Marcus & Millichap, Inc. (MMI) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Marcus & Millichap Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Steve Swett. Thank you, you may begin. I would now like to turn the conference over to your host, Stephanie Heim. Please go ahead.

Thank you, Operator. Good afternoon and welcome to Marcus & Millichap's Third Quarter Earnings Conference Call. With us today are Marcus & Millichap's President and Chief Executive Officer, John Kerin; Senior Executive Vice President, 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," "think," "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 general economic conditions and commercial real estate market conditions. Including the recent conditions in the global markets in, in particular, the US debt market, the Company's ability to retain and attract transactional professionals; the Company's ability to retain its business philosophy and partnership culture; competitive pressures; and Company's ability to integrate new agents and sustains its growth; and other factors discussed in the Company's 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 9, 2015. 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 an 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 measures and an explanation of 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 you may reference during the prepared remarks. With that, it's now my pleasure to turn the call over to Marcus & Millichap's President and Chief Executive Officer, John Kerin. John?

Thank you, Steve, and thank you all for joining us today as we discuss our results for the third quarter of 2015. I'll begin today's call with an overview of the Company's performance and a few operational highlights, and then discuss how we are continuing to execute on our long-term growth plans. Hessam Nadji, our Senior Executive Vice President, will follow with an update on 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. As everyone is aware, the third quarter of the year turned out to be a period of heightened global economic issues and stock market volatility. We also saw a rise of concerns that some of these headwinds may have a ripple effect on the US economy and commercial real estate markets. The normalization of the investment sales market, which we anticipated going into the year, also appears to be materializing, partially due to the quarter's events and headlines, but also as a result of a still strong but maturing real estate cycle. With this backdrop, I am proud to announce that we remain successful in executing our growth plan, staying the course and achieving a 10% revenue growth rate for the quarter on a year-over-year basis. Our total transactions grew only 12% and our private clients dominated $1 million to $10 million price segment registered a growth of 17.6% in brokerage transaction counts. This underscores the importance of our market leadership in this large and vibrant sector of the marketplace. I am also excited to announce that we reached an all-time high in the size of our salesforce last quarter with 1,516 investment sales and financing professionals serving our clients throughout the country. Our brokerage and management team continues to work hard to grow our business, and I am pleased with our efforts. I'd now like to share some of the highlights of our quarterly and year-to-date performance. Adjusted EBITDA was $29.6 million, an increase of 15.4% over the same quarter of the prior year, and our EBITDA margin in the period improved to 17.8% from 17%. On a year-to-date basis, our revenues increased 21.6% to $485.9 million, and we grew net income by 40.2% to $46.4 million. Our adjusted EBITDA increased by 40.8% year-over-year to $88.9 million. These are some key highlights, and Marty will provide more color on our financial results in his prepared remarks. Turning to our operations, our third quarter sales volume was $9.4 billion, which was comprised of $2,212 transactions for an increase of 11.8%. Year-to-date our sales volume totaled $26.9 billion, which was comprised of 6,255 transactions. Our sales volume increased 15.6%, the same period of 2014. And the number of transactions grew by 13.3%. I am also proud to announce continued success in our specialty division and mortgage brokerage business, Marcus Millichap Capital Corporation. Our specialty divisions, which include niches such as self storage, land, senior housing, hospitality, and our IPA Division experienced a 19.6% increase in transactions, overall. Each of our specialty divisions have tenured executives or tested growing through training, education, leading our business development and branding efforts, and ultimately delivering superior service to our clients. And MCC revenues grew just over 38% during the quarter and financing transactions expanded by 25.8%. This is a result of our concerted efforts to add qualified loan originators to our team. We are continually improving the integration of our financing with our investment sales professionals. We posted financing volume of $1.2 billion, an increase of 29.2%, which included 409 clients and transactions, an increase of 25.8% for the quarter on a year-over-year basis. Year-to-date we achieved nearly 36% increase in financing volume, an 18% jump in financing transactions. As we move to the balance of 2015 and into 2016, our strategy remains consistent. We are focused on increasing our market share in the largest, most stable segment of the real estate market, our core private client business, growing our specialty divisions and expanding our financing business. Our continued strong results are a testament to the strength of our platform and ability to achieve further growth and maximize shareholder value in the long term. With that, I would like to turn the call over to Hessam Nadji to speak further about overall market conditions and industry trends. Hessam?

