Greetings, and welcome to the Marcus & Millichap First Quarter 2014 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, Lasse Glassen. Thank you. You may begin.

Thank you, operator. Good afternoon, and welcome to Marcus & Millichap's 2014 First Quarter Conference Call. With us today are Marcus & Millichap's President and Chief Executive Officer, John Kerin; Chief Strategy 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, intend, plan, believe, seek, could, estimate, judgment, targeting, should, 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, one, general economic conditions and commercial real estate market conditions, including the recent conditions of the global markets and in particular, the U.S. debt markets; two, the company's ability to retain and attract transaction professionals; three, the company's ability to retain its business philosophy and partnership culture; four, competitive pressures; five, the company's ability to integrate new agents and sustain its growth; and six, other factors that the company describes in its public filings, including the risk factors included in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 21, 2014. Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, certain of the financial information presented in 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, presents reconciliations to the appropriate GAAP measure and explanations to why the company believes such non-GAAP financial measures are useful to investors. Finally, this conference call is being webcast. The webcast link is available on the Investor Relations section of our website at www.marcusmillichap.com, along with a slide presentation that you may reference during our prepared remarks. With that, it's now my pleasure to turn the call over to Marcus & Millichap's President and CEO, John Kerin. John?

Thank you, Lasse, and thank you, everyone, for joining us this afternoon to discuss our financial and operational results in the first quarter of 2014. I'll begin today's call with an overview of the company's performance and a review of our operational highlights in the first quarter of 2014. Hessam Nadji, our Chief Strategy officer, will follow with an update on general market conditions; and Marty Louie, our Chief Financial Officer, will conclude by providing additional details on the company's financial results. We will then open up the call to your questions. We are off to a strong start in 2014 with excellent results during the first quarter of the year. During the quarter, we were able to meet or exceed our goals for all the key metrics vital to our performance. This includes revenues, earnings, headcount and productivity. Before I highlight these specifics, let me reiterate that in addition to our successful execution, there was also an unusual market factor in the year-over-year comparison for the quarter. As you might recall from our year-end 2013 earnings call, anticipation of the rising capital gains tax rates accelerated many transaction closings during 2012. This in turn elevated closings for 2012 and reduced sales activities for the first quarter of 2013. At the top line, first quarter revenue was $114.6 million, increased more than 65% compared to the same period in 2013. At the same time, adjusted EBITDA of $13.5 million was more than 3x higher than the prior year. Our performance during the quarter was driven by ongoing strength in our core apartment and retail property types, particularly in our core private client segment dominated by sales in the $1 million to $10 million price range. Private clients have become increasingly active in the marketplace, thanks to improved property fundamentals and…

Thank you, John. Good afternoon, everybody. My comments today are intended to provide an overview of the commercial real estate market, and therefore, are not necessarily specific to Marcus & Millichap. In the first quarter of 2014, we saw the continuation of 4 positive trends in commercial real estate investment. These include steady job creation, improving property fundamentals, low interest rates and ample availability of financing. During the quarter, nearly 600,000 jobs were created, while following upward revisions to prior estimates, which is an important indicator of a strengthening labor market. We have now recovered almost all the 8.7 million jobs that were lost during the Great Recession. In fact, private sector employment is now well ahead of the 2008 peak, putting the economy on strong footing. The steady but less than spectacular job creation trend that we've seen over the past few years resulted in an ideal combination of further occupancy improvements throughout all commercial property sectors while keeping interest rates stable during the first quarter. In the 4 major property sectors, apartments maintained their lead with an average occupancy rate of 95% nationally, and retail occupancy aged up 30 basis points year-over-year to 93%. These are the 2 leading business segments for our company, and we're seeing strong investor demand as a result of their healthy fundamentals. The industrial sector also showed further strength with a 92% occupancy rate, followed by office properties, which had an 84% occupancy rate at the end of the first quarter. As I mentioned on our year-end call, the supply side of the market remains in check, which is setting the stage for an emerging rent increase cycle. Construction starts during the quarter for office, retail and industrial point to new supply levels that are well below long-term averages. On the other hand,…

