Welcome to the Marcus & Millichap Third Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Ms. Evelyn Infurna. Please go ahead.

Thank you, operator. Good afternoon and welcome to the Marcus & Millichap's third quarter 2016 earnings conference call. With us today are President and Chief Executive Officer, Hessam Nadji; and Chief Financial Officer, Martin 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, 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 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. And 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 our prepared remarks. With that, it is now my pleasure to turn the call over to Mr. Hessam Nadji. Hessam?

Thank you, Evelyn. On behalf of the entire Marcus & Millichap team, good afternoon, everyone and thank you for joining our third quarter earnings call. I'm pleased to report another positive quarter as once again our team successfully helped our clients execute a wide range of transactions and navigate a still healthy, but changing market environment. During the third quarter, we posted revenue and market share gains amid a challenging year-over-year comparable quarter and a slowing transaction environment, tempered by investor and lender caution. During the third quarter, total revenue grew by 9%, brokerage volume increased 19% on transaction growth of just over 2% and our sales force grew 10% compared to the third quarter of 2015. To put these results in perspective, preliminary estimates point to a decline in transaction count and dollar volume in the marketplace this year which indicate further market share gains for MMI. Before I go deeper into our results and strategies, I'd like to share our current perspective on the evolving market environment. The slowing investment sales market seems at odds with healthy occupancies and rent growth, lack of overbuilding and ample availability of financing near historically low rates. As we have shared over the past several quarters, we believe the transition in trading momentum is a natural result of a maturing expansion cycle, the rapid rise in values in sales over the past five years as well as heightened uncertainty from a number of external factors. This environment will continue to foster a bid/ask spread with buyers and lenders applying added scrutiny and tighter underwriting in the near term. Nevertheless, we continue to see ample volumes of capital from every type of investor, seeking commercial real estate investments which points to an active, albeit slower investment marketplace. With respect to the composition of…

Thanks, Hessam and thank you again everyone for joining us today. I'd like to discuss our third quarter results in greater detail. Total revenues in the third quarter were roughly 9% to $181 million compared to $166 million for the same period in the prior year. This growth is primarily driven by a 9% rise in real estate brokerage commissions which grew to $166 million during this quarter as we benefited from a greater amount of larger transactions. Real estate brokerage generated nearly 92% of Marcus & Millichap's total revenue in the third quarter. Our agents executed 1,631 brokerage transactions compared to 1,596 transactions during the same period last year or an increase of approximately 2% from third quarter 2015. Revenue from financing fees was $11.3 million compared to $10.9 million in the same quarter of the prior year, representing an increase of approximately 4% year-over-year. The increase in revenue was due to higher amount of transactions offset by lower average commission rates per transaction. Other revenues comprising mostly of consulting and advisory fees were $3.6 million compared to $3.1 million last year. Total operating expenses were $156 million for the quarter compared to $138 million in the third quarter of 2015. The 12.5% increase was primarily driven by increases in cost of services and SG&A. As a reminder, cost of services are variable commissions paid to the Company's investment sales professionals and compensation-related costs in connection with our financing activities. Cost of services as a percent of total revenue for the quarter was 63% compared to 61.5% for the same period in the prior year. The increase was primarily due to the proportion of transactions closed by our more senior investment sales professionals, who are compensated at higher commission rates. SG&A was up by $5 million or 14.3% compared…

[Operator Instructions]. The first question today comes from Mitch Germain with JMP Securities. Please go ahead.

I know Hessam, when you took the reins, you discussed that technology initiatives were one of the real pillars of your strategy and there would be some near term drag which clearly seems to be playing out in the margins. Is there a way to quantify either the drag or the investment that was made in the quarter? And kind of maybe you can also provide some perspective on specifically what kind of projects are being invested in?

