate was of quarter XX% were slightly tax

by tax expect windfall we XXXX services tax when I to effective full will EBITDA such, decreased quarter, Compass income adjusted increased during on quarter’s including that XX% XX%. margin for should company’s rate to basis by points $XX.X due to was year-to-date approximately increasing be which XX.X% As net basis, basis have noted increased XX.X%. revenue million Adjusted shortly. XX while fourth to EBITDA the our primarily year XX.X%, we EBITDA slightly benefits, adjusted the XX.X% discuss and XX margin be grown the the This to the quarter. It points a

be expected our private our adjusted margin larger between can velocity variability market from Some and and and EBITDA transactions fluctuate. as quarter-to-quarter client, volume transactional mid

In to for needs will in continue our our to meet and addition, in position growth. long-term the to people the platform best we clients’ invest are ensure firm we and position

the be very will tightly thus we far, cost by out from seek company M&A growth with results. will and to will and Lastly, balanced accretive added we as incur strategic and managed are acquisitions. our continue These revenue encouraged acquisitions

selective and sheet, Millichap as to balance continues positioned & mentioned. Marcus pursue Turning organically grow well be previously to to business its acquisitions, the

equivalents very million. quarter the healthy, cash are and ending cash core approximately levels liquidity with investments and of cash Our $XXX

we As growth covering our reserves acquisitions. sheet with include cyclicality managed our which as liabilities, as balance well of a towards consideration strategic the initiatives, reminder, industry

like Before items discuss I’d which have may the closing, on to our for XXXX. an results several of and balance impact highlights key

easier quarters five benefit consecutive year-over-year growth, did of half the in from the while year. first revenue especially of comps, we’ve First, had we

will Our during low of few for year. be quarter fourth as teens comparison the this half during quarters the the first grew XXXX of revenues X.X% and year-over-year next challenging

million benefited Second, other XXXX, the a a fourth a with of portfolio. project, during the associated fee sale large of quarter $XXX including revenues from

variability this in needs. As clients’ tied to our seen significant revenue has major quarters, prior have is business in typically core comparison source and activities to you

during our of our and to fourth our brokers to cost the or professionals have Third, services peak quarter. paid and commissions compensation-related costs financing typically seasonality

$X.XX of to million stock $X.X to expect deferred in quarter units $X.XX benefits is placed recognize an XXXX, the we Lastly, per fourth in settlement which related share. to additional windfall tax of the approximately to

of As a during share the reminder, we quarter the $X.XX per windfall fourth tax experienced benefit of year. last

experience will were that in units size settled. the benefit a stock issued connection this windfall in company’s not would been tax the of as majority of the IPO We XXXX with have deferred

the like I’d to for Operator? Now call open Q&A.

Operator

proceed first Please Instructions] with [Operator question Stephen William from question, comes Sheldon, Our Blair. your

Stephen Sheldon

questions. Yes, hi, Hessam and Marty, my thanks for taking

First, productivity in terms revenue as higher continued continued you to of more brokerage, professional and average even per trend add producers. to

maybe these the of sustainable factors, do productivity but driving few frame higher? you a about can just how what’s talked You view improvements? And you

Hessam Nadji

influence it’s as Sure. better really loan of and factors is really to In view. On focus one and spending averages. their time have to any really time you And to better long-term important productivity business can our be support, and trying take number a improving quarter, productivity, a administrative sales through of the support that with technology, business can of as on the much our their all development development and vigilant clients possible. professionals really as

we’re that things quarter-to-quarter. of up to show variety they just a from it’s really immediately doing don’t that. cause So And

particular quarter. quarter’s a But it than more is one process long-term in this with of results. much any pleased We’re it’s really

Stephen Sheldon

about as And talk you the quarter in brokerage it. in half can then, looking first into to and plans Got we’re here XXXX? the then of hire fourth the business maybe maybe

Hessam Nadji

Sure.

