Greetings, and welcome to Marcus & 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 former presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Evelyn Infurna with ICR. Thank you. You may begin.

Thank you. Good afternoon, and welcome to Marcus & 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 and 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 statements 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 reconciliations 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 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 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 teams safe and ensuring business continuity; intensifying 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 15, the entire organization 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 a 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 the 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 through virtual career fairs and interviews with a number of successes that we're excited about. We view this period as an opportunity to bring highly skilled professionals to the firm, who will benefit from our stability tools and long-term growth plan. That said, the economic shock and real estate transaction disruption will be major challenges in overall sales force expansion for the foreseeable future. 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 a 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 the 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 reflects 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 with 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 bank's 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 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 turned 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 and 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 apartments 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 with 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 who are 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 Louie. Marty?

Thanks, Hessam. Total revenues in the first quarter increased 18.7% year-over-year to $191 million due to strength across all business lines. Revenue from real estate brokerage commissions rose an impressive 18.6% to $172 million, which accounted for 90% of our revenues, while financing fees increased nearly 12% to $15.4 million. Our private client market which accounted for 67% of real estate brokerage revenue increased 19% to $114 million due to a 17% increase in transactions, while revenue from our larger transaction business increased nearly 46% year-over-year to $29 million. Financing fees grew 12% to $15 million for the quarter, driven primarily by increases in both purchase and refinance transactions. Other revenue comprised primarily of consulting and advisory fees along with referral fees from other real estate brokers grew 74% to $3.5 million. During the first quarter, we executed 2,250 transactions for an increase of 15% from the prior year, while total sales volume for the quarter increased 19% year-over-year to $12 billion. We finished the quarter with 1904 sales professionals and 89 financing professionals for a total headcount of 1,993 for a year-over-year increase of 4%. As part of our continued efforts to shift our financing unit towards more experienced and productive professionals, we continue to evaluate our team to ensure we have the best players on the field. As Hessam mentioned earlier, despite the first quarter's decline in headcount, we were able to increase the number of transactions and volume for MMCC, demonstrating progress in our continued efforts to increase the overall quality of our sales force. Total operating expenses for the first quarter were $171 million, up 20% year-over-year as compared to $142 million during the year-ago period. The increase in total operating expenses in the first quarter was primarily the result of higher cost of services. Cost of services rose 24% year-over-year to $114 million due to an increase in real estate brokerage commissions. As a percent of total revenues, cost of services was 59.6%, an increase of 250 basis points over last year. This was due to an increase in the proportion of transactions closed by our senior investment sales professionals. SG&A increased by 12% year-over-year to $55 million, primarily due to increases in sales support, sales recognition programs related to 2019's revenue performance, acquisition-related expenses, legal costs, expenses related to the renewing of office leases, as well as some initial costs related to workforce reductions. These increases were offset by a reduction in compensation-related expenses. Diluted earnings per share for the quarter was $0.33 compared to $0.40 per diluted share in the year-ago period. Our tax rate for the quarter was 31.2% versus 26.6% for the first quarter last year. The change in tax rate was primarily driven by the effect of permanent items including our deferred compensation plan assets as well as income generated from higher-taxing states or jurisdictions. Adjusted EBITDA decreased by 3.4% to $22.4 million during the quarter, while our adjusted EBITDA margin was 11.7%. Given the uncertainty surrounding the impact of the COVID-19 pandemic, we expect our adjusted EBITDA margin to remain under pressure for the foreseeable future. Moving on to the balance sheet. We finished the quarter with strong liquidity levels with approximately $337 million of cash and core cash investments. Even with the strong balance sheet, we have taken significant actions to reduce expenses and preserve capital. Our top priority for capital deployment is to ensure the continued smooth execution of our day-to-day operations provide the most current market research to our agents and clients and to continue to invest in our platform. In addition, we believe the current business environment will provide incremental opportunities to acquire complementary businesses and brokerage teams. Before closing, I would like to point out a number of key items and highlights, which may have an impact on our 2020 results. First, the current health crisis and the subsequent shelter-in-place orders have limited the opportunity for our agents to meet with clients, underwrite and inspect properties, and in many cases determine property values. These impediments have also negatively affected lenders, appraisers, and other ancillary businesses critical for our functioning investment sales market. While these serious challenges will continue to negatively affect our business, we believe our business will improve as the physical impediments are lifted. Second, we are reducing controllable expenses by 25% to 30% over the next few months. As such, we believe we will be able to achieve savings in total SG&A, which includes fixed costs between 14% and 17% during that time. The cadence of adjusted SG&A should be similar throughout the remainder of 2020. These overall reductions include salary cuts as well as ongoing investments in key areas I mentioned earlier. Third, the cost of services will most likely be higher than usual as senior agents, who are typically on higher commission splits, closed a higher percentage of our deals during times of market disruption. As such, we expect cost of services during the next few quarters to be in the range of 62% to 64%. Lastly, we expect our tax rate to be approximately 31% to 33%. I would like to now open up the call for Q&A.