Thank you, Hessam. Now turning to our first quarter 2014 numbers in more detail. Total revenues for the first quarter of 2014 were $114.6 million compared to $69.4 million for the same period in the prior year for an increase of $45.2 million or 65.2%. The increase in total revenues is primarily a result of increases in revenue from real estate brokerage commissions. Revenues from real estate brokerage commissions increased to $104.7 million in the quarter from $61.2 million for the same period last year, an increase of $43.6 million or 71.2%. Revenues from financing fees generated from our Marcus & Millichap Capital Corporation, or MMCC, increased to $6.1 million from $5 million in the first quarter of last year for an increase of just over $1 million or 21.7%. Other revenues of $3.7 million were up 18.5% compared to last year. As John explained earlier, our first quarter revenue's [ph] gross was very strong. However, since a portion of our year-over-year growth was due to investors' actions related to the rise in capital gains tax rates effective January of 2013, we expect year-over-year growth rates to be more balanced in the remaining quarters of 2014. Now let's take a closer look at some of the key revenue drivers within our real estate brokerage platform, which generated more than 90% of Marcus & Millichap's total revenue in the period. For the first quarter, sales volume was $4.4 billion or up of just over 50% from $2.9 billion in the first quarter of last year. The total number of transaction was 1,181 for an increase of just over 37% from 861 transactions for the first quarter of last year. The increase was primarily driven by a combination of a 16.5% increase in the average number of investment sales professionals, 37% increase…

[Operator Instructions] Our first question comes from line of Mitch Germain with JMP Securities.

Just curious, why is it so hard to increase your presence in the office and industrial sectors relative to some of the other sectors?

This is Hessam, Mitch. I'm not sure if I would agree that it's so hard. It's just, for us, it has been more of a recent focus, given the fact that the company really grew its footprint in the early 2000s using our main property types of core expertise, apartments and retail. And then growing, in our growth plan, we sized the markets and our strategy was to expand into other property sites. So it does require a different training. It does requires a different background and tools that are customized to office and industrial and has really more recently in the last 2 years or so, become more of a focus.

Got you. And has the public currency since the IPO, has that helped your efforts in recruiting experienced professionals?

Yes, it has. I mean, we've always been looking for experienced professionals. I think the fact that we're a public company today has given us bigger exposure for groups to even contact us, in some cases, to see what we're all about, but I think it's helped us a lot.

And then those type -- tuck-in type deals, I mean, I know it's only been 2 quarters, but is that -- how would you characterize the pipeline for those sort of transactions now?

This Hessam again. We're actively talking to a number of experienced teams around the country. It's certainly not all that unusual in terms of the number of discussions that we have. And also, the additional comment on your question regarding currency, it's really more about the company getting more visibility as a public firm and the additional branding that has occurred because of our public status than it is directly related to the currency because the experienced teams that we've hired really are more excited and engaged with our platform and our management support and tools than they are really the currency.

Got you, got you. Two more for me. One, are the client -- the private clients, are they as -- as they sensitive to interest rate moves? Or are they kind of underwriting those gradual increases that you referenced in your prepared comments?

Well, I think everybody in some way, shape or form is sensitive to interest rate moves but I think the private clients are flexible enough to be able to look at a project and decide whether or not it's a good project, if interest rates are going to go up 0.25 or 0.5 point at some point. So it's -- I think everybody's underwriting. Everybody's preference is a little bit different, but we've seen interest rates rise a number of times, including last year, a little bit and we didn't really miss a beat as far as our productivity and our closings.

Right. And then thoughts on potential dividends?

Yes, Mitch, this is Marty. The thing is, is that we'll continue to monitor our cash position and our future cash needs. And we'll make the recommendations to the Board at the appropriate time.

Our next question comes from the line of Keane McCarthy with William Blair.

First, I mean, the average number of transactions per sales broker increased pretty nicely to a little under 1 and I know, Marty, you had said that some of that increase was just because of reverting back a little bit from the normalization of Q1 of '13. But still, I mean, that ticks up nicely from that 0.75 in Q1 of '12. So I was just curious, if there are any other specific inputs for that increase. Like, were some of the more tenured brokers doing the lion's share of the work or just some of the less experienced guys ramping up a little bit sooner?

This is John, Keane. Yes, I think some of our -- we started to recruit 18, 24 months ago to start to develop more agents. And as the agents develop, they do more transactions. So I think you're right on along the lines that some of the agents have matured and started to do more transactions. And also the fact that 2012, we closed a lot of transactions, it took us a little bit of time to reload. And I think that in the first quarter of '13, you saw the effects of the reloading.

