Marcus & Millichap, Inc. (MMI) Q2 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Marcus & Millichap Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Ms. Evelyn Infurna, Investor Relations. Please proceed.

Thank you, operator. Good afternoon, and welcome to Marcus & Millichap's Second Quarter 2017 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; 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 16, 2017. 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 measures 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 the slide presentation you may reference during the prepared remarks. With that, it is now my pleasure to turn the call over to Hessam.

Thank you, Evelyn. On behalf of the entire Marcus & Millichap team, good afternoon, everyone, and thank you for joining our second quarter 2017 earnings call. The second quarter brought a continuation of the market environment we observed in the first quarter with two opposing macro forces. The positive force is that of a healthy economy and real estate market with strong occupancies and rent growth. At the same time, elevated uncertainty, particularly regarding tax policy and economic stimuli are spurring a wait-and-see stand among many buyers and sellers. With this backdrop, our team has been hard at work, first and foremost, making sure our clients are well served and supported through an evolving marketplace and secondly, to return the company to year-over-year earnings growth as quickly as possible. To get there, we're executing a three-pronged strategy. First, we're making significant progress in rebuilding our new business pipeline after the productivity disruption caused by the interest rate spike in the fourth quarter of last year. Secondly, we're expanding our sales force, investor outreach and business development campaign to combat the estimated sales decline of 10% in the market. Last and certainly not least, we're leveraging recent enhancements to our financing platform and lender relationships to capture more refinancing business. Many investors are opting to recapitalize assets instead of selling at this point given the bid/ask spread in the market, and our financing team is better equipped to help our clients. With that said, our second quarter revenue came in at $180 million, which was lower than a year ago by just 1.6% and 4% below last year on a year-over-year basis. Our private client brokerage revenue was flat for the quarter and down by 2.2% on a year-to-date basis. Our team closed over 1,200 private client brokerage transactions in the quarter, slightly higher than last year and indicative of further share gain. Based on preliminary reports, we estimate an 8% decline in private client market sales during the quarter and 9% year-to-date. We strongly believe that today's private client share gains are tomorrow's improved results as we further consolidate our leadership within this segment and one that is highly fragmented. Private client transactions, typically in the $1 million to $10 million range, once again, comprised 84% of total sales in the market, reflecting the importance of the segment. An important highlight for the quarter is the 18.5% increase in our financing revenues, including a 37% rise in refinancing. I'm also happy to report that our recent multi-family lending correspondent relationships with ReadyCap on small balance deals and PGIM or Prudential on larger assets contributed to the growth in our financing business. We also saw a jump in consulting and advisory service revenues in the quarter related to helping clients evaluate assets and formulate strategy. We see these as great examples of how our expanding capabilities and the flexibility of our platform can serve the shifting needs of our clients and market dynamics. During the quarter, several positive indicators emerged worth highlighting. Our marketing timelines and bid/ask spread, although expanded from their low points in the first half of 2015, remained stable in the second quarter. As you may recall, our [indiscernible] transaction rate spiked in the fourth quarter of last year and began to ease in the first quarter. In the second quarter, this ratio was within the last three years’ average. Our leading indicators, particularly new listing inventory level, began to improve gradually in the quarter, which is directly attributable to the various company-wide marketing campaigns and client outreach initiatives we have launched. A major challenge for us in the quarter and so far this year has been the slowdown in the more variable $20 million-plus market segment. Revenue in this segment declined by 15.7% in the quarter and 27% year-to-date. There are two major drivers behind these results. First, there has been a significant