Greetings, and welcome to the Marcus & Millichap’s Third Quarter 2018 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, Evelyn Infurna, Investor Relations.

Thank you. Good afternoon, and welcome to Marcus & Millichap’s Third Quarter 2018 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; 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 as discussed in the company’s public filings, including its annual report on Form 10-K, which has been 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 these 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 this 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 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 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. And with that, it’s now my pleasure to turn the call over to Hessam.

Thank you, Evelyn. On behalf of the entire Marcus & Millichap team, good afternoon, and thank you for joining our third quarter 2018 earnings call. Before I discuss our results, I wanted to take a moment to acknowledge that October 31 marked our fifth year as a public company. In that time, the company has grown substantially by the numbers and as importantly in skill and experience as a leading brand. On behalf of the management team, we express our thanks, first and foremost, to our clients, for their confidence and trust in MMI. I also want to thank our sales and financing professionals and support team whose commitment and hard work define the company. We also thank our shareholders for whom we strive to create long-term value in everything that we do. We’re very excited about the opportunity to build on our 47-year tradition of value-added brokerage through innovation and excellence in client service. As for our third quarter, I’m pleased to report continued improvement in most operating metrics, which resulted in a 15% year-over-year rise in revenue and a 35% increase in net income. We posted growth in all market segments, expanded our sales force to nearly 1,900 strong and successfully completed two acquisitions in the last few months. Coming on the heels of a strong second quarter, these results are once again attributed to our enhanced client outreach and marketing initiatives over the last 18 months as well as ongoing investments in the Marcus & Millichap platform. The result of our team’s hard work during the quarter are also noteworthy relative to the improvements in our numbers in the third quarter of 2017. Marty will elaborate on this during his presentation. We find the market environment as healthy with relatively flat sales transaction. We clearly see improved…

Thanks, Hessam. I’ll be discussing our third quarter in greater detail. Total revenues during the third quarter grew nearly 15% year-over-year to $211 million, driven by real estate brokerage commissions, which accounted for 91% of our total revenue, and grew 13.4% to $192 million with strong results across all market segments. On the Private Client side, brokerage revenues grew 8.6% on a year-over-year basis for the quarter, driven by 5.5% increase in the number of transactions. This is on top of the 7% increase in Private Client brokerage transactions during the third quarter 2017. In addition to the strategies to grow the business that Hessam touched on, we believe our recent investments in technology, business development and expanded marketing are crucial factors behind these results given a generally flat market environment. We remain vigilant in containing expenses where necessary and making strategic investments to grow our business at the same time. During the quarter, the middle market segment grew revenue and transactions by 27%, aided by easy year-over-year comparisons. However, the larger transaction market segment increased revenue and transactions by 27% and 13%, respectively. We accomplished this while outcome a tough year-over-year comparison which saw revenue and transactions grow 13% and 19%, respectively, during the prior year’s third quarter. As we have mentioned in the past, these market segments tend to be more variable, depending upon the timing of transactions. There were no extraordinarily large transactions that drove this quarter’s improvement. During Q3, we executed 2,427 transactions, which represented an increase of 6.5% from the prior year. Total sales volume for the quarter grew 18.7% year-over-year to $12 billion. Revenue from financing fees generated by MMCC rose more than 40% to $15.9 million for the quarter, primarily driven by growth in our origination sales force, which includes those from Pinnacle…

[Operator Instructions] Our first question comes from Stephen Sheldon, William Blair. Please proceed with your question,

Yes, hi, Hessam and Marty, thanks for taking my questions. First, productivity continued to trend higher in terms of revenue per average professional and brokerage, even as you continued to add more producers. You talked about a few of the factors, but can you just maybe frame what’s driving productivity higher? And how sustainable do you view these improvements?

Sure. On productivity, it’s really important to take a long-term view. In any one quarter, you can have a number of factors that can really influence the averages. And our focus really is improving the productivity through technology, better administrative support, better business development and really trying to support all of our sales and loan professionals to be as vigilant with their time and spending as much of their time on business development and clients as possible. So it’s a variety of things that we’re doing to cause that. And they don’t really just show up immediately from quarter-to-quarter. We’re pleased with this particular quarter’s results. But it’s really much more of a long-term process than it is in any one quarter.

Got it. And then, can you maybe talk about plans to hire in the brokerage business here in the fourth quarter and then maybe as we’re looking into the first half of 2019?

Sure. Our hiring process really hasn’t changed at all and that we have our traditional new agent hiring development and support programs in place as well as the focus that we’ve increased in the last couple of years on attracting and hiring more experienced professionals with the book of business. Both of those are very much intact, they don’t change from quarter-to-quarter, our focus on it at the local level through our regional managers, division managers and our specialty directors who really work together as a team to make all of this happen is basically very consistent from quarter-to-quarter. And it is, as I mentioned in my formal remarks, a more challenging employment environment because of low unemployment, obviously. And so we have really to fine-tune some of our programs. We have the sales internship program that’s designed to attract talented new entries into the business and a couple of other strategies that we’re employing to be competitive out there. But we feel very good about how we’re doing in terms of the hiring and expect to continue going forward.

Got it, that’s helpful. And then just thinking about, yes, trends in the fourth quarter, you kind of highlighted the tough comparison there. Any talks about, I think, the market environment overall being healthy, obviously some puts and takes. But I guess, just – have you seen – just as we think about what you’ve seen through October, have you seen any major change in the environment, I guess, over the last – in September and October, just against more broadly?