And hey, Keane, it's Marty. And I think you'll see in those metrics, we did get an increase in our average fee percentage, too. So I think that is in correlation with what John kind of alluded to, that we increased our number of transactions in the $1 million to $10 million.

Okay. And then regarding office expansion, you guys have recently opened 3 offices in Canada as well as extended the IPA capability into the Portland market. So nice expansion there. But I was just curious, what are the driving forces behind that expansion? And then just to get your mindset on average, what is kind of the duration where those offices transition from being maybe a net cost to a net benefit center?

This is Hessam. I'll answer the first part of the question that has to do with the strategy for Canada and the IPA expansion. On the Canadian side of it, obviously, I think that most people recognize it's a -- of the 12% or so of the commercial real estate sales that are directly attributable to foreign investors, Canadian investors make up the lion's share of that, roughly 35%, 40% of that. So about $12 billion of capital was invested by Canadian investors in the U.S. last year. And so it's a significant cross-border movement of capital. And for our system of servicing the private client in particular that's looking for different investment options and being able to basically leverage our platform for that audience, it was a natural expansion of what we do. And so strategically, it made a lot of sense for that expansion. As far as IPA is concerned, we are growing that part of our business in a very strategic fashion because of some presence in major metros that are value add to what we do nationally. Boston was another major metro where we brought in a very tenured, very experienced team to IPA. But again, as a reminder, really, IPA is an extension of our private client market because so many of our private clients are now investing in larger deals, and our institutional capability certainly has become far more competitive. But it's much more of a supplement to our core business focus of the private client. Marty, do you want to answer the second part of the question regarding the...

Yes, sure, no problem. Yes, there is cost related to opening up new offices, especially in a different country. So provided that the market continues to progress and the property economics are -- continue to stay positive, I wouldn't be surprised that, by the end of 2015, that we're in the black.

Okay. And then shifting focus to MMCC a little bit. Just curious how you evaluate what a successful MMCC presence looks like. Maybe if you could provide like a bookend in terms of internal capture rate from your guys' end and maybe a more established office gives you guys versus one of your newest ones provides.

This is John. What's a success? I mean, I really believe that -- here's what we've done year-over-year in our capture rate. We moved our capture rate from up from 4 point...

8 -- 4.4 is...

8.1, okay? So that's something we focused on and we talked about that at the end of last year, too. As far as offices that are more mature, absolutely. I mean, you have a lot of senior agents. You have a lot of senior originators. They're going to probably do more transactions. And again, what we were talking about before was we have some offices that did not even have any representation. We've actually filled in some of that over the last quarter though we maybe only have -- we have 12 offices right now that doesn't -- that don't have representation from our mortgage origination side of it. But the numbers are up, like we talked about the gain of 16% quarter-over-quarter. So we're moving in the right direction.

Yes. I think if you look at the productivity levels of those loan originators for the last couple of Q1s, that we have increased year-over-year for the last 2, 3, 4 years.

Yes, definitely. Okay. And then last question for me. Just given you guys' scale in the private client segment, I think, with, what, over 70-plus offices, is there a way that we can think of kind of cross-platform transactions this quarter and maybe how that's compared to previous periods? And I guess what I'm trying to understand or better appreciate is kind of the market connectivity or the holistic view that you gave the seller or buyer. So basically just a larger inventory set that they can choose from versus some of the peers out there.

Well, let me see if I can take a stab on that one. This is Hessam. What happens frequently is we have a private client that has worked with us over the years that built up some equity in a number of properties. And we're seeing more and more of those clients wanting to consolidate their equity into fewer higher-quality assets. Really had to do with wealth transfer, estate planning and so on and so forth. So just in the last, I would say, 2 to 3 years, we've seen a growing number of our private clients become active bidders on our institutional inventory, which is why we created IPA, and we've now created a platform for our more senior agents that are doing some institutional business to make this capability available to our private clients. And then going the other way, we're seeing a lot of our institutional clients and funds co-invest with joint venture partners that are really local operators that operate in that $10 million to $20 million. That seems to be their sweet spot. They don't really go under $10 million that often. But because, again, because of our footprint and market presence, we're able to help them match their capital with the right inventory. So that's how we're basically bridging the private and institutional capital markets. I hope that answered your question.