Thank you. We will now begin the question-and-answer session. Our first question comes from the line of Blaine Heck. Please proceed with your question.

Thanks. Good afternoon, everyone. I have a broader question for Hessam. You mentioned that your transaction volume performed well in the first quarter. However, as you've noted, the situation has changed significantly in the second quarter. Now that we are over a month into the second quarter, could you share what you've observed in April regarding transaction activity? Additionally, what might be a reasonable expectation for a decline in deal activity in the second quarter if the current trends continue through June?

Let me share my thoughts on the question. You are correct. In the first quarter, we experienced a couple of very strong months in January and February, and March started off strong as well. However, as the month progressed, the effects of shelter-in-place and a nearly frozen capital market began to impact transaction velocity. A useful benchmark is RCA's published transaction numbers for the first quarter, which indicated a 7% decline overall. In their April figures, they reported about a 44% decline for March. This suggests that as the marketplace constraints continued to intensify, transaction velocity likely decreased even further than the March figure. This trend is reflective of the broader market dynamics we are facing. Additionally, we are currently in an unprecedented period. We've experienced downturns before, like the one in 2008-2009, which unfolded over roughly eight quarters from peak sales activity to the bottom. In contrast, this disruption has occurred in just one quarter. While this situation represents a significant and steep disruption, we expect it to be temporary due to the combination of market disruptions related to financing availability, pricing uncertainty, and economic instability, along with the physical challenges of conducting business amid shelter-in-place orders. Therefore, when these factors are combined, they create the extreme disruption we anticipate will be temporary in the second quarter.

All right. That makes a lot of sense. It's very helpful color. And then my second question, just on the recruiting and retention side of things. I think there seems to be kind of two competing forces there in my estimation. And correct me if I'm wrong, but it seems like retention could get a little bit tougher the longer the crisis persists just given that your brokers are paid on commission alone and some might not be able to bridge that gap between earlier this year when the investment sales market was wide open and whenever it recovers. But then, you've also got the opportunity to maybe go out and use these recruiting fairs you mentioned in your prepared remarks or even acquire some of these smaller firms like you have been doing, and hopefully the pricing on those deals has been improving for you guys. But with those acquisitions, obviously come additional professionals. So, I guess, is that the right way for us to be thinking about it? And how do you think those competing forces kind of net out this year? Does your workforce increase or does it decrease?

Sure. Well, if you look at history, your comment has confirmed that in a tougher market environment, newer professionals that just don't have experience yet or their client relationships find it harder to basically survive in a lower velocity environment. We've seen that happen many times. Our normal fallout rate of newer professionals increases during market disruptions. I don't think this will be any different. So, there will be a higher degree of natural loss of newer and less experienced brokers because of that. At the same time, to your point, we are shifting more of our hiring towards experienced professionals. That's going very well. If anything that might pick up. In fact, we are working very hard to make sure it picks up. And on the front of the offensive front of hiring new talent, we're not stopping the interviewing, the selection, the evaluation of new and experienced professionals. If anything through these virtual fairs and virtual interviews, we've kept that and focused very much a part of what our managers do and plan to continue to do so because there is still talent out there. There are a lot of people who like this business. And whether there's a downturn or not, they're going to want to join our company. But at a time of disruption, there are usually fewer people that are looking for a commission-only type of a structure. Now, we have grown our teams in the past and we are able to add a lot of newer folks as mentees or as interns within some of our existing teams. That's another strategy that's been working very well for us. Net-net this year is going to be a very challenging time for us in terms of increases to the sales force. It's very hard for me to forecast where we'll end up for the year. Part of that has to do with whether this is a one-quarter disruption or a two-quarter disruption and the time frames being very uncertain at this point. But we're not slowing down any of our traditional efforts both new agent recruiting and training and experienced agent recruiting and acquisitions because of the disruption.

Great. Thanks a lot for the color.

Thanks for your questions.

There are no further questions. I'd like to hand it back to management for closing remarks.

Thank you, operator, and thank you to everybody for joining this call. We look forward to getting back on the road and seeing a lot of you in person in time. We wish everyone health and safety as the economy reopens being very careful, related to health and this virus stays a very, very high priority, hopefully not just for our company but for everybody, so that we don't have the risk of another wave of this disruption. Thank you very much and the call is adjourned.

This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.