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. The global economic issues and market volatility in the third quarter that John referenced in his opening remarks increase uncertainty for real estate investors along with somewhat tighter underwriting standards by lenders. I'd like to address these factors on today's call. Looking back at the root source of the news and market turbulence in the third quarter, China's currency moves and economic slowdown were the largest factors as opposed to any significant domestic issues. This poses the question as to how global concerns could impact the US economy and commercial real estate. To start with, US economy now stands four million jobs ahead of its prior employment peak with a net gain of 12.7 million jobs since this recovery began. The unemployment and under-employment rates now stand at seven-year lows and are gradually falling. Employment is the most critical driver of demand for commercial real estate, and the steady pace of job growth has pushed occupancies for all property types to healthy levels. We saw further occupancy gains during the third quarter ranging from 30 to 60 basis points year-over-year in all property sectors across the board. Keeping in mind that consumption makes up 68% of the US economic output, core retail sales are now 20% above the 2007 peak and growing at 3% to 4% a year annually. Besides being a critical indicator of a strong economy, strength from the consumer side is behind a robust recovery in retail real estate and the housing market, which includes apartment rentals that are still seeing above-average rent growth. Professional business services, health care, and education and train transportation are the top job-producing sectors and tend to generate higher-than-average wages. These sectors made up 63% of the 2.8 million jobs that were added in the country in the last 12 months. This is translating to demand for office, industrial, and health care real estate and another supportive force behind demand for apartment rentals. In fact, the rental market continues to break records with the second quarter reaching the highest absorption of units in the past five years followed by a solid 88,000 units absorbed in the third quarter. In an increasingly global and interconnected economy, there is no doubt that we're vulnerable to shocks and bouts of heightened uncertainty. The strong dollar is starting to weigh on exports, dollar in the manufacturing, while the business and real estate cycles are both maturing. As we've indicated for some time, the rate of growth is normalizing as a result of all these dynamics. However, the key positive data points that I summarized on top of a healthy banking system with ample liquidity, point to a strong economic foundation here in the US amid global volatility. We are simply much better positioned to withstand speed bumps and headwinds than anytime in the recent past. Another reason we expect the economic and real estate expansion cycle to continue is the gradual pace of the recovery itself. The slow pace of growth, lack of an inflation bubble, and lower energy prices are helping to prolong the cycle in our view. Ironically, the slowdown in job growth that materialized in August and September, is in combination with the global growth concern gave the Fed reason to pause. Even if the Fed resumes plans to raise interest rates as early as December, expectations are for moderate increases that will align with fresh economic readings. Rising interest rates will not be a surprise to real estate investors according to our most recent surveys and contributed to acceleration of some transactions into the earlier part of 2015. As for the commercial real estate outlook, we continue to point out the lack of overbuilding as the core strength for the industry. Even for apartments, which are seeing the largest volume of new development of any product type, there are only a few markets with pockets of overbuilding in the high-end urban product. For the apartment industry as a whole, especially in the Class B and C segments, which comprises the vast majority of the rental stock, demand continues to exceed supply. This lack of overbuilding combined with a sizable drop in vacancies over the past few years, provides a critical cushion rarely seen at this point of an expansion cycle. Even if job growth slows down from its current pace of 2% a year, or 2.8 million jobs, there should still be enough demand for space to keep both occupancies and rents rising. We frequently talked about a market normalization and investment sales as opposed to a repeat of the 2008-2009 near shutdown of sales velocity. This expectation is primarily based on the more gradual and steady nature of the current real estate cycle versus the frothy leverage-driven runup we saw from 2004 to 2007. With health property fundamentals, low interest rate, an accommodative Fed, and, most importantly, very competitive yields, capital will likely continue to flow into commercial real estate in the foreseeable future. Based on our preliminary estimates, total market transactions were up somewhere between 4% to 6% during the third quarter of 2015 compared to the prior year and basically flat over the second quarter of 2015. This still represents an active and vibrant investment sales market with over 50,000 transactions and $450 billion in trading volume estimated for the last 12 months. It also points to ongoing strength and sustainability in sales velocity supported by well-balanced lender underwriting and solid property performance. In addition to this market backdrop, for us at MMI, the alignment with the private client market typically transacting in the $1 million to $10 million price range remains a bedrock of strength. Over the long term, the $1 million to $10 million private client segment has proven to be at least 30% less volatile than sales in higher-priced assets as transactions are typically driven by personal factors such as death, divorce, partnership breakups and other circumstances. In terms of sheer size, once again, in the last 12-month period, 83% of all commercial property sales and 60% of the commission pool were in this segment. For MMI, this segment accounted for 89% of transactions and 77% of revenue. I'd like to emphasize that MMI's $1 million to $10 million transaction count increased 17.8% as John shared earlier, and our overall transaction count increased by 10.4% year-over-year. Supported by the expansion of hiring into secondary and tertiary markets and higher yields, transaction momentum in these locations outpaced the overall market. Showing an increase of 19% and 24%, respectively, year-over-year. As we have noted before, the movement of capital for these markets is another positive indicator for MMI, as 45% of our transactions are typically sold to out-of-state buyers. Looking forward, we expect additional job gains through the remainder of 2015 and into 2016 will support commercial property performance and continued growth and property sales at normalized rates. In our view, the biggest risk to a favorable outlook is still limited to a significant unexpected event or economic shock. With that, I'll turn the call over to Marty for an in-depth look at our financial results. Marty?

