Greetings, and welcome to the Marcus & Millichap Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Evelyn Infurna, Managing Director of Investor Relations. Thank you, Ms. Infurna. You may begin.

Thank you. Good afternoon, and welcome to Marcus & Millichap’s fourth 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 variation 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; 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 will be filed with the Securities and Exchange Commission on March 16, 2018. 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 and earnings conference call presentation which was issued this afternoon 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 a 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 Marcus & Millichap team, good afternoon, everyone, and thank you for joining our fourth quarter 2017 earnings call. 2017 was a challenging year in the marketplace and for us, as we helped our clients navigate through a widened bid-ask spread and uncertainty related to tax reform. This tested our results in overcoming in a slower sales environment, while staying the course on critical investments in the Marcus & Millichap platform, which we believe are essential to the Company’s long-term growth. We expanded client outreach and marketing initiatives, we implemented after the market disruption in the fourth quarter of 2016, resulted in steady improvement in our revenue with timeline throughout 2017. These efforts culminated in revenue growth of 7.2% in the fourth quarter compared to a revenue decline of 6.9% in the prior year. We once again grew our Private Client market share and extended our leadership in this vital segment. Our financing revenue grew by 23% in the fourth quarter and 14.3% for the year. And we saw an increase in advisory and consulting fees, as more clients sought our expertise on assets, market and recapitalization strategy. Most importantly, we entered 2018 with more positive leading indicators, particularly, as related to our inventory and pipeline. Let me state that these positive trends are a result of our internal initiatives as opposed to any measurable upturn in market activity. While these developments are encouraging, let me also reiterate, that achieving higher growth rates and financial results for our shareholders, while continually positioning the company for long-term competitiveness, encapsulates managements entire focus. Of course, the biggest news was the passage of the new tax legislation. The anticipation of which pushed many investors to the sidelines, particularly private investors. Favorable commercial royalty tax provisions were retained…

Thanks, Hessam. I’ll be discussing our fourth quarter 2017 and full year results in greater detail. Total revenues in the fourth quarter were $203 million, up 7.2% year-over-year, due to gains across all of our business lines. Revenue from real estate brokerage commissions, which accounted for 87.4% of our revenue, grew 2.7% to $177 million. While our Private Client business slightly decline to $116 million during the fourth quarter, the number of transactions actually increased by nearly 1%, which points to continued market share gains. Our Larger Transaction Market segment performed well, growing year-over-year by 5.1% for the fourth quarter to $26.6 million, despite facing a tough year-over-year comparison with solid segment growth 15.1% last year. For 2017, total revenues increased slightly to $720 million, largely driven by the growth in financing fees and other revenues. This is a slight decrease of 1.9% in real estate brokerage commissions to $649 million. As we have discussed throughout the year, uncertainty has kept many investors on the sidelines, resulting in a slowdown in market sales. This was the primary factor impacting the Private Client Market, which accounts for the vast majority of our revenues. Overall, we executed 2443 transactions in the fourth quarter, up 5.8% from the prior year. For 2017, the total number of transactions executed by our agents was consistent with the prior year at just under 9000. The total sales volume for the quarter increased 12.1% year-over-year to $12.3 billion and $42.2 billion for the full year. As a reminder, larger transactions for real estate brokerage, which are more variable, had outsized revenue growth of 32% in 2016 and experienced 11% decline in 2017. We are encouraged by the results in the fourth quarter in a more challenging market environment and our ability to increase our Private Client Market…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from Mitch Germain of JMP Securities. Please go ahead.

Good evening. How are you?

Hi, Mitch. Great, how are you doing?

I’m great. I’m great. So just want to make sure, I can clarify that. Can you – the consulting fee that you guys recorded in the quarter, some of it – how should I think about it? All of it is in other revenue, or some of it’s in the other revenue, some of it’s in the brokerage revenue, and maybe just kind of talk about the background when that saying.

Sure. First of all, in the whole category of other revenue, which is predominantly consulting and advisory services, you have to remember those are generated by really the same client base we do our brokerage and financing business. So it’s not really a different business line, if you will, just a different type of business with our same client base. But that particular period, we had one fee that was really to project that had actually been filled a while back, but there were some additional fees related to that sale that we’re collected and the best categorized under other instead of sales during the fourth quarter.

Okay. And that was – you said, you referenced that was the$400 million was the senior housing portfolio, correct.

No, it was a different portfolio of single tenant lease product. And it had already closed sometime ago, but this was a residual fee related to that sale.

Got you. And just remind me, Marty, what’s in the other income expense line? Actually, that’s grown a little quarter-over-quarter, is that from – related to the cash balance rise? I mean, how should I think about that line item?

Yes, it’s definitely related to the cash balance. We have some foreign exchange items in there as well.

And deferred comp gains.