market slowdown in larger transactions in key specialties in which we're very active. This includes seniors housing, self-storage and institutional apartment. Secondly, for MMI, larger transactions were at record levels last year, having increased by 60% in the first quarter and 25% in the second quarter of 2016. This made for a very tough comparison this year and reinforces the high degree of fluctuation that can occur in this segment, which we've shared with you on prior calls. The segment is driven by our IPA division, which services our institutional clients in addition to many senior Marcus & Millichap brokers who often carry out the needs of larger private clients. We're committed to growing IPA in our larger transaction segment as a supplement to our primary private client business. This is a critical part of our career development and retention for maturing brokers and helping all of our clients through the full spectrum of investment option. Given these dynamics, our earnings continued to be challenged in the second quarter with net income of $15.6 million, compared to $17.5 million last year. While returning to a healthy rate of earnings growth is a major focus, we're committed to making sure MMI is positioned for long-term growth, competitiveness and shareholder value creation. Some of the investments that are impacting our short-term results include expanded office space in key metros that offer significant growth opportunity, upgrading infrastructure, technology and proprietary tools that impact broker productivity and competitiveness as well as increased investment in marketing and business development. We strongly believe these investments are critical and will create long-term value. Other costs outside of these areas have been reduced and continue to be tightly prioritized. We continue to grow, train, develop and deploy our sales force. In the last 12 months, we have added 127 professionals to our sales force for a record 1,749 and growth of nearly 8%. Many of these individuals come with experience, including a few top-level industry sales and financing veterans who've joined us during the quarter. It should be noted that the headcount reduction in our financing team is the result of the process of transitioning our financing sales force to a more experienced team. Now let me address the four pillars that impact our business, which include the economy, real estate supply and demand, capital markets and investment sales. The economy continues to be supportive of commercial real estate with steady job growth of 2 million to 2.5 million this year on employment at a 16-year low of 4.3% and no sign of inflation overheating. On the supply/demand side, we expect continuation of healthy occupancies and rent growth as the industry benefits from a general lack of overbuilding in the cycle. There are certainly pockets of overbuilding in luxury apartments and self-storage, but by contrast, office and retail construction levels are just now reaching 60% and 30% of prior peaks. Capital markets, the third pillar of our business, have maintained ample liquidity levels for both debt and equity, although interest rates are up 80 basis points from a year ago. Having said that, today's interest rates are still historically attractive, and lenders are active in the marketplace. The absence of over leveraging, thanks to tight underwriting standards, is another supportive indicator for the durability of this cycle. Thanks to moderate inflation readings, the Fed has signaled that rates may be reaching a neutral level and that further tightening may come in the form of balance sheet runoff as opposed to additional rate hikes in 2017. The fourth pillar, investment sales in the market, will likely remain tempered at the current year-over-year decline rate of 8% to 10% until clarity on taxes and fiscal policy emerges. Let me emphasize once more that the healthy property fundamentals and still attractive yields continue to generate investor interest for all types of commercial real estate. There is no shortage of capital. The issue is around the bid/ask spread, exacerbated by elevated macro uncertainty, thereby keeping many investors on the sidelines for now. In closing, let me point out that throughout our 46-year history, we have proven that share gains during times of market change lead to more client relationships and future revenue growth. In contrast of the declining broader transaction market, we view the incremental market share gain we delivered during the quarter as a critical step towards stronger financial performance in the future. We expect to build on this momentum in the second half of the year. I will now turn the call over to Marty to discuss our results in more detail. Marty?