Yes. I guess maybe asked a different way, is there a way to kind of quantitatively tell us, as far as how many of the transactions that you guys are doing or maybe the potential buyer is located in Southern California but -- and his representation as a Southern California broker, but maybe they've got a nice piece of property in the Northeast or the Midwest. Can you maybe speak to, is there a percentage of the transactions that are kind of that cross-metro angle?

Oh, I'm having a better understanding of your question now. I would say at least 30% to somewhere between 30% to 40% of our transactions involve an out-of-area buyer. Now that could be somebody that is buying from Northern California into Southern California or it could be somebody that is buying from New York into Southern California. The more important point is that because of our information sharing and the platform that we have in place and that 1,300 of our professionals have access to the inventory, the fact that they're exposing that inventory to literally hundreds of potential buyers and then tens of potential bidders in every situation. The best and final buyer represents the numbers that I was talking about. But the marketing process and the bidding process actually opens up the marketing to a far larger number of people from out of market. That's the whole essence of how our system works.

[Operator Instructions] Our next question comes from the line of Phil Stiller with Citi.

I guess I wanted to ask about revenue seasonality as a start. I think Marty, on the last call, you talked about first quarter representing somewhere between 17% to 20% of revenue. I know the year-over-year comp was very easy this quarter. But is there anything that you guys saw in the first quarter or seeing in the pipeline that suggests that, that historical pattern shouldn't hold this year?

Yes. Yes, it's -- we really did have a great Q1 but I think if you kind of look at our current pipeline as well as the seasonality weighting, the seasonal weighting of the Q1s during the frothy year or years like 2004 to 2006, I think I wouldn't really be surprised if the seasonality weighting of Q1 at the end of year ends up being like 1 or 2 points higher than the high side of my range.

Okay, that's helpful. And then the average transaction size of the brokerage business, I guess you're up 10%. I understand the normalization of the commission rate impacting the commission size. But was there anything unique that drove a 10% increase in transaction size this quarter?

Yes. I think if you look at this Q1 compared to the Q1 of 2013, I think we noticed a higher number of transactions in what we call hybrid transactions. Those are transactions in the $10 million to $20 million range. But in terms of the fee increase, the increase in our fee percentage, we've definitely seen a large increase in our core business, the $1 million to $10 million, where the fee percentages are higher.

Okay, that makes sense. And then, John, I think you mentioned retail was 44%, which is bigger than multifamily. Is there -- are you guys seeing any changes in the retail dynamics? I know that's normally the second largest segment, so it seems like it was a pretty good growth year-over-year.

Right. So 44% was really the transaction volume and we did a lot of single tenant net lease transactions this quarter. And that segment of the business was up greatly. So that's where there's smaller $1 million to $3 million transactions a lot of them took place. And that's why the percentage of transactions was higher on the retail but the volume was higher on the apartments' sales volume.

Okay. Is that a change in the market dynamics? Are you seeing a lot of demand for those types of transactions?

There's really no change in the dynamics. But I mean, there's always demand for those type of properties. What happens sometimes is we'll exchange a client out of an apartment building and put them into a triple net deal because they're going to want the net. They want the ease of management. So that's been -- we've been working with that for the last 15 years. So there's really no change in the dynamics.

And then last question, you guys did a lot of hiring last year. Obviously, good first quarter. But can you read anything into how the agents you hired during 2013 are performing so far?

They're performing basically like they've performed for the history of our company. But one of the things that we tried to do is we needed to bulk up our hiring. We needed to be able to go to marketplaces and be able to have representation on the ground in certain product types like office and industrial. But the key right now for us is really to look at developing these agents, number one, and number two is to look at experienced agents in the marketplace because we think we haven't -- the amount or close to the amount of optimal agents that we need in our company and we still need more. But at the same time, developing these people that we've hired and also going after a different segment of agent, people will have more experience, I think is really where we're moving to as far as the strategy is concerned. But recruiting is still very important for us. But I think we may be changing the way we do things, that we didn't do things like that in the past. So we're really looking to find experienced people in the marketplace.

Okay. But it sounds like the agents that you did hire last year seem to be producing right on track with the [indiscernible].

Right. And the experienced people we hired last year did very well, too.

That is all the questions we have in queue at this time. I would like to turn the floor back over to management for closing remarks.

Well, thanks very much, and thanks again for your support in participating in today's call. We'd also like to remind everyone that we'll be presenting next month in the William Blair Growth Stock Conference in Chicago, and we hope to see many of you there. Thank you, and have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.