Mitch, let me start with the project and I'm going to have Marty chime in on the effect on our expenses. On the kinds of projects that we're pursuing, there is a variety of different initiatives. A number of them have to do with our various communication systems, electronic marketing systems, but probably the largest project, most important project, is the replacement of the legacy systems that affect our business the most and that is our proprietary in-house proposal and marketing material production system and that is what our agents use to basically prepare for their underwriting process and their presentation process to owners as they're evaluating the owners' different options. The process of gathering all that information, running the analysis and packaging it for presentation is automated through the system, we call it MNet offering. MNet is the enterprise system throughout Marcus & Millichap and it has different tentacles and then offerings being the module of the system that addresses this client interaction proposal system and also then bleeds over to our marketing system. Once we obtain the listing from a client and that listing is being put on the market and shared with potential buyers, the system then automates the process of preparing that material and then, of course, distributing it to the potential buyers and so on. The replacement of that system has been the flagship project in the last several months and the first two modules of that have been completed and rolled out with just terrific feedback from our sales force and our clients. We've both not only updated the processing and the capabilities of the software, we've also renewed the branding and the output with a fresh look and a very nimble sort of output that agents can also customize based on what's happening with our customers. Marty, can you weigh in on the expenses, please?

Yes, sure. The expenses that are constant, we're incurring for a lot of these projects are actually capitalized. So the way I would look at it is probably as about $200,000 a year to our depreciation.

Marty, should this investment -- will that create, I guess, efficiencies going forward? Is that the way to think about it? You said it's a drag today, but benefits tomorrow.

Yes, let me add more perspective on that, Mitch. It absolutely affects the productivity of our agents, it also affects the productivity of their teams, whether it's the administrative staff or partners that work with senior agents and so on, because of the fact that it really touches -- this particular system anyway, touches the processing of our client interaction. However, in terms of the metrics on productivity, it takes a while for these new systems to actually basically take hold, migrate people off the old systems, migrate people off of other processes or systems that they've used in the past. So it's not an immediate effect. And I also want to point out that Marty's comments are related to the actual software development part of the additional expenses. We also have significant staff increases related to training, related to technology support and related to the design that are outside of just the capitalized software development component of it.

I've been reading and hearing that there has been a greater amount of interest in some of the alternative asset classes from investors who have been overweight, industrial and retail and apartment. Is that consistent with what you're seeing?

What do you consider alternative investments? Because in our world, when we look at our primary product types of apartments, core shopping centers and single-tenant net leased retail, small to mid-sized office buildings, we're seeing capital come out of some of those more core assets into self-storage, into hospitality, into mixed use. So I'm not sure if your definition of alternative is the same as how we're thinking about it.

That is consistent. So is that certainly what you're seeing?

It really is. In particular, we have a very strong movement of capital coming out of apartments, went to single-tenant net lease, coming out of apartments, going into multi-tenant, retail, community shopping centers, unanchored strip centers and office. And to a lesser extent, but nevertheless a growing extent, even alternates like hospitality which a lot of apartment owners aren't necessarily familiar with, but because of the yield of arbitrage, they've been a lot more open to considering those kinds of higher cap rate type of properties. The other thing that is important to mention is the movement of capital out of your primary markets, your coastal markets, especially Southern California, Northern California and New York, even Florida, into the Midwest, into Texas for the same reason [indiscernible] capital arbitrage. And so these quality assets in some of these markets that are pretty stable are seeing a lot of out-of-state interest.

Last from me. Obviously, we're seeing the increase in some of these larger transaction deals. In your mind, is there an ideal mix in terms of the contribution of your core business versus the $10 million or $20 million plus transactions?

Mitch, the ideal mix is to do a great job for all of our clients, basically. So many clients are considered the single private investor 10 or 15 years ago that today has accumulated a very large real estate network and a portfolio, they're independent, $20 million price range, because the prices have depreciated. And now, many of them want to upgrade and are becoming buyers of institutional assets. And so we're helping this migration up and down the price spectrum all the time. And so from the standpoint of where we want the Company's revenue diversification to be, we feel very, very good about the fact that we're able to help our clients up and down the full spectrum, but it's really important that we continue to gain share and further penetrate really the micro transaction market or call it the sub $10 million marketplace just because of its size, its fragmentation, but that doesn't mean that we're not able to -- we've demonstrated to do transactions in the upper price ranges as well.