Thanks, Hessam. I'll be discussing our second quarter 2017 results in greater detail. Total revenue in the second quarter was $180 million, compared to $183 million in the prior year, reflecting a decline of 1.6%. The decrease in revenue this quarter was primarily due to lower brokerage commissions, which were mainly driven by a reduction in sales volume. This was partially offset by improvement in financing fees and other revenues. As Hessam discussed, the sales transaction market continues to be challenging. However, based on our performance, we continue to increase market share. Looking at the quarter more closely, the number of closed brokerage transactions was just 3% lower than the second quarter of 2016. Revenues and transaction volume improved from the first quarter of 2017 despite preliminary second quarter estimates of a 10% decline in sales transaction market. As in the first quarter, the distribution of transaction over our four key market segments varied widely. Most notably, this was due to a decline in larger transactions in the aftermath of last year's record sales in this segment, which Hessam also mentioned. While the average brokerage transaction size contracted by 12.2%, it was offset by a 25 basis points increase in average commission rates. For a longer-term perspective, total transactions and revenue for the quarter were the second highest on record for the same period. Revenue from our private client business for the second quarter declined nearly 10 basis points on a year-over-year basis on a modestly higher number of transactions and a 2.4% increase in average transaction size. Revenue from financing fees generated by MMCC grew by 18.5% to nearly $13 million for the quarter, accounting for 7% of our total revenue. Our financing business improved primarily due to a 1.8% increase in sales volume driven by revenue growth of 37% in financing transaction. This further highlights the flexibility of our platform in a changing market environment. Although average headcount decreased slightly, it was offset by an increase in loan originator productivity levels. Continuing to improve our financing delivery systems and tools remain a major opportunity for us to expand our capital markets platform. Other revenues for the second quarter, which are comprised primarily of consulting and advisory fees along with pro fees from other real estate brokers, increased from $2.5 million in 2016 to $5.1 million. This includes a large advisory fee, which involved valuation and consulting services related to a significant single tenant portfolio. Excluding this large advisory fee, other revenues increased just over 18% due to increase in valuation studies and consultative services for our clients as they formulate strategies to navigate current market conditions. Total operating expenses for the quarter slightly increased to $155 million primarily due to higher SG&A, which was mostly offset by lower cost of services expenses. Cost of services during the second quarter fell by 2.4% to $110 million versus $113 million in the prior year. As a percent of total revenues, cost of services were 61.2%, compared to last year's 61.7%. The decline was directly related to lower revenues on a year-over-year basis and a proportional drop in larger transactions by our more senior investment sales professionals. As a reminder, this expense is primarily comprised of commissions paid to the company's investment sales professionals and compensation related to financing activity. We expect cost of services, as a percent of revenues, to increase later in the year as our sales professionals meet certain annual revenue thresholds. SG&A for the quarter rose by 8.1% to $44 million compared to $40 million for the same period last year. The increase in SG&A was due to higher costs related to marketing and business development, legal, facilities from the renewal and strategic expansion of certain offices as discussed on our last two calls and stock-based compensation. As we have also shared, development of new proprietary systems, expanded training and infrastructure upgrades are continuing this year due to their vital importance to our long-term success. We have reduced costs in other categories and continue to diligently prioritize expenses. For the second quarter of 2017, net income was $15.6 million compared to $17.5 million in 2016 for a decline of 11.2%. Adjusted EBITDA was $28.7 million during the quarter compared to $31.8 million in 2016 for a decline of 9.7%. Our adjusted EBITDA margin of 15.9% for the quarter reflects top line pressures and the increased costs in key areas as previously mentioned. As indicated in past calls, based on current market conditions, the company's investment needs, our margins will continue to be under pressure during 2017. However, we believe expense leveraging should resume in 2018. Turning to the balance sheet, Marcus & Millichap is well positioned to grow its business organically and to pursue selective acquisitions. Our liquidity levels are very healthy as we ended the quarter with cash and cash equivalents and core cash investments of approximately $251 million. The senior management team continues to evaluate avenues for external growth as well as return of capital alternatives given our liquidity level and our continued strong cash flow generation. However, as we've said in the past, our strong balance sheet affords us tremendous flexibility and advantages. We are exploring some acquisition opportunities in both our investment sales brokerage and financing businesses. We are starting to see moderately lower valuation expectations on behalf of potential targets, although a gap still exists. Before closing, I'd like to point out several key factors, which may have an impact on our third quarter results. First, we continue to face market headwinds summarized earlier on the call. With this backdrop, last year's third quarter revenue growth of 8.9% will be a very difficult comparison in the third quarter of 2017. We will continue to leverage our unique platform to advise clients as they position themselves for when the transaction market improves. Secondly, the Larger Transaction Market segment remains susceptible to variability from quarter-to-quarter, notwithstanding the significant inroads we have made in this segment over the past years. The comparable for the larger transactions during the third quarter will be challenging given last year's nearly 27% growth in this market segment. In closing, our team continues to work hard to navigate through the current market environment, while we continually strengthen the foundation of this company. We believe the stability of the U.S. economy combined with healthy real estate fundamentals will continue to be key drivers for investors to transact. Eventual clarity on tax reform and economic stimulus programs, combined with a more stable interest rate outlook, should be catalysts for higher sales velocity in the marketplace at some point. Until then, we will continue to position MMI by taking market share and investing in the future. I'd like to now open up the call for Q&A. Operator?