Thanks, Hessam, and thanks again, everyone for joining us today. I'd like to discuss our third quarter results in more detail. Total revenues in the third quarter of 2015 were $166 million compared to $151 million for the same period in the prior year, for an increase of 9.9%. This increase in total revenues was primarily driven by an 8.4% increase in real estate brokerage commissions and a 38.2% increase in revenue and financing fees primarily from MMCC. Within real estate brokerage, which generated more than 91% of our total revenues in the third quarter, we executed 1,596 transactions, which represents an increase of 10.5% from third quarter of 2014. Additionally, when normalized for an extraordinary large transaction that closed last year, we reported a slight decrease in the average transaction size of 8.8%, which is indicative of a more normalized growth for our business that we have discussed in recent earnings calls. Total operating expenses for the third quarter of 2015 were $139 million, which represents an increase of $11 million or about 8.9%. This was primarily driven by a 10.6% increase in cost of services. As a reminder, cost of services is primarily variable commissions paid to our Company's investment sales professionals in compensation related to costs in connection with our financing activities and should track closely with our brokerage commissions and financing fees on a quarterly and annual basis. Our selling, general, and administrative expense increased by $1.6 million, or 4.6% primarily due to four areas. First, salaries and related benefits, which are correlated to higher headcount in corporate to support our growth; secondly, sales and promotional expenses driven by marketing expenses to support increased sales activities; third, stock-based compensation expense resulting from an increase in the Company's stock price, which impacted stock-based compensation expense of [indiscernible] to the Company's agent, which are required to be measured at fair value and incremental stock-based awards granted since the third quarter of 2014; and, lastly, other expense categories primarily driven by our expansion in business growth. These increases were partially offset by a decrease in legal costs due to settlement of an outstanding litigation. Our effective tax rate was 42.9% for the third quarter of 2015, which was 170 basis points higher than the third quarter in the prior year. We believe the effective tax rate for the first nine months will remain consistent for the balance of the year. The Company's net income for the third quarter of 2015 was $15.2 million compared to $13.5 million for the third quarter of 2014. The Company's adjusted EBITDA for the third quarter of 2015 was $29.6 million, or 18% of total revenue compared to $25.6 million, or 17% of total revenue in the third quarter of the previous year. Turning to our balance sheet, our cash balance as of the quarter-end was $68 million compared to the cash balance of $149 million at the end of 2014. The Company's use of cash is typically related to limited working capital requirements during the year, the payment of taxes, and purchases of office equipment, as needed. Our cash balance decreased primarily due to a core cash investment of $100 million of our excess cash and fixed income debt securities in accordance with our investment policy as approved by the Board of Directors. We believe our cash position, core cash investments, and access to a $60 million credit facility remains a competitive advantage and supplies us with meaningful flexibility as we continue to grow our business. Other than the outstanding principal balance of notes payable totaling $10.6 million and SARs liability of approximately $21.2 million, both resulting from the spinoff related to the IPO during 2013, the Company has virtually no debt outstanding. In closing, we will continue to execute our strategy to be the dominant player in the core private client segment, grow our specialty divisions and expand our financing business units. Our balance sheet is supportive of this plan, and we will continue to work to create value for our shareholders.

