Greetings and welcome to the Marcus & Millichap Second Quarter 2016 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, Ms. Evelyn Infurna. Thank you. You may begin.

Thank you. Good afternoon and welcome to Marcus & Millichap’s second quarter 2016 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, general economic conditions and commercial real estate market conditions, including the recent conditions in global markets, in particular the U.S. 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; 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, which was filed with the Securities and Exchange Commission on March 15, 2016. Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement whether as a result of new information, future events or otherwise. In addition, certain of the 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, presents reconciliations to the appropriate GAAP measure and explanations of why the company believes such non-GAAP 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, www.marcusmillichap.com, along with a slide presentation you may reference during the prepared remarks. With that, it is now my pleasure to turn the call over to Mr. Hessam Nadji. Hessam?

Thank you, Evelyn. Good afternoon, everyone and thank you for joining us for our second quarter earnings call. On behalf of our team, I am once again pleased to report another quarter of growth for Marcus & Millichap, particularly in light of the more challenging market environment. As we have discussed over the past few earnings calls and investor conferences, the commercial real estate sales market is facing a natural slowdown after a strong recovery. Over the past several quarters, our industry has also been impacted by global and macro events, which are weighing on investor sentiment. The cumulative effect continues to show up through added buyer caution, wider bid/ask spreads and extended list to close transaction timelines. Lender underwritings have also tightened, especially among commercial banks, which are the primary source of financing for our brokerage transactions. The good news is that unlike past cycles, the real estate industry is not overbuilding. Rent growth is on a sustainable track. Interest rates remain near historical lows. And most importantly, yields are attracting capital into the sector. This healthy picture of real estate fundamentals supports our view that the market can remain active in the aftermath of a 5-year run leading to record sales in 2015. The bottom line is that buyers want more reward for the added risk they perceive to be taking and lenders are avoiding overleveraging partly due to the tighter regulatory pressure and partly due to the lessons learned from the financial crisis. While both of these factors also support our view that cycles don’t just die of old age, they point to slower sales velocity and heightened volatility in the near-term. For all of us at Marcus & Millichap, market shift and changes and complexities of external forces are nothing new. For 45 years, our focus…

Thanks Hessam and thank you again to everyone for joining us today. I would like to discuss our second quarter results in greater detail. Total revenues in the second quarter grew 5.7% to $183 million compared to $174 million for the same period in the prior year. This growth was primarily driven by a 6.2% rise in real estate brokerage commissions to $170 million from $160 million for the same period in 2015 as we benefited from a greater amount of larger transactions, partially offset by a decrease in commission rates and financing fees. Real estate brokerage, which generated nearly 93% of Marcus & Millichap’s total revenue in the second quarter, executed 1,675 transactions compared to 1,552 transactions during the same period last year, which represented an increase of approximately 8% from the second quarter of 2015. Revenues from financing fees were $10.7 million compared to $11.2 million in the same quarter of the prior year. The slight decline in revenue was due to the composition and type of transactions, which was similar to what we experienced last quarter. Other revenues, comprising mostly of consulting and advisory fees were $2.5 million compared to $2.1 million last year. Total operating expenses were $155 million for the quarter compared to $144 million in the second quarter of 2015. The 7.4% increase was primarily driven by cost of services, which are variable commissions paid to the company’s investment sales professionals and compensation related costs in connection with our financing activity. The rise was also due to an increase in selling, general and administrative expenses and to a lesser extent, depreciation and amortization. Cost of services as a percent of total revenue for the quarter was 61.7% compared to 60.8% for the same period in the prior year. The increase was primarily due to…

Thank you. [Operator Instructions] Our first question comes from the line of Brad Burke with Goldman Sachs. Please proceed with your question.

Hey, good afternoon guys. I want to ask about your performance year-to-date. And I guess it depends on which third-party source you look at. But I guess, regardless of the third-party source, you have been outperforming over the first half of the year for transaction volume. How much of that do you think is related to the private client segment and how much of that is your relative performance within the private client segment?

Hi, Brad, it’s Hessam. Not sure if I – can you clarify your question? Again, regarding latter part of your question….