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Blaine Heck with Wells Fargo. Please proceed with your question.

Thanks. Good afternoon. So it looked like the financing results were strong as you guys touched on, but I had a few questions related to that. Number one, the number of financing professionals was down. So I guess what's behind that? And should we expect that count to continue to decrease or bounce back up? And then secondly, it looked like the size of the transactions was up but so was the average fee rate. So was there anything kind of anomalous in there that drove both of those up during the quarter?

Blaine, good afternoon. Good to have you on the call. On the first part of your question, the headcount may go down a little bit more in the short term as we transition the sales force to more experienced individuals and focus more on building that tenure throughout the team. And the effect of the refinance business increase did impact the increase in fees. They tend to have a little bit higher fees. We have also put together a couple of very important correspondent relationships that's also helping increase the fees a little bit. And in terms of the average size of the finance transactions, there was really nothing unusual. It just happened to be a quarter of a few larger deals.

All right, that's helpful. And then secondly, can you just talk a little bit more about the balance sheet and investments? You guys now have kind of close to $165 million in cash, another $72 million in marketable securities, so plenty of liquidity. When you look at growing the business, I guess, can you give us any color on investments out there that look particularly attractive on a risk/reward basis? And I guess, can you handicap at all the chances of getting something kind of substantial done? Or should we expect that cash to remain on the balance sheet in the near future given what you're seeing out there?

Sure. Our emphasis really has been deployment of capital to accelerate growth and for us, that focus is some M&A opportunities in our core businesses where we feel like our core competency makes M&A much more viable. And so we have had a number of discussions. Marty referenced it in his comments and we are actively pursuing a number of transactions. As far as handicapping those, there's a price expectation gap out there and we are very diligent in terms of underwriting risk and reward and being very careful given the importance of timing where we are in the cycle and so on. So I can't really handicap it, but I can tell you that we have a number of active dialogues in process right now. Our overall strategy of having a strong balance sheet hasn't changed, and we don't foresee any change in that strategy in the immediate term. Once a year, we look at all of our plans and we update our business plan and capital plan included in that going into 2018. We'll be doing that again later on this year. But the real focus is what can we do on an add value basis to accelerate the growth of our core business, and that's where the emphasis has been. Marty, anything to add?

No, I think you hit it.

Just a quick follow-up on that, can you remind us what's in that basket of marketable securities? And I guess, are those just opportunistic investments or more kind of strategic purchasing of companies you might be interested in owning a larger part of someday?

Yes, a lot of chip away investments, government treasury bonds things like that. Pretty low risk.

Okay. Fair enough. Thanks guys.

Thanks.

Our next question comes from Mitch Germain with JMP Securities. Please proceed with your question.

Hey, good afternoon guys.

Mitch, good afternoon.

How are you?

Good.

I wanted just to talk about the financing arm again, and I'm curious – I'm going to ask Blaine's question a different way, which is the refinancing capability, how much of that was driven by these new agreements you have or just bringing new additions on over the last couple of years that had these relationships that could add that different dimension into your business.

The new correspondent relationships certainly were helpful, but they're not the reason for the increase in refi activity. 75% of MMCC's business is with commercial banks, 10% or so with credit unions, and we have a variety of lenders that we have relationships with out there that we utilize every time there is a need for a borrower. So it was really a broader increase in refinance activity given the overall platform and not limited to ReadyCap and PGIM, although it was helpful to have them online for some of the refi activity as well. And so it really wasn't limited just to those experiences that we've had with ReadyCap and PGIM.

Got you. And then, in your prepared remarks, you talked about many investors on the sidelines, right, awaiting clarity on tax and economic policies. So I'm curious because, obviously, this has been ongoing for several quarters now right? Would you characterize that there has been a greater pause today relative to where we stood earlier this year?