[Operator Instructions]. Our first question comes from the line of Phil Stiller with Citi. Please proceed with your question.

Hi guys thanks for taking my questions. I guess I wanted to ask about the sequential downtick in revenue. Obviously, you talked about a more volatile economic environment. Maybe you could give us some historical context in terms of what you guys have seen in periods where third quarter revenue is below second quarter. Is that indicative of a broader issue in the market?

It's Marty, how are you doing? I think typically our seasonality curve, as I mentioned, is fairly stable during times of growth and over the past year, I think in the beginning of Q4, we talk about the flattening of the seasonality curve. There haven't been too many times where there was actually a situation where Q3 was a little lower than Q4 [indiscernible]. But the things is, is that during times of stability Q3 and Q2 tended to be fairly flat. And I think that's what we're seeing here.

Phil, Hessam here. I'd just add, obviously, that the market environment was also affected by the headlines and the volatility that John mentioned as well. If you look at all the different reporting sources, and so on, the usual trend in the marketplace also was affected by these headwinds, let's call it.

Yes, that makes sense. Can you guys give any insight into what your expectations are for fourth quarter or maybe talk about, kind of, listing volume to give us some comfort in terms of what you had characterized as a normalized growth rate, going forward?

I think in terms of a normalized growth rate, I think we've always said that it was -- we see that as being in the high single digits to low teens, very low teens, and so I don't think Q4 is going to be any different from what we've said in the past.

Okay. And then last question from me, I guess the agent headcount has been, roughly, flat since the beginning of the year. I guess underneath that, I mean, you guys did a lot of hiring in 2014. Can you give us an update in terms of how the new agents are performing either from a production or, from your perspective, retention perspective, and I guess how we should think about your headcount growth, going forward? Thanks.

Well, let me tell you. This is John, Phil. We hired 26 net agents for the quarter, which is about norm for the quarter. As far as what we're trying to do and what we have been doing over the last few months, or excuse me, the last two years, has been trying to hire people who have some experience in the investment real estate business. What we've found now is that we're doing probably 50-50 as far as net hires. Thirteen might be new people we're going to put in organic training program, and 12, 13, 14 of these people have been in the market before, so we can start with them training in a little bit different way, and they should be able to be more productive as we go along. So we are seeing more productivity from the people that we're hiring that have experience. I don't have anything, really, to give you a schedule of what's going on, but as far as our plan and strategy, it's working out nicely for us.

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

Hi guys thanks for taking my question. Maybe a different way to ask, kind of, the pipeline or the outlook into Q4. Hessam, maybe this one's for you, but just time to close days on market for some of the deals and how that's kind of fluctuated maybe from this time last year or even maybe sequentially and how you're looking into that metric into Q4?