I am trying to try to understand your outperformance whether it’s focused on the private client segment and whether the private client segment is outperforming or whether Marcus & Millichap is outperforming within the private client segment.

I understand. If you look at the transaction growth for Marcus & Millichap in the private client business, it’s 11 – I am sorry, 10.8% for the year-to-date and we believe that the market number will be about flat based on the preliminary reports and [indiscernible]. So if you look at the difference and believe that we are clearly outperforming the private client segment of the market – we are getting some background noise on the call.

Yes, sorry about that guys. But that does make sense. And then I guess the other one that I had is just trying to understand the comment being made about the third quarter and the difficult comparison. When I look at your brokerage volumes, they have averaged about $8 billion for the first half of the year per quarter. And in the third quarter of last year, you were at $6.4 billion. So, just trying to understand your comment about the third quarter of last year being a difficult comparison, was that in regards to the number of transactions or was it talking about the dollar volume of transactions?

Well, I think what’s really important to remember is that the private client business, which of course is the vast majority of our focus in our revenue sourcing was growing at a much faster rate last year than we have seen so far this year and expect for the remainder of this year both on the market side of the equation and our internal growth rate having been 17.6% in the third quarter of 2015 for the $1 million to $10 million private client marketplace. Given the change in market momentum what we have seen so far this year, that pace of private client growth is a significantly different world than what we are experiencing currently. That’s the first thing. The second component of that comment, Brad, is the fact that the first half of this year had an outsized number of $20 million plus transactions, above normal and given the variability – extra variability in that segment, it would be difficult to expect the same amount of production out of the $20 million plus in the third quarter versus what we have seen so far this year.

Okay. But the comment about shifting momentum that was a comment just about 2016 versus 2015, that’s not talking about anything sequentially from the second quarter into the third quarter?

Right. It’s a year-over-year comment. Q3 of 2015 versus Q3 of 2016.

Okay, I appreciate the color. Thank you.

Thanks Brad.

Our next question comes from the line of Brandon Dobell with William Blair. Please proceed with your question.

Thanks. Afternoon guys. First, I may have missed it in your comments, but just want to get a sense if you are still comfortable with adding around 100 producers this year on an average basis. Just want to make sure where we stand with that metric? And then kind of within the headcount, any change over the last, I don’t know, 3, 6 months in terms of attracting the more experienced people where you haven’t dig a little deep in the pocketbook to get them? Are people able to get or ask a little bit more to move from different firms over to Marcus & Millichap? Some of those headcount dynamics will be helpful. Thanks.

Hey, Brandon. I wanted to address the first part of your question. We are comfortable with our target rate of 100 net agents as our growth rate. We really look at that as part of our long-term plan. And as market trends come and go from quarter-to-quarter that doesn’t really sway our focus and our goals of growing at that rate. And on the experienced agents’ front, we are continuing to see very good success in attracting that mid-tier 2-year to 4-year experienced agents that is doing some transactions elsewhere, but doesn’t have the benefit of our platform, our training, our support systems and everything else and that is still the sort of the sweet spot of our experienced agent hiring. They are not costing us anymore or – in any unusual way to attract and we are seeing pretty good success there. Your comment about what’s happening on the mortgage franchise and large production recruiting, again, we have seen no big difference in that segment, but our main focus is that mid-tier, somewhat experienced professional that really is not an acquisition.

Got it. Okay. Within MMCC, those skew towards larger deals, should we expect that trend to continue? And I guess the context there is are there initiatives within MMCC to focus those producers on working with their counterparts in the larger transactions or is it just a natural outgrowth of having more experienced guys and maybe a little bit of a gap in what the commercial banks are willing to do on a talent basis these days?

Right. From an initiative perspective, our focus hasn’t changed at all. I mean, the private client focus on the brokerage side is our primary – number one priority. Same thing on the financing side, there has been no change of strategy at all. We are very focused on what we do best and doing everything we can to do more of it. From quarter-to-quarter or on a periodic basis, you will see some of our more senior originators, just like our investment sales brokers, having to do larger transactions in that particular period. It’s not really a shift in strategy. And you are right on one component of your comment and that is some of the more experienced originators that we have attracted in the last 12 months tend to do some larger deals, but I wouldn’t expect it to be a significant trend. It’s – we are trying to be as versatile as possible and service all of our clients, large and small, but the focus is the $1 million to $10 million private client world.