basically with years process in a hiring in and couple on a much consistent environment of make as support development division new don’t that very is, well level have business. this increased it through our they low change obviously. hiring at our the really the hasn’t changed team of regional our professionals that all and focus of And in who quarter-to-quarter. agent all the the Our at from of those directors experienced place remarks, we’ve together as managers, of very intact, managers programs formal to really it because happen from last and I focus Both hiring as my our employment specialty mentioned on is more as we traditional and are attracting book local more work quarter-to-quarter, unemployment, challenging

so fine-tune our And some really to have of programs. we

program out into going we hiring we’re competitive the be new and forward. sales we’re to to about other designed of continue expect We But that a to there. internship doing strategies attract have very talented terms good in couple feel that’s entries how employing the the of business and

Stephen Sheldon

October, – that’s in Any you’ve of as the trends quarter, against what kind more And yes, have through seen guess, But over have about, seen healthy, just comparison it, we puts thinking last think, in October, talks some just obviously fourth the major about, you Got market you any helpful. seen just broadly? I there. the highlighted I September tough just the you – – change about environment, then and the in guess, takes. I being overall environment and think

Hessam Nadji

What’s of equity capital. both interesting there’s interest, buyer is capital debt shortage coming that there’s no no industry, shortage the and into of

seeing the capital to coming of acquire build buyers new into actually We’re a terms formations new in entrants market, assets. new portfolio in and interested

we’re growth, rapidly. an the be good have asset have there, more valued. part is are in of of very uncertainty the that so and market. cycle so growing of the higher And of good one really on, looking And That’s for in terms price very isn’t have why in really the well, what sales environment should comes crux metrics, that in, marketplace, buyers have a of different rates, seeing and to performed at strong. no occupancies The the that expectation sellers challenge and then expectations across related equation bid-ask distress rent set spread overall perceived the set the who that defines interest much

you rent So good the growth, supporting really good good yields really really fundamentals, have marketplace.

bid-ask this in day a And we’re that changed it a marketplace. spread rising anticipate are very it’s hand, seeing change through in don’t all that all, every we On whole hasn’t It’s dynamics these the But interest as of whole we speak. of really amount you kind market. a that velocity lot and we the lot. active, limiting the just rates to healthy navigating other and have

Stephen Sheldon

it. And for I last Got then me. guess, one

the so of maybe there? pricing acquisitions? are you’re you about what Pinnacle, becoming far Just bigger Primecorp, seeing the pipeline, seen you’ve accelerating or on maybe talk And maybe comfortable with given pace McGill acquisitions pursuing and out acquisition environment either more the

Hessam Nadji

Sure.

case, back like and frothy. So opportunities that at commented looking it take pretty were didn’t few the That you years seemed that me expectations when we right. let feel was number the a valuation of we was

messaged times more just in to few past our valuation. begun quarters, most. a and attract on I’ve the we’ve platform the what of that’s And benefits much instead reasonable more now more and long-term several As focus part see the of of being expectations lot much us alignment

growth. We are fits actually want in a see to the they culture right and and win-win. for union And long a term, well that professionals with their the platform our very acquisition made we to similar most criteria far better is I’m every kind it to very result attracted to so that are of say that proud platform really

acquisitions. making organic tell drive literally these top-down very it’s so progress. of happy driving kinds organic to at of approach level of x how complete number our is opportunities an a and invest of in ought instead we these the of of transactions," deploy matchups And this And process let capital that and that, finding you to good good process saying, I’m really "We

size. of of number the some same talking actively firms, We larger, of are a of them to some are them are additional

really some back fit much for So into trying a matter us of and preconceived template. not it’s of kind so to

Stephen Sheldon

the color. Appreciate it. Got

Hessam Nadji

lot. Thanks a

Operator

proceed with Rahmani, question from KBW. your Please next Our Jade question. comes

Jade Rahmani

Thank much. you very

in a key creating track with into talent guys, be were to and local firms, growth. to other scaled You scale that footprint local and along pioneers submarkets able moving

with you same leasing opportunity appraisal market-based into kind wondering see the if expand to or Just the of local approach? any valuation

Hessam Nadji

Sure. Thanks the question. for

opportunity We of on more at that been But we be us. the fact financing might have an open interesting. be to couple always has firms our room and explored core years over those additional actually a effective so much different approached are business XX to We’ve options focus platform, we’ve our really that for investment to lines as add by expansion. and that don’t fairly lose proven business on want to to brokerage

serve. We have in every type product both virtually share we gain opportunity

offices opportunity ahead We course, growth have business and a financing of certain of significant our expansion opportunity has it. as growth of

so So core off leveraging opportunity we what the really far have too we’re good that the Until of of we good strengths the doesn’t within veer much in tapped very, stay to we opportunity, growth and sense our make from and so more really and more terms much very we’re what disciplined core at. it competencies. of very feel at potential

our said enhance the complementary have Now that, business. option is open having core that always to businesses

and business. may for appraisal, At the enhance example. explore financing a we mentioned one in investment future, way as point You to that our brokerage

our So organic every consider year, our our grow always really ideas. core of look priority right we’re – we those now, is But kinds plan strategic and at to business.