We are seeing marketing times stretch. That's a function of both the maturing cycle a little bit as well as, obviously, once again, the market factors that we experienced during the third quarter. But in terms of anything that has to do with deals really dying or anything like that, we're not seeing anything out of the norm. It's just the process of marketing, especially certain sectors, is getting a little bit lengthened due to all these different factors converging at the same time.

Sure, got it, okay. I think I was given, I think it was yesterday or two days ago, the press release with the CAO hiring. Maybe just talk about what exactly that entails and then, kind of, how does that impact the appetite for taking on future investments or maybe even acquisitions?

Sure, this is Hessam, I'll jump in on that one. Really, the creation of that position has to do with our long-term strategy of really taking our tradition of 40-plus years of technology innovation and pioneering a lot of different business practices and techniques and taking it to the next level. A big part of our growth plan has to do with more investment and technology, integration of technology with some of our other Company capabilities like market research and faster and better delivery systems for our extensive research that we put out there, and transactional information made available for our clients. So the position is really responsible for bringing together four or five different elements of our support system and brokerage infrastructure - technology, market research, marketing, and our administrative support. So it's actually quite exciting for us because to have someone assigned to bring all these things together, we have very ambitious plans for new systems, number of upgrades to our existing legacy applications that we've had for some time. And that's the purpose behind that particular position. And in terms of investing in M&A, we're constantly looking at that as an option where the Company obviously, it has to scale - obviously, it has to be very synergistic and accretive for us. So it is definitely part of our long-term strategy. But it's not one where we're going take it lightly and really have to make sure that it's a strategic fit with scale.

Okay, that's helpful. And then a final one from me - just given, kind of, a pause in market activity this quarter, have you seen any meaningful changes in your producer or productivity metrics? Have you seen some of the more tenure guys maybe doing a bit more of the work just because it may be a little bit tougher to find new deals out on the marketplace?

Yes, Keane, it's Marty. No, actually, our productivity level for our agents actually increased quarter -- year-over-year for the quarter by just about 3%. So it's actually progressing as we had thought it would, especially with the hiring of these more experienced agents.

Our next question come from the line of Brad Burke with Goldman Sachs. Please proceed with your question.

Hi good evening guys. I just wanted to follow up and ask - generally, I think about your private client segment as being less volatile and susceptible to macro risks. And as we think about the third quarter, I think most of us were looking for US transactions to be, roughly, flat. So why is it do you think that when we look at the transaction volumes you had in Q3 that they were lagging in the broader market?

Brad, hey, it's Hessam. If you're talking about dollar volume, obviously, that is going to be affected by the impact of larger deals that may or may not get done in a particular time period. But if you look at our number of transactions, which is a much more steady and predictable indicator, we had a very nice increase of 10.5% in our investment sales, and 12% overall on a year-over-year basis. And based on the preliminary numbers we've gotten from the various market-related data sources, that's comfortably above what the market did. So we expect to have gained share in the third quarter.

And, Brad, this is Marty. And when you actually dissect it, our $1 million to $10 million transactions actually went up 18%.

Okay, and I guess that was a segue to the next one just on the operating costs. It looks like maybe there's some pressure on split because of the mix of seasoned brokers, which makes sense, but that ties into the average transaction price, which went down. And that's not really the relationship that they normally expect. So - first, am I thinking about that relationship correctly? And then, second, is there anything else to think about that would have been pushing the operating costs higher in the quarter?

Yes, actually, as the year goes on, if you look at our historical financials, the commission rate that we pay out to our agents actually do progressively get higher because some of our more tenured senior agents are on a - what we call a "graduated split," where the more they generate in business during the year, the higher their splits get. So that's the first thing. So you look in terms of fees that we - our commission fees that we generate, it actually went up a bit because of the lower, I guess, transaction sizes during the third quarter.