Okay. When I think about the business in general, you guys talked about making those investments and sales and marketing materials, given the volatility, post election. Should I’d be thinking that maybe some of the increase in G&A that you got overhead, that you guys of experienced and I think was a 10%, or so, rise in 2018? The increase won’t be as significant, considering that the marketing materials a kind of disappear from the story relative to how much you guys are spent last year. How should I think about the expense side of the equation?

Well, you’re absolutely right, Mitch, and there was a catch-up effect, if you will, on some of the projects that we wanted to invest in both 2016 and 2017 and the bulk of those new projects and new investments have been completed. A lot of the expense items aren’t going to go away, but you are right in that the rate of growth related to those kinds of things will be a lot less.

Great. Hessam, you talked about uncertainty, and again, talking about election heading into this year and then at the end of last year, tax reform. In talking to some of your customers, I know you talked about having 10,000 or so people chiming into your call. How would you consider – the sentiment is across your customers base, I mean, I think you referenced – pipelines are growing, things seem stable, yet, there still some uncertainty. I mean, how do you think they are kind of feeling level constructiveness in terms of kind of where we stood maybe six months or twelve months ago.

Sure, the sentiment has definitely improved since the passage of the tax law, in that people are looking more favorably at the economic outlook, for sure. They are looking favorably on the way that the real estate came out of the tax reform process. But in the backdrop of a market that doesn't have any distress, cash flows are strong, occupancy are strong and there is really no problem to solve if you will in the marketplace even the clients that we are interact with all the time, they really would like to trade, whether it's still one asset and exchange into another asset, or these usual trading that that we normally experience or hesitant to do so on, so there is more clarity on the specifics of the tax reform. As Marty said, it's only been a couple of months. We need some more answers for some questions that are out there regarding really the flow through entities and deductions that apply there and some of the other provisions in the tax code. So the desire to want to transact is there, the capital that’s on the sideline that is looking at assets is definitely there. Sentiment has definitely improved, but in terms of any pulling of the trigger in a meaningfully higher level than a year ago right now, we’re not seeing that yet, but we believe with these you know additional clarities that will come. Now at the same time we've got this interest rate movement component added into the mix and the marketplace is just trying to digest all of this. The biggest difference for us is that, as you said Mitch, in Q4 of 2016, we have this market dislocation and a disruption that we didn’t have in Q4 of 2017, but in Q4 of 2017, we still have the hesitancy and the headwind that we have been kind of saddle with since the election. And it’s our own initiatives outreached more clients, more market initiatives, fine tuning our training and so on, that’s resulted in a little bit of a positive trend on our pipelines and our inventory.

Got you. Last one for me, can I read from your comments that you’re going to be taking up a bit of a moderator approach to hiring, is that the way that we should be thinking about kind of the net adds on the year?

Yeah, two things happen. We have seen this many times through various cycles. When the market adjusts to a different environment than rapidly rising market, like we saw from 2011 through let’s say 2015, a brand new agents ramp-up time, gets stretched, the amount of training that you have to do for them to kind of make it through their first couple of deals and then grow from there gets stretched. Therefore, they need more financial wherewithal to withstand their longer runway of getting going into business, apprenticeship and internships become more important, and then for a newer agents, that have joined us, as you know, we are a very effective hiring company when it comes to new agents and training them. A lot of them, as that make it through for the first six months or for the first year or 18 months and so on, have a more difficult time in this kind of a market environment getting to the next stage. So it becomes a little bit more decisive to say a larger percentage of it probably aren’t going to make it and therefore let’s transition out of the company. So it gets more selective on both the incoming hire and also in terms of maybe shortening the time lines on some of the folks that are unlikely to make it, because of the change in the market environment.

Great, that’s helpful. Thank you.

Thank you.

The next question comes from Peter Christiansen of Citibank. Please go ahead.

Thank you. Hi, guys.

Yeah, hi. Hi, Peter.

Hi, hi. So I guess the comments are kind of mixed in terms of the market, you guys – you have strong property fundamentals that are going on. A couple of confusion after the tax reform, some interest rate changes. I was just wondering you can give us some context that maybe on a sequential basis as the year-over-year is tough, but how is timeline market or inventory or the bid-ask spread kind of change particularly as we had this jump in interest rates?

Sure, we’re seeing pretty stable metrics when it comes to time on the market, maybe just a tiny bit of stretch in the last 60 days, but nothing dramatic. We’re seeing steady reading on our ideal transaction and we’re seeing very stable number of offers on what we believe are reasonably priced assets in fact those assets are move in off the shelves very quickly and then we get multiple offers on them. What the – the change in the marketplace if you will really began in 2016, so if you look at those – all those readings they’re up from where they were and let’s say 2013 through 2015, but they've been fairly stable, except for Q4 of 2016 and Q1 or 2017, because we really did have a market disruption in those two quarters. Since then they've kind of settled back down. The hesitancy is more about on the list side, whether an owner is now at a point where they would like to pull the trigger and list the property. We are seeing some loosening on that front, but then that’s where the price expectation gap, which is you know still in the marketplace not only widening any further, but it’s still holding pretty, pretty steadily, so that’s where the price expectation gap comes in and our job is to really educate the seller on what is real market for their asset and what are their other alternative investments in order to pull the trigger. And so that bid-ask spread is still the main culprit for a slowdown in velocity.