Okay. And then final one for me, you kind of mentioned in the passing the small – I think you can call it small balance or third-party small balance program. Maybe some more color on what that is? And I guess tied into that I know there has been discussions historically about trying to broaden the list of financing options or avenues that you guys can provide to clients, so is this one of them, has it – has your view changed about using your own balance sheet or partnering with somebody to try and I guess just increase the breadth of options that your clients may have for financing?

Yes. This is really in line with expanding our options without changing our approach on our own balance sheet and having more partnerships with lenders and affiliate programs. And this is one of those kinds of initiatives that will be announced shortly. And it is really designed to give us more streamlined and more organized access to some agency lending programs that are specifically beneficial to the small balance borrowers. So our private clients, in particular are the target of creating a little bit better service and a little bit more competitive rates with the special program. It should be announced in the next several days.

Okay, great. Thanks. I appreciate it.

Thanks Brandon.

[Operator Instructions] Our next question comes from the line of Mitch Germain with JMP Securities. Please proceed with your question.

Good afternoon and great quarter guys. Hessam, just curious about – and I appreciate the commentary on MMCC, but you guys were weighted towards those larger transactions, with all the investment being made there in personnel, experienced personnel, are you looking at the quarter in a positive light or maybe think that there still is a lot more wood to chop to get that momentum going?

Hey Mitch, there is – we have more work to do in three different areas. One is the better integration of our loan originators with our investment sales force. Second, actually accelerating the number of experienced loan originators that we are bringing onboard because so far, although we have had some success there, the predominant amount of our hiring still has been with moderately experienced people that still need a lot of training. The number of true 5-year, 7-year plus experienced originators that we brought in have been very limited and we want to increase that. So as far as the quarter goes, obviously we had a lot of headwind from the standpoint of tighter underwriting and deals taking longer. That’s just the reality of the marketplace and we do everything we can to be patient and work through that. And that’s really kind of the reality of the marketplace. There was no – there was nothing in the quarter that made us think it was particularly bad or particularly good in terms of anything that’s getting in the way of business other than the tighter underwriting or any issues at all, both internal and external. So no dramatic change is expected in the short-term.

Are these guys included in the pitch that your sales professionals are doing to their customers in terms of the capability of having that avenue on the financing side or is it really just separate customers that they are both working with?

Well, the answer is yes and that’s part of the integration works that we have done in the last year has been to include them in the sales continuum and really the client contact continuum, not just on their own and independently but along with our investment sales force. And we have made huge strides there. But there is a long way to go. That’s my – my comment about integration is exactly what you just talked about. If through training and through having well-trained quality originators in every office, we really expect to see that integration go better and quicker in the future than it has been in the past. And that is a huge part of our focus and initiative in terms of the capturing of internal business that we should be capturing.

Great. And is there a way to quantify the drag from the tech investments this quarter on the EBITDA margin?

It wasn’t just the investment in technology. We have made a number of investments in a variety of different areas, whether its training, whether it’s our specialty executives that are growing the various property types, agent – direct agent support and marketing support for the business development, our client events and conferences. So there has been a variety of different categories, including facilities, by the way, because as some of our leases have expired, we have taken more office space to keep up with our growth and what we think is the potential in a lot of the major markets where we have lease rollovers. So it’s a variety of things. Technology is certainly being one of them, but really not the only one that could – that you could look at as the increase in investment.

So we should expect these expenses to trend a little higher than previous year’s levels is kind of what you are alluding to?

Yes.

Great. Thank you, guys.

Thanks Mitch.

There are no further questions at this time. I would like to turn the call back over to Mr. Hessam Nadji for closing comments.

Everybody thank you very much for joining our call for this quarter. And we look forward to having you at our next quarterly call. Thanks a lot.

This concludes today’s teleconference. Thank you for your participation. You may now disconnect your lines and have a wonderful day.