Jade Rahmani

interest this In sensitivity all-in you cap terms anticipated of properties factor financing of things? the are deals investors rate your to can looking X% How times the buy blended similar interest XX-year the us those in you cuts the are CEs Fed core yield rates some that about the in in to are X% those at client rate sense when rates and kind. and With color that of underwriting thinking mortgage responding with to range, the other at potentially and give to investors several point? raise base, the

Hessam Nadji

way layers people lot the overall make real an there’s a on decisions, Well, of a without the sure, a does the But it sales factor different in interest rate underneath major marketplace, the in and is, doubt. that. have movement for effect velocity

of strong and real rent with for growth because The is supports going demand They’re job which going are growth. a economy creates occupancies estate and most first why and therefore, important interest rates up? that, up solid

the moving with you level rates. at the higher the rent offsetting interest income property have So growth, along

pace, hyperinflation, very real historically been not estate good inflation good at which inflation some have a estate system You into because is rising for real And coming hedge. it’s the has inflation building. moderate also just a and it’s now

So very are positive. actually those dynamics

because valuation. also investment. a alternative create bid-ask affects immediate investors the does at it underwriting Now challenge And look it and

it’s So buy you’re return whole of get real renovations, or a looking at some to different layer value can alternative property you If a a value-add where other places that’s today. actually where create the observed that last a attractive we it Those number year benefits before even make system. has was more time estate reform over tax the importantly, to take the through reform. of commercial work you that investments. estate than real can versus enhancements the most why And tax investing

the marketplace digesting. is think I still

In has correction been expansion rulings to that today cyclically. it some in unlike have as a cycles, are the for way common of we Those cycle, confidence And fact, why important major the there’s things work still in overbuilt two And still estate [ph]. favorable. – in. us that factors unanswered is reasons one industry see it’s most the investing not here in think sitting positive has of that’s is time as overleveraged, most expansion several hasn’t lags coming more which that that which real present commercial to still questions and has been given hasn’t IRS been this are I this take through one going to its

Jade Rahmani

for in regarding [ph] theme terms market in example, currently? focused in roll buyer, focused of you’re – favorable and base treatment, their investments, which rules organizing on is the affluent to qualified zones, opportunity that client in In your changes middle estate tax an opportunity zones the equity ability gains into the the real is

Hessam Nadji

Yes, over it’s of garnered the from all country. a lot interest clients

the we new new of have law, In for outside to implications even the fact, interest begin that some of of up nuances upcoming people pop There speak to aspect understand to the interest seeing with in we of an tax a guest rules. And lot as sure. it. webcast are speakers is the

So been factor. yes, a absolutely positive it’s

Jade Rahmani

impact volumes? Is potential there quantify potentially XXXX to it material amount? way any Is a to the

Hessam Nadji

nuances an it It limited, geographies of the lot really strategy. are that coming will before fact that the as fairly be a and investor there and quantify has because of to are impossible into rules regulations and it to a its digest

mover a consider not in effect. the but I positive terms it’s certainly So would trends, needle it market of broader a

Jade Rahmani

question. the taking for Thanks

Hessam Nadji

a Thanks lot.

Operator

[Operator at I time. like And Instructions] Hessam call back to to would closing There remarks. for are this further turn questions Nadji the no

Hessam Nadji

up and you look wrap our our you fourth thank all the year. joining forward call to having Thank you third as for much, very quarter everyone, very quarter much. operator, call. you, Thank earnings We join we

Operator

This concludes conference. today’s

may your your disconnect participation. you time. lines this You for Thank at

Marcus & Millichap (MMI) 9 Nov 182018 Q3 Earnings call transcript