Greetings. Welcome to Marcus & Millichap's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Evelyn Infurna. 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, 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, 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 on 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 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 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 revenues coming from our more senior brokers, similar to past market disruptions. Revenue was supported by the residual momentum of our record pipeline prior to the pandemic and the 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 and strategic acquisitions. 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 highlights 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 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 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 brokerage transaction decline of 41% was significantly less than the overall market decline and suggests market share gain. We believe the market's need for real-time information, grounded perspective, and our technology readiness have positioned MMI to touch and ultimately service the largest investor pool in our history. While the still hampered real estate transaction market may not facilitate revenue growth for some time, the eventual release of pent-up demand points to a robust recovery in real estate transactions, which MMI will leverage to propel forward. To this end, 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 expanding the platform through accretive, 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, self-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 collections 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 average 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 in 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 have 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? Is the exodus from urban centers we currently see a 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. Tight 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 make fundamental improvements in all aspects of the company. Our cost containment plan is nimble and updated in real time as we stand ready to deploy resources as the recovery begins to take shape. Last but certainly not least, we are carefully deploying capital towards strategic investments in technology, new tools, and acquisitions. We believe this will not only elevate our market leadership in the eventual cyclical recovery but significantly strengthen 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 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 17. Steve brings an extensive background as a 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 and Chief Financial Officer of InTouch, a remote healthcare provider, which was recently acquired by Teladoc in a $1 billion 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 of 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.

Thanks, Hessam. Total revenue in the second quarter declined 44% year-over-year to $117 million, reflecting a rapid and broad-based decline across all of our business lines as a consequence of the health crisis. Revenue from real estate brokerage commissions accounting for 88% of our revenue fell 45% to $103 million, while financing fees fell 28% to approximately $13 million. Our private client market segment, which accounted for 69% of our real estate brokerage revenue for the quarter, was down 45% to approximately $71 million with transactions falling by 43%. Revenue from larger brokerage transactions for the same period also contracted to $16.4 million for a smaller decrease of 37% due to an easier comparable to last year. Both market segments were affected by declines in multifamily and retail transactions, our largest product types. Although apartments, single-tenant, and necessity retail have been impacted much less by the shelter-in-place, these sectors' overall declines reflect the broad nature of the market disruption. Financing fees down 28% to $13 million fared better, bolstered by an active refinancing market. Refinance transactions, which accounted for 66% of total origination fees, declined year-over-year by just 5% for the quarter, which helped offset a much larger 38% decline in the financing of purchase transactions. Financing revenue from private client and middle market segments reflected moderate declines of 2.6% and 6.5% respectively during the quarter. However, the financing fee of larger transactions declined 50% during the same period. Other revenues, comprised primarily of consulting and advisory fees along with referral fees from other real estate brokers, fell 58% to $1.3 million for the quarter. During the second quarter, we executed 1,587 transactions, down approximately 37% from the prior year. Total sales volume for the quarter was $6.9 billion, a 47% decline from last year. Sequentially, transactions and volumes were down 29% and 41% from the previous quarter respectively demonstrating the velocity and severity of the pandemic's impact on real estate transaction markets. Lower activity levels during the quarter combined with higher percentages of expired listings and died deals resulted in declines in our listing inventory and pipeline of deals under contract. While our overall inventory aging increased during the period, listings that were properly priced were closing within normal timelines. This highlights the importance of price discovery, which will take some time to emerge, but will eventually drive an increase in sales. Despite the near-term disruption, we remain focused on the opportunity ahead. For example, we finished the quarter with 1,963 sales professionals and 85 financing professionals for a total headcount of 2,048 for a year-over-year increase of 4.2%. The change in the quarter also reflected our ongoing effort to shift MMCC towards more experienced and productive professionals. However, it is important to note that we've increased our brokerage salesforce by 101 net professionals in the trailing 12 months. This is through our management team's creativity, use of technology, and social media to hold virtual job fairs and interviews. Total operating expenses for the quarter were $120 million, down 34% year-over-year as compared to $183 million during the year ago period. The decline in total operating costs reflects lower cost of services due to lower total revenues as well as cost containment efforts implemented. Cost of services declined 42% year-over-year to $74 million for the quarter. As a percent of total revenues, cost of services was 62.8%, an increase of 180 basis points over last year. As Hessam pointed out, this is due to an increase in the proportion of transactions closed by our senior professionals in a market disruption. Because of their experience, they closed a larger proportion of deals in the quarter. The recent addition of more senior agents also contributed to the higher rate. As a result of our expense cuts, SG&A decreased 18% to $43.5 million for the quarter. Controllable expenses reduced 41%, primarily due to decreases in executive management and staff compensation and benefits events, travel and entertainment, marketing, and legal expenses. For the quarter, we broke even on a diluted earnings per share basis compared to $0.54 per diluted share for the same period last year. Our tax rate for the quarter was 28.4%, in line with the second quarter of last year. Adjusted EBITDA decreased by 87% to $4.2 million with an adjusted EBITDA margin of 3.5%. Given the current economic uncertainty, we expect our adjusted EBITDA margin to remain under significant pressure for the foreseeable future. Moving on to the balance sheet, we finished the quarter with strong liquidity levels, with approximately $322 million of cash, cash equivalents, and core cash investments. Given the importance of cash preservation at a time like this, investments and acquisitions are scrutinized heavily for short-term risks and strategic value. 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 brokers and clients, and continue to invest in our platform. As expected, the market disruption has resulted in increased opportunities to acquire complementary businesses and brokerage teams which we are actively pursuing. The strength of our balance sheet has given us great flexibility to invest toward our strategic initiatives. 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 health crisis economic and physical impediments are expected to negatively affect the investment sales and financing markets in the short term. As such, considering second quarter's performance included some residual transactions from the first quarter, we believe the cadence of transactions will be slightly lower in the third quarter. Second, beyond this challenging time, we believe our business will improve significantly once there is a resolution to the health crisis, thanks to our increased client outreach and mind share, continued hiring and training, as well as the deployment of new brokerage tools. Third, we continue to manage our controllable expenses tightly. As such, we anticipate the cadence of SG&A will be similar throughout the remainder of 2020 unless business dramatically improves, in which case expenses may increase accordingly. Fourth, cost of services will likely trend higher as senior agents, who are typically on higher commission splits, close a higher percentage of our deals during times of market disruption. Accordingly, we expect cost of services during the second half of 2020 to be in the range of 64% to 66%. Lastly, we expect our tax rate to be approximately 29.5% to 31.5%. In closing, after 10 years as the Chief Financial Officer for Marcus & Millichap, I'm looking forward to handing the reins over to Steve, as I focus my efforts towards a smooth transition as well as initiatives aimed at improving and growing the company's platform. Steve's background will certainly give our senior management team added strength as we navigate towards our next phase of growth. With that, I'd like to open up the call for Q&A.