Okay, and then I guess the last one just talking about some of the macro commentary. I think we can all see what's going on with CMBS and the unsecured bond market, but I was hoping that you could touch on what you're seeing from the regional banks because if I'm thinking about it correctly, that's really the incremental source of capital for most of the transactions in the private client segment.

I think the - you know, if you're talking about different types of changes or headwinds in the marketplace, buyers, along with the banks start to look at underwriting a little bit and take a step backwards and that's where the delay comes in, is that you're not able to close the transactions a little bit quicker. We talked about our average day on the market has gone up a little bit more. But the deals are still, as Hessam had mentioned, are still closing. So it's just more of a delay at this point in time, and it's normal in our business. I mean, something happens next week that could be a possible delay, but our business still goes through this. We've been doing this now for almost 45 years, and we understand what to do in markets like this. We understand to keep building our pipeline. So they're still out there with plenty of money, it's just a matter of how that money is going to go to the marketplace. Is it going to be a five- or seven-year deal? Is it going to be a little bit better loan to value? But it's all really underwriting a regional bank. I mean, they want to make sure that they're putting their product on the marketplace in the best possible way.

And with the market improving, at least the public market is improving recently over the last four, six weeks? Have you sensed any improvement on the ground when you're talking to regional lenders?

This is Hessam, Brad. There really - in term of improvement. There's plenty of lenders at the table, and there's plenty of capital sources for financing. It's more the mechanics of the underwriters have gotten a little bit tighter and have stayed pretty much about the same throughout the last couple of months. We haven't seen any market change either way. But, again, to John's point, there's no dramatic shift or anything in the marketplace. It's just that people are basically sharpening their pencils a little bit.

I apprciate it guys thank you.

Thank you. Our next question comes from the line of Mitch Germain with JMP Securities. Please proceed with your question.

Did I get this stack correct? 30% less volatile, the $1 million to $10 million segment? And, if so, can you just describe that a little further?

Sure, Mitch. There's actually a slide in the deck for your review at some point. The update on that is that our research department basically took 12 years of quarterly data and analyzed it just in terms of the movement of sales by price tranche. And each sector was basically measured against its own loan from average. So if you take a look at each one separate from the overall market within itself, you can see that the smaller properties in the $1 million to $10 million have a much lower volatility rate than a $10 million to $20 million - especially the $20 million-plus. So that's how that was calculated.

What is the Company - how are you guys trying to position MMCC in terms of getting more cross-sell opportunities? Is it bringing in more experienced producers? Is it marketing that platform a little bit differently? I know that there's some great momentum there, but it still seems like it could get even bigger.

Yes, this is Hessam, Mitch. You hit on a very key point, and that is the tenure and the experience level of the originators over the past couple of years as you've heard us talk about before. We've really done a pretty comprehensive change, and basically training and development programs and, therefore, people that have been with us for now a couple of years are far more skilled and capable. And the recent hired over the past 18 months have come to us with extensive background and experience. So that's making a very big difference. We've always talked about the key point in the integration is that the more qualified and experienced our mortgage originators are, the easier it is to integrate them into the investment sales process. Now, having said that, a lot of improvement in that side of the business, but also an MCC is marketing himself directly as a source of financing. So, roughly, 50% of their business is coming from direct marketing to borrowers on re-fis and transaction financing. So we're positioned very well to take advantage of both the internal growth opportunity and the external growth opportunity. And it's also, as we've talked about, the model really has proven very effective, and our key focus right now is to just build more capacity - add more people, there are a number of markets where we can add additional originators, plenty of market there to be captured. And a number of metrics where we don't have origination yet, we're aggressively adding MMCC.

Is the goal to have an originator in every market?

Absolutely. Or more than one in numerous cases.

Great, and then last question from me, and I apologize if I might have missed someone else asking this, but average transaction size in the investment sales business was down not just year-over-year but really more sequential. And so that trough - is that a sign that the level of activity in the, kind of, $10 million-plus was down? Maybe if you can talk about some of the trends within the $10 million-plus versus the, kind of, bread and butter business, the $1 million to $10 million, I'd appreciate that.