[Operator Instructions]. The next question today comes from Blaine Heck with Wells Fargo. Please go ahead.

Just continuing on Mitch's last question, can you talk about whether you think the increase in activity in the larger transactions segment is due more to market trends that are lending to the more favorable environment to execute transactions in that segment or is it more that you guys are making a conscious effort to increase market share in that segment?

Well, from a lending perspective, we're not seeing a major difference in underwriting or lender caution in the sub $10 million price range versus the $10 million to $20 million or the $20 million plus. In fact, our core business, the $1 million to $10 million business, is still the most financeable with very favorable terms we have seen. Loan to value remain very stable in that lower price range. As you go up the scale of price and of course, it depends on the risk profile of the asset and the marketplace, that's where we're actually seeing more scrutiny because lenders really wanted to be careful in not overextending themselves in this environment and given that added regulatory pressures. So our core business financing has been fairly stable. We've seen a little bit of tightening in the upper price categories, we've seen a lot of tightening on the loan to values on what's considered somewhat higher risk assets like hospitality, for example. And then of course, construction lending has significantly seen tightening and much more equity requirement.

And then, Hessam, you've mentioned that the [indiscernible] transactions ratio remains in the three-year average. Is that ratio something you guys can disclose or can you tell us what the more recent trends might have been for that ratio, either year-over-year or as we've seen it progress throughout this year?

Yes. That's not a metric that we disclose for competitive reasons, but as we've said on the last few calls, the ratio has been stable. And the reason why that's important for perspective is that it really illustrates the fact that there is plenty of buyer demand, there is plenty of interest in commercial real estate, as we've said and we continue to experience, but the transaction timelines have been extended this year and are more variable now because of the fact that both buyers and lenders are really doing their job in scrutinizing every transaction and we're going through, what I'll call, a recalibration evaluation and kind of a reassessment of future risk and that is what's extending the timelines or it has been throughout most of this year. But in the end, even though transactions are taking longer to basically consummate and get financing for and execute, they are getting done.

Okay. Then lastly, just kind of related to that, on the transaction volume side, we've seen sort of a plateauing of transactions this year from pretty strong growth in prior years which you've mentioned many times before. But do you think that trend of deceleration can turn into kind of sharper declines in volumes as we look forward into 2017 or is it your view that maybe we're going to stay at the current levels and flat for the time being?

Every indicator that we look at and all the evidence that we examine tells us that the next phase of this cycle really should be nothing like 2008-2009 which is what most participants are concerned about. We have completely different dynamics at work, lack of overbuilding, lack of overleveraging and really no internal prices being caused by commercial real estate, by doing those two things, overbuilding or overleveraging which in most of the prior rough downturns or severe downturns in history have been caused by one of those two things or both. Therefore, that basically tells us that this market is adjusting to a post-record levels of activity, particularly as prices have really gone up. And there is just a recalibration going on and given the fact that job growth still remains stable and even though construction levels are increasing in a couple different product types at a macro level, they're still within balance and therefore, occupancies and rents should be supportable. That tells us that we should really be a relatively smooth transition. From the indicators that we're seeing in the near term, transaction activity is continuing to slow in the overall marketplace and will probably persist for the foreseeable future, but it is clearly unlikely for that to turn into something resembling a major decline as we saw waiting on that.

This concludes the question-and-answer session. I would now like to turn the conference back over to Hessam for any closing remarks.

Thank you, operator and thank you, everyone for joining our call and we look forward to having all of you back on our next quarterly earnings call. The call is adjourned.

This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.