Well, I would not say it's any greater or any less. It feels like it's about the same, and I've been basically judging that based on the survey results we get from some of our clients, surveys that we do, agent forums that we hold around the country, both formal and informal, as I travel throughout the company. And everyone is in dialogue. In other words, we're face-to-face with these clients. A lot of them are our repeat clients. A lot of them are new clients. And they're having the dialogue with us, but the hesitation to pull the trigger to list the property at this particular time or the hesitation as a potential buyer to step up and hit the price expectation is being pulled back, is being held back. And the number one reason that's cited by our clients from these dialogues is, "I kind of want to wait and see what happens with tax reform, I kind of want to wait and see what happens with the economy and whether the stimuli that everyone's talking about is really going be a pretty big magnitude or small." And because there is no distress in market, Mitch, and there is no, if you will, pain in the market from the standpoint of having the discount assets, sellers are taking their time in listing properties. And that, I would say, is the most pronounced sluggishness that we're experiencing in the marketplace.

Are you seeing sluggishness with regards to the ability to access capital? Or maybe a different way to say it is, is the banks – are the banks changing their posture toward underwriting?

The banks have – as you know, they've been very tight. They've tightened a little bit further in the last 12 months or so, but there's plenty of financing available for reasonable loan criteria. LTVs are maybe a little bit tighter, but the issue is not availability of debt capital and certainly not equity capital. The issue is around the bid/ask spread. That's the bottom line. After a six-year very robust run-up in both prices and sales velocity, this, if you will, cloud of uncertainty regarding tax reform and the economic stimuli is just exacerbating what we've began to feel in 2016 as a natural slowdown in the marketplace. It's just making it more pronounced than it would have been otherwise.

And is there that gap, bid/ask gap, is that wider, narrower, across any specific asset class?

Really, in the second quarter, in general, it was pretty unchanged. And yes, the gap is wider on riskier assets, hotels, some older shopping centers, suburban office, and of late in the last two quarters, a bigger gap in the institutional $20 million plus segment, especially seniors housing and self-storage and institutional apartments saw that gap widen in the last few months.

And then lastly for me, obviously you're pretty aggressive on the hiring front, but obviously, there's a big effort to bring in experienced producers, really grow out the IPA business. Any real change in the way that you're approaching your hiring today?

The strategy is the same, a steadfast focus. Most of the experienced people that are joining us are joining for the platform, joining for the management support, and it's not so much of a financial acquisition if you will. Although very similar to some of our M&A discussions, we're also in talks with several larger teams that really aren't companies, but they're more individuals and smaller groups. In fact, as I mentioned in my comments, a number of industry veterans of that stature have joined us in the last several months in some key markets, Chicago, New York, Seattle, Southern California, a little bit around the entire country.

I've seen that. And then with regards to the management team, division regional leaders, I mean, are you kind of – is that – I know, obviously, after joining, you kind of made some shifting there. Are you complete where you stand with regards to that?

Yes, our management streamlining and reorganization plan of 2016 was executed and put into place really with very good results. We're very happy with what we're seeing out of our new leadership team as well as some changes we made in our local management teams around the country. It's very encouraging. We have just a phenomenal level of energy that we're seeing among our sales force and throughout management and a bunch of people that are very eager to see the company get back to aggressive growth mode.

Great. Thank you so much.

Thanks, Mitch.

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

Great, thanks. Good afternoon guys.

Hi, Josh.

I'll first turn to one of the comments that you've made in the last couple of quarters about expansion into some key market areas. Could you just talk about your national strategy on that front and whether you approach market expansion from a target penetration rate or whether you're continuing to gain market share and expand in markets, generally speaking, like California, in a meaningful way still?

Well, as I've said on a few other occasions, we have so much room for market share gains in so many markets. It's very hard to limit the strategy to any one or two areas. I give an example, in our apartment division, which is the leading sector of the company in terms of market share, we still have significant room to get our market share to levels that are even close to our top 10 offices within that particular segment. So there's plenty of growth opportunity, really, everywhere. What we've done is to articulate a physical plant-related strategy as not one of additional office openings because we're pretty much in all the major metros that we feel we should have a major office in. But in a lot of these metros, we're seeing so much opportunity in the greater metropolitan area beyond the boundaries that we've served traditionally. So we're either expanding the footprint as the leases roll over. And we've done that in half a dozen strategic locations, and it's looking like it was a very, very good strategy as we're now filling that expanded office space with very good producers and covering a wider market area. And in some cases, we're actually opening satellite offices where it makes sense. There is enough of a pocket of stock, of properties and good enough velocity for us to assign people to cover certain suburban markets or outreach markets via smaller, if you will, satellite offices. So we're doing both of those strategies, but the most pronounced one has been the expansion of major offices in major metros just to have more capacity to service a greater market area.