You had a pretty impressive year in terms of market share growth. I guess if we look outside of the top ten some of the smaller players out there. Are you seeing any consolidation at the lower end, the smaller end? And if so are you seeing any opportunities on the M&A side to scale up with perhaps some assets at the lower end that are performing not as well, given they don't have the strength of the platform.

But we are definitely seeing hiring opportunity of experienced professionals that are with smaller companies, because our platform that becomes a lot more valuable, especially because of all the tools and the things that we have in place to help people through whatever market conditions may throw at us. So on the individual hiring and the team hiring, without a doubt, we are seeing opportunities there and we'll have some success there, as I mentioned in my formal remarks. On the acquisition of company's side, your point is very well made, in that the vast majority of players in our core business, whether it's Private Client investment brokerage or financing, there are small to midsized groups that act and function as companies. We are definitely looking at some opportunities to acquire some of those.

And you guys did a great job blocking and tackling this year, given the volatility in the market. A lot with some of your events, switching to more auction type of events and stuff like that. Can you remind us, that was really something that kind of took place, I guess, midyear and is there any way you could quantify what the benefit was on the year? I'm just trying to figure out what the attribution would be between that? And I guess, normal status quo kind of thing?

Sure, we really went on board with the idea that we needed to increase our market outreach, starting in Q4 of 2016. Very quickly, after we saw the interest rate movement and all the things that were happening in the fourth quarter of 2016. So we came into the year announcing additional events, where we could feature listings and investment opportunities across the country. One of the biggest advantages of our platform is the agility, because we haven't managed sales force and we have managers in every local market. Very quickly, we can basically gear them towards certain actions that need to be taken to increase client contact and increase really the exposure of inventory to different types of investment. I'll give you an example, the event that we had scheduled throughout the year really were kind of repositioned to make sure that we are showing higher cap rate inventory from places like the Midwest or Texas and secondary and tertiary markets to the coastal buyers, where we know so many of our clients are looking for a higher yield, but they are not been able to find that in the local market. Where we have over 40% of our business actually get executed with buyers that come out of area, this is the kind of example of being able to shift very quickly and engage in a campaign, which pretty much ran, not just through at mid-year, we’re really started in Spring of 2017 and so on. And that resulted in countless offers on that kind of inventory resulted in numerous transactions. I don't have an exact number to give you as to what came out of that process. But it is a part of – it's part of what we do. And another add on for us want to make sure that we attend and take a very important part in some offshore investor symposiums one in Shanghai in particularly that’s ended up being a very good vehicle for us to expose our inventory to foreign private client investor.

Is there any sense of what percentage of your transactions are from foreign investors?

For us, it’s probably in the low-single digits, maybe mid-single digits and it really is market specific, in markets like Southern California, South Florida, New York and Chicago it plays a larger role. But it’s really not a significant part of our business as a whole.

Thank you, very helpful.

Thank you.

The next question comes from Stephen Sheldon of William Blair. Please go ahead sir.

Yes. Hi, thanks for taken my question. I guess just first within the private capital market business, we saw declined probably for the quarter and year. And I know you gave some color on 2018 expectation. But have you seen any change of this in conversations over the last few months just given the deduction for pass through income that was included in the reform package?

Hi, if you can clarify your question, it change in terms of sentiment or change in terms of strategy, give me a little more before I can answer.

More related to sentiment.

Okay, got it. Is the sentiment is definitely has been affected in a positive way. I mean there's just more excitement there's more enthusiasm, people believe that the lower taxes going to help the economy and real estate the fact that the key provision for real estate stayed intact, whether it's the interest deduction, whether it's depreciation and whether it's the 1031 exchange mechanism. All that is very, very helpful business. Plus with the lower tax rate on passthrough entities once the clients and get them answers and their tax advisors, can give them answers and we've had situations where client is asking the same question of two different tax advisors and they're getting two different answers. So those are the kinds of wriggles if you will in a very well laid roadway that needs to be ironed out. We believe it just a matter of time before they do. But the energy to do more in real estate is definitely there.

Okay, got it. It’s helpful. For the consulting revenue you saw in the quarter related to large transactions, lot of that revenue flow through to bottom line, and I’m guessing and wondering how much of an impact that may have hadon margins in the quarter?