What’s interesting is that there’s no shortage of buyer interest, there’s no shortage of capital coming into the industry, both debt and equity capital. We’re actually seeing new capital formations in terms of new entrants into the market, new buyers coming in interested to build a portfolio and acquire assets. And so that part of the equation is very strong. The challenge comes in, in terms of price expectation in that buyers are looking at one set of metrics, higher interest rates, perceived uncertainty related to the cycle and so on, and then sellers who have no distress really in the marketplace, have performed very well, have good occupancies and good rent growth, have a different set of expectations for what an asset should be valued. And there, that defines the bid-ask spread that we’re seeing across the market. That’s really the crux of why the overall sales environment isn’t growing much more rapidly. So you have really good fundamentals, really good rent growth, really good yields supporting the marketplace. On the other hand, you have rising interest rates and this bid-ask spread kind of limiting the amount of velocity that we’re seeing in the market. And that really hasn’t changed a whole lot and we don’t anticipate it to change a whole lot. But all in all, it’s a very active, healthy marketplace. It’s just these dynamics that we are navigating through every day as we speak.

Got it. And then I guess, last one for me. Just on the acquisition pipeline, given what you’ve seen so far with Pinnacle, McGill and Primecorp, are you maybe becoming more comfortable either accelerating the pace of acquisitions or pursuing maybe bigger acquisitions? And maybe talk about the pricing environment you’re seeing out there?

Sure. So let me take you back few years when we commented that it seemed like the valuation expectations was pretty frothy. That was the case, and we were looking at a number of opportunities that didn’t feel right. As I’ve messaged several times now in the past few quarters, we’ve begun to see a lot more reasonable expectations and much more alignment and much more focus on the long-term benefits of being part of our platform instead of just valuation. And that’s what attract us the most. We are most attracted to right kind professionals with a similar culture that are in it for the long term, they want to actually see the union of their platform and our platform result to better growth. And I’m very proud to say that every acquisition we made so far really fits that criteria very well and is a win-win. And so it’s literally driving this process at an organic level of finding these kinds of opportunities instead of a top-down approach of saying, "We ought to complete x number of transactions," and let the organic process of these really good matchups drive how we deploy our capital and invest in acquisitions. And I’m happy to tell you that, that is making very good progress. We are actively talking to a number of additional firms, some of them are larger, some of them are of the same size. So it’s really a matter of fit for us and not so much trying to back into some kind of preconceived template.

Got it. Appreciate the color.

Thanks a lot.

Our next question comes from Jade Rahmani, KBW. Please proceed with your question.

Thank you very much. You guys, along with other firms, were key pioneers in moving into local submarkets and creating a scaled footprint to be able to track that local talent and scale growth. Just wondering if you see any opportunity to expand into the leasing or valuation appraisal with the same kind of local market-based approach?

Sure. Thanks for the question. We have always explored additional business lines as an opportunity to add on to our platform, and those options are open to us. We’ve actually been approached by a couple of different firms that might be interesting. But we really don’t want to lose focus on the fact that our core investment brokerage and financing business that we’ve proven to be fairly effective at over 47 years has so much more room for expansion. We have both share gain opportunity virtually in every product type we serve. We have expansion of certain offices as a growth opportunity and of course, our financing business has significant growth opportunity ahead of it. So we stay very disciplined in terms of what we’re very, very good at and leveraging the opportunity within our core strengths and core competencies. Until we really feel that we have tapped so much more of the potential and so much more of the growth opportunity, it doesn’t make sense to veer off too far from what we’re really good at. Now having said that, the option is always open to have complementary businesses that enhance our core business. You mentioned appraisal, for example. At one point in the future, we may explore that as a way to enhance our investment brokerage and financing business. So we’re – every year, we look at our strategic plan and always consider those kinds of ideas. But right now, our priority is to really grow our organic core business.

In terms of your core client base, can you give us some color and sense of the interest rate sensitivity of the investors that are looking to buy properties at this point? With the blended mortgage rate in the 4% to 5% range, with the Fed anticipated to raise interest rates several times and potentially the 10-year yield responding in kind. How are those investors thinking about underwriting the deals at cap rates that are similar to those all-in financing cuts when you factor in CEs and other things?

Well, the interest rate movement is, for sure, a major factor in the way people make real decisions, and it does have an effect on the overall sales velocity in the marketplace, without a doubt. But there’s a lot of different layers underneath that. The first and most important is that, why are interest rates going up? They’re going up because of a strong economy with job growth which creates demand for real estate and therefore, supports solid occupancies and rent growth. So you have the offsetting rent growth, the income at the property level moving along with higher interest rates. You have some inflation coming into the system now and building. And it’s not hyperinflation, it’s just rising inflation at a moderate pace, which is also good for real estate because real estate historically has been a very good inflation hedge. So those dynamics are actually very positive. Now it does create a bid-ask challenge because it affects the immediate underwriting and valuation. And investors also look at alternative investment. So you’re looking at other places where you can get a return today. If it’s a value-add property where you can actually create some value to enhancements or renovations, that’s a whole different layer of why buy real estate versus alternative investments. And most importantly, the tax reform that we observed over the last year has a number of benefits that make commercial real estate investing even more attractive