Got it. Okay, that makes sense. I guess, maybe to that point, could you just comment on the competitive front and what you're seeing in terms of churn from maybe your more senior brokers today versus an expanding market?

Yes. Our five year and above cadre of agents have had a very, very long retention history with the company, and our loss rate in our most senior agents have been minimal over the years. We're very proud of that. We never take that for granted, and we're always focusing on making sure that stays the case. We're focusing more and more on how to help the newer agents transition to being very productive sooner and therefore, raising the probability of not so much our brokers leaving for the competitors but our brokers leaving the industry or the business. This, as you know, is a very tough business and so we're really focused on making our conversion rates of newer agents healthier and better through better training. I think the leadership question that Mitch asked is a very important one as it relates to our improvements on training and local management guidance and so on. So that's how we really look at it. Nothing has changed in the last quarter or certainly in the last 12 months materially from a competitive point of view to share with you other than that it's a very competitive business and everybody's always trying to grow. And that's always been the case.

And then the last one for me just in light of the comments the last couple quarters from Marty. I'm wondering if the SG&A line, if at some point the cost containment measures that the company is going through right now ends up offsetting some of the increases in costs due to stock comp, investments in the company, additional training, et cetera.

So I guess, Josh, what is your question, though, in regards to SG&A?

Sure. So just trying to get a better feel for where SG&A is going to move in the back half of the year and whether there is still cost containment measures that are being implemented and we should see a bit of pressure on SG&A or whether the increase in stock comp, tech investments and the like are going to keep it maybe at current run rates or a bit above last year.

Got it. So I think I mentioned in the last quarter's earnings call that we had a range of SG&A being at anywhere between $175 million to $180 million for 2017. It looks like it's going to be on the lower end of that range. And then in terms of cost containment programs, we just continue to watch our expenses closely without, obviously, sacrificing any services that we give to our agents. But you have to also realize that in the fourth quarter, though, that we typically – SG&A typically rises a few million dollars because of increased bonus accruals and other types of expenses such as trade shows that typically run during the fourth quarter.

Okay. All right. Thanks for the color. That’s all for me.

Thanks, Josh.

[Operator Instructions] Our next question comes from Peter Christiansen with Citibank. Please proceed with your question.

Good evening. Hi guys, how are you?

Hi, Peter. Fine, how are you doing?

Doing well. Hassam, I was wondering if you'd talk about if you see – if you've noticed any changes in 1031 activity. And I guess, as we come up to the debate on tax reform probably over the next quarter, with that being the one issue that's kind of up in the air, is there any feeling or impetus from those interested in doing 1031s to get them done before this? Or is this still more of a wait and see?

We really have not seen any meaningful change at all in the pattern. As a percentage of the business that includes a 1031 exchange, we certainly have not seen a rush to get them done, and we haven't seen any kind of a decline. It's been steady as she goes. Even after the surprise outcome of the election, November election, if the marketplace is speaking through that, it's basically signaling that they don't anticipate much change, if any, with the 1031 exchange. Otherwise, I think, we would have seen a rush to get them done. And if anything through our – as I was mentioning, our client surveys and agent forums and interactions with our clients around the country, if anything, the general expectation is that if there's a modification to the 1031 exchange or elimination of it, it would probably be offset with some other changes to the tax code that would be favorable for real estate. So there's a lot of speculation. Some industry groups think it's going to go away. Some industry groups think it's not going to go away. It's all pure speculation. We're really just focused on evaluating each situation with each client, doing the best job we can to help them execute the right thing at the time and try not to get too sidetracked with speculating what may or may not happen. I think, in time, whenever that is, when we get some clarity on either direction, it will be very helpful in the psyche of the investors to know what the rules are. And that way, they can make their decisions accordingly, and we can move on. And that's kind of been our little bit of experience here over the past three quarters now since the election outcome regarding 1031 and taxes.