Sure, Mitch, it's Hessam again. During a couple of quarters when that trend was actually moving up because we were capturing more larger transactions, if you remember, one of the points that I made was that our core focus is the $1 million to $10 million segment in the marketplace. And when the trend was moving up, I made a point to really reiterate the core strategy of the firm, and that $1 million to $10 million category killer status isn't changing, isn't shifting. That's really our bread and butter foundation of the firm. So periodically, you're going to see our agents that have been with us a long time with tenure, do capture larger shares of bigger transactions servicing their clients, and that's going to ebb and flow. But the main focus has always been in a $1 million to $10 million range, and it remains the same. So - the tendency is going to have some noise in it on an average basis from period to period. But that's not really indicative of any change in strategy either way.

Thank you. Our last question comes from the line of Young Ku with Wells Fargo. Please proceed with your question.

Just a question on the overall transaction market. The average size that you mentioned - is that a function of - I mean, you said - Hessam, you said that there was more activity in the tertiary and secondary markets in Q3 versus prior quarters. Was that partially a function of that?

Were markets [indiscernible], absolutely. That is a function of the market mix but, again, it also has a lot to do with our core business making up such a large portion of our revenue base. So it's a combination of both, and we are, as I shared specifically, we are benefitting from the capital migration to these secondary and tertiary locations, and the transaction sizes do tend to be smaller than the primary metric.

Given where the cap rates are for the primary markets versus the secondary and tertiary markets, yes, you said that the transaction volume is increasing in those secondary markets. So - should we expect that average size to move down, kind of, progressing through next year as you focus more on those markets?

I'm not sure if that's a trend you should expect because while that is one trend going on, there's other offsetting trends. So, for example, our institutional property advisors division that does the more major private investor and institutional types of transactions, is also growing. We have a number of very, very large transactions that are conducted by private investors that we tend to capture because we've had the long-term relationship with them. So there's a lot of offsetting factors. I think the key message is core focus is in the $1 million to $10 million range. The overall trend is going to reflect some price appreciation in the marketplace. It's going to reflect some basically maturing of our salesforce, but those really shouldn't be distractions in that core focus is in the $1 million to $10 million range.

And just one more question - what percent of your transactions are conducted with the foreign investors?

In the marketplace, in general, that tends to average around 10% to 12% in terms of what is documented as a foreign capital coming into the US, and the long-term average is - I'm sorry, long-term average is 10% to 12%, the current average is about 15%. For Marcus & Millichap it's really limited to a number of gateway markets where we have a foreign buyer influence Southern California, Chicago, South Florida, New York, of course, D.C., and a number of other markets. That percentage is probably somewhere around 5% to 7% is what we estimate.

And have you seen capital kind of slowing down given the strong dollar in those markets?

We actually have not because, remember, a lot of our clients tend to be the private client family investors from foreign countries that are really looking for diversification, they're looking for the safety of the United States real estate markets as an investment vehicle, and they're less concerned about any short-term issues or even short-term gyrations in currencies or whatever. More about the long-term preservation of capital and taking advantage of our political, economic, and real estate market.

Okay, great, that's helpful. And one last question from me. I think this might be for Marty. You guys are retaining cash at a pretty fast clip, call it, $200 million in terms of cash and market securities, and you don't really have too much capital to spend. So were you guys potentially think about any way to, kind of, give that back to investors, potentially special dividend?

At this point, I think we continue to believe that our cash balances are at appropriate levels, and right now we continue to work with our Board to figure out the appropriate uses of our capital. I just always mention that we deemed our cash balance to be a strategic advantage for us as the market slows down. So - at this point no.

Sound good. Thank you.

Thank you. Ladies and gentlemen, I'd like to turn the floor back to management for closing comments.

Thank you, Operator. And thank you, everyone, for joining us today. We look forward to speaking to you again at the end of our fourth quarter. Have a good night. Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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