Thank you. Our first question is from Blaine Heck with Wells Fargo. Please proceed.

Great. Thanks. Good afternoon. Can you just talk about the amount of competition your agents are facing to win deals, when there are so few transactions on the market? And whether that could potentially have any effect on the commission rate given that everyone is kind of reaching for those same deals?

Blaine, good afternoon. Good to have you on the call. Obviously, competition is a constant in our business. But I will say that in market disruptions, especially this one, we've seen a lot more of an advantage in increasing our client contact, our brokers really staying the course and being in front of clients, and our advantage in having had lots and lots of relationships, especially on the private client side, for many years. So that is all paying off in the fact that we were able to complete almost 1,600 transactions in the quarter, which reflects what we believe to be share gains. In terms of the commission rate, we have not seen any kind of a degradation in what our clients are willing to compensate us for. If anything, because there is a market disruption and more of a problem to solve for our clients, we believe our value is even more pronounced than in a normal market environment. So, no concerns in that area at all.

Great. That's helpful. And then Hessam or maybe even if Marty wants to chime in in his new role, can you just talk about the opportunity set that you guys see in front of you with respect to business acquisitions? Are you seeing a lot of agencies out there that are much more willing to entertain an offer than maybe they would have been five months ago? Or is it still too early for that sort of motivating selling to occur?

Well, first of all, this is Hessam. I'll start with some comments. First of all, the business itself is really temporarily in this logjam that we're experiencing because of the uncertainty around pricing and of course the economy and so on. Once the building blocks of a transaction become more normal, such as visibility on pricing, a little bit more flows on the financing side, and a little more clarity on where the economy is, we're expecting a robust recovery to form because of that. In the meantime, we're seeing a lot of the companies and groups that we've had discussions with over the past several years, that had decided to stay the course as independents or wherever they are, come back to us because of the fact that they're seeing Marcus & Millichap play a leadership role in front of clients in terms of branding, in terms of research. The outreach that we have executed over the last few months is having as much impact on potential candidates for us as it is on potential clients. So interesting that you should ask this question because a few of our discussions that are going on right now are renewed ones from some parties that we talked to before. And for whatever reason, we didn't find common ground. It's not so much of a pricing adjustment per se, as it is the realization of the value of the Marcus & Millichap platform. Now in terms of our underwriting and valuing companies and groups that we're looking to acquire, of course, all of that has been adjusted to accommodate for the fact that currently we're in a bit of a window of uncertainty. But almost every one of these discussions are about the long-term, about synergies, and about how coming together really helps the target company as well as Marcus & Millichap. We've done a very tight job in making sure that the companies we're talking to are complementary; that they bring coverage in a property type or a market area where we don't have coverage, especially on the financing side. All that makes it far more of a tight fit than just randomly trying to add headcount.

Great. That's helpful. Thanks, guys.

Our next question is from Josh Lamers with William Blair. Please proceed.

All right. Thanks and good afternoon. And thank you, Marty, for your efforts over the years.

Thanks, Josh.

Hi, Josh.

Hi. Hi guys. So just want to start with headcount. Better net headcount growth in the quarter than we had expected, and you noted that you're continuing to do some virtual recruitment and interviews, which is good to hear. But are you finding it easier to keep brokers in this environment as well, so it's helping on the retention side? And then on the other side of the pandemic, would you allow for upside in your recruitment efforts? Or do you think the normal course of hiring that you guys have targeted in the past still makes sense?