That's great color. And then I think you've been pretty vocal on saying leverage should return next year. You've hired all the key top management in the right spots. I guess, the third part of that is you've been reassessing your stock in various markets, trying to optimize where you deploy your agents so on and so forth. Can you give us a sense of where we are in that process? And how do you think that's going to start to bear some fruit in – possibly in 2018?

Absolutely. The key is to get back to revenue growth on a year-over-year basis. We have always been diligent regarding expense management. Some of the expense increases over the past two years were deliberate and part of a strategic plan to improve the company. And we did not react to the cyclical forces in those areas, the infrastructure, the technology and some of the training programs and so on because we really feel that, over the long term, we have to get more and more competitive and improve the power of the platform. So with that in mind, the key is revenue growth. And even though we continue to gain share where the market is declining significantly more than we've experienced in our transaction decline – in fact our Private Client transactions were slightly up for the quarter and year-to-date in a market environment that is contracting right now by somewhere between 8% to 10%. So that really does point to share gains, clearly, for us that we're leveraging to get closer to more clients. As I believe that the – sort of the cloud of uncertainty starts to diminish, we expect to see improvement in sales velocity, and that increased share would be followed by revenue growth. So from a leverage perspective, while we're always diligent on expenses and we'll always be diligent, the real key is to get revenue growing at a healthy rate on a year-over-year basis.

And then I was wondering if you could provide some historical perspective. I know there's been several sources out there talking about how, particularly in multifamily there – in certain markets, there's a lot of new supply that's coming on. And maybe if you can give us some historical perspective of how that affects the transactions market. Is it something that stalls for a bit then picks up? Or is it you see more urgency for people to get out in front of that? Any sense of what you've seen in your experience would be really helpful.

Sure, Peter. I think it's important in answering that question to bifurcate the multi-family rental industry into the luxury high-end units and the other, let's say, 90% of the bell curve that has workforce housing, older stock of apartments, usually smaller assets built in the '80s, '90s – '70s, '80s, '90s and so on because there are really two different worlds. In the luxury sector, high-end apartments, the construction levels have been at record levels over the past, really, three years. And after a big drought of virtually no supply coming on after the recession, 2009, 2010, 2011, we saw those volumes pick up and hit record levels for two or three years in a row and that continues. So if you look at that at a, if you will, surface level, it is very concerning to see 300,000 units a year coming out of the ground over the past three years, year after year. But when you dig into it, I can tell you that the top 10 metros for new construction of apartments account for nearly half of all that volume. So those 10 markets currently have been at risk of overbuilding, and some of them have become overbuilt without a doubt, but it leaves the other half for the entire rest of the country, which is a rounding error in terms of a percent increase in rental stock. And so the industry as a whole is not being overbuilt, but pockets of overbuilding in those specific metros are certainly happening. Velocity of transactions certainly gets affected when there's overbuilding. That's why some of the $20 million plus apartment statistics on the sale side we're seeing do show a pretty big pullback because all of a sudden the bid/ask spread gets higher, especially in those markets and the market needs to recalibrate. On the workforce housing, which, by the way, is, by far, what Marcus & Millichap specializes in, older, smaller assets where there's no new supply, this has not really affected the marketplace, and those occupancies are still very high. Those rent growth numbers are still very healthy, and the bid/ask spread in that category is much less. But that market has been on fire for the past six or seven years, so a little bit of a pause in the growth in transaction activity was not all that unusual. And we're not concerned with anything structural happening to apartments. The overbuilding, I really don't think is at levels that are going to affect the industry as a whole. We just need to get through the current phase of this cycle and see transaction velocity pick back up.

That’s really helpful. Thank you. That’s all from me. Nice execution this quarter guys.

Thanks a lot, Peter. Appreciate it.

Thank you. At this time, I would like to turn the call back over to Mr. Hessam Nadji for closing comments.

Thank you, operator. Once again, on behalf of the entire Marcus & Millichap team, I want to thank you for joining our call. We look forward to seeing some of you on our road shows coming up over the next several months and to have you back on our next earnings call for the third quarter. Thank you very much.

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