Well, I think you're referring to other revenue category, which is predominately consulting and advisory services. Remember those fees are generated by our agents for on whatever their split is with the company. So they're treated as a brokerage revenues are. We're financing, if it's a financing professional that does a consulting this time in a row advisory fee, but splits with our team does not change based on the type of business they bring.

And should we expect I guess a more normalized level of consulting and advisory revenue if you look through 2018?

Yes. That’s probably – obviously very – it’s a lumpy category in that – it really ebb and flows with whatever opportunities come up for us based on client need. But what's really important is my earlier comment that these are our clients. We're doing business with them. We're selling things for them. We're helping them by things. And there are times when especially larger accounts, institutional investors, portfolio investors, really don't know what to do yet. And or they need recapitalization, restructuring of ownership or other slightly different services than they traditional fail, and were still there, we’re still there without capabilities, without research, without expertise, and certainly without relationship, so that we capture that revenue. But it is lumpy.

Got it. Thanks.

The next question comes from Blaine Heck with Wells Fargo. Please go ahead sir.

Thanks, good afternoon. In your remarks Hessam, couple times you’ve talked about the bid-ask spread you guys are seeing in the market. Can you just expand a little bit on that and has it widened recently and are you seeing that it's affecting kind of large transactions versus smaller transactions or one sector over another or is it pretty consistent across the board?

Sure. We’re seeing the widest GAAP in the product types that you would view as the highest risk product types. So in the most recent months, I would seniors housing and hotels have seen the highest bid of spread, more recently because of all the negative press, frankly over blown press, press that we’ve been out there trying to counter with good educational information sharing on multi tenant retail, which is getting a little bit about throwing the baby out for the bathwater because of all the buzz around e-commerce and all that. Those re-product types are seeing perhaps the widest and I would say maybe why didn't in the last three or four months. And the most feeble on that apartments, manufactured housing are seeing the least. On the apartment side, which is an important part of our business and single tenant at lease side, it’s more about whether the seller is ready to sell, and what their investment alternatives are? What do they want to exchange into? And that’s where there has been – because of the price you know appreciation with the past few years and very healthy occupancies and cash flows. There is less motivation right this minute until we get more clarity on the tax side and so interest rates hopefully stabilize bit.

Got it, that’s helpful. And it seems as though the industrial transaction market has held up better than some other sectors. So how do you guys think about growing there, is there anything specific that kept you guys largely out of the industrial transaction market or is it just kind of a matter of building the team in that sector?

Well, first of all, you're absolutely right, industrial is the hardest sector right now, in fact, if you were to look at the transaction market, and you took out industrial in the way we count the person change in velocity, and our market share gains and so on, industrial has been up year-over-year while other products actually been down more year-over-year. So there’s overall market slowdown will be more pronounced if you exclude it industrial, because it is that the hardest sector and showing additional velocity. For us it has not been a major product type really for two reasons. One, industrial has a very large component of owner user, ownership profile, there are lot of small to mid-size manufacturing or distribution companies, own their own facilities. And so it's not really viewed as an investment vehicle, cash flow type of investment vehicle for the type of investor we typically serve. And the other side of it is that they are such a diversity in the base of industrial spacious very large assets and then very small incubator space and smaller asset, it is definitely a growth area for us. But it’s not a growth area for us in every metro. There is about 13 metros that we have identified as the most conducive to our type of investment brokerage and our kind of client profile we’re hiring, training and deploying for industrial and having some very good success, by the way it's a very small base of our revenue as you know right now, but it was one of the highest growth components for us in 2017, as well as the office sector. And that’s do not so much because that office market is doing anything different than our apartments or retail. But for us it's a matter of having hired more people in the last few years, having improved our training last couple years and having put more emphasis on office and industrial as part of our revenue diversification. We do it as a growth opportunity for sure.

All right. Makes sense. Last one from me. Hessam if you’ve talked about buybacks. How do you think about the possibility of share buybacks given that you guys have kind of a relatively small market cap compared to some of your peers, so I guess what are your thoughts on balancing the desire to grow the business and have liquidity in the stock versus returning capital and maybe taking advantage of what could be maybe temporary price dislocation in the stock.

First, I mentioned in my comments. We don't have the specific plans finalized yet. But we're actively looking at the best mechanism and the best magnitude of returning some capital to our shareholders. Mainly because now we’re in a position as a company, the public company to be able to explore that so whether buy back our practical or not and what size – it’s too early for me to comment.

Okay. Fair enough. Thanks guys.

Thank you.

Sorry. There are no further questions at this time. I now would like to turn the floor back over to Hessam Nadji for any closing comments.

Thank you very much, operator. Let me get just thank all of you for joining our call. Let me acknowledge the hard work of our team and helping our clients through a market change and let me thank our shareholders for their confidence and as we're looking forward to having you on our next conference call. Thank you very much.

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