I'm not sure if I understand the second part of your question. Can you repeat that, Josh?

Sure. Yes. I'm just wondering if post-pandemic, given the success that Marcus & Millichap has seen as well as some of your peers in terms of taking market share, you've obviously got better capabilities. I'm just wondering if you're going to find post-pandemic, maybe it's easier to recruit agents, and as a result, you would allow for more upside than your targeted net additions per year. Or if that pace of hires will continue to make sense and that's what you'll shoot for.

Thank you. Now I understand your question. Let me address the first part of the question, and that has to do with the fact that our ongoing hiring is resulting in bringing on a lot of new talent, a lot of talent without prior experience as well as our focus on experienced agent hiring. Right through the pandemic, we've never slowed it down. In fact, if anything, we tried to speed it up. At the same time, while that effort brings in new people, a more difficult market environment is naturally going to increase the turnover rate and the fallout rate of trainees and newer agents that have been with the company for two years or less because it is a challenging business, and it becomes even more challenging during times of market disruption. That’s a very normal pattern that we've seen. We do believe that after the pandemic and really speaking of real-time during the pandemic, the value of the platform is becoming more appreciated by the marketplace, whether it's among new people frankly as well as experienced seasoned brokers. So we believe it's going to help us now and in the future. Does that mean we're going to change our target number of net hiring? It's too soon for me to declare that. Because remember the other side of that equation is the higher fallout rate in a market disruption. So we're just basically putting one foot in front of the other in terms of making sure we're in front of the right people, we're applying the right evaluation, filtering, and interviewing process with the candidates that are coming in and bringing on the best and brightest every which way we can.

Great. Thank you. Now moving on to the client outreach and marketing efforts that you guys have continued for a couple of quarters now maybe and then some. I'm just wondering how you're finding clients and prospects. Are they still receptive to that kind of increased outreach and informational webinars? Or do you end up hitting some kind of plateau at some point with that effort?

Well, I'm not so sure if we're going to plateau anytime soon. I'll give you a couple of examples, Josh. In late March, when I hosted our first broad client outreach after the pandemic had really impacted the markets, we had 18,000 people attend our webcast, which was a record. I think the previous record for Marcus & Millichap had been around 11,000, and that was in advance of the 2017 tax reform. So when there is market news, people rely on us for guidance, and it's been a major advantage of years of building our research reputation, transactional leadership, and of course, technology leadership. Another case in point that I can share with you, Josh, is our annual ICSC Retail Conference which we host in Las Vegas as part of Recon in May of every year. That event usually draws a couple of thousand clients because it's a physical event. We, of course, held it virtually. We always feature a leadership panel of major CEOs of retail owners and public and private companies and so on. Instead of our typical 2000 clients being the audience, there were 10,000 clients on that particular webcast. So the silver lining of both our investment in research technology and the massive outreach relationships that our 2000-plus salesforce maintains all the time is the added need for information and our advertising and branding that we are available to help drawing in these kinds of numbers. We're very confident that this level of escalated touch points and interactions with clients and follow-up after the events is eventually going to generate more business and, more importantly, more long-term relationships.

Yes. That's helpful and good to hear. And then last one for me and I know it's still maybe a bit early to ask but seeing as how we're approaching November sooner rather than later 1031 is back on the table for high earners. And I'm wondering to what extent that tax benefit has been leveraged in transactions across your platform today? And maybe how significant would it be if there were changes to that?

Sure. It's remaining an important part of our business. Typically, somewhere between 25% or so of our transactions involve 1031 exchanges, and that's been a steady part of our business for a long time. As a reminder, there have been many periods where the 1031 Exchange was a subject of discussion whenever there is a change in administration or discussion of tax laws. And one way or another, it's very hard to predict what will happen with the election outcome. If anything actually does take place that will affect 1031 Exchanges. We've always felt that if for any reason 1031 Exchanges were to be eliminated, that doesn't necessarily eliminate the need to sell. It is of course an attractive vehicle for deferring taxes for many of our clients, but it's not the only reason that they transact. There is always a driver behind that transaction that is at the root level of what the client needs. Typically, for the private client, it's the personal drivers, debt, divorce, partnership breakups, a particular asset reaches a level where it makes sense to take some profits and move money around and so on. We're not overly concerned about it at all. There's been lots of rhetoric around this topic for many years. And so far our clients are not reacting one way or the other. Business on that front is actually robust right now because of the fact that the capital that we bring out of apartments, especially into 1031 Exchanges of capital into single-tenant net lease retail is the most popular movement of capital. Where a lot of apartment owners run their course of investing in that product type and want a less management-intensive investment vehicle through a single-tenant net lease. We're also seeing the movement of capital from apartments into other property types, but the single-tenant net lease is the most popular and is quite robust right now.

Okay. Thanks for your time.

Thank you, Josh.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Hessam for closing remarks.

Thank you, Operator, and thank you for attending our call. We look forward to interacting with you during the quarter, maybe not in person, but definitely via video and looking forward to getting back to normal and being able to get on the road and see many of you in person. Thank you. The call is adjourned.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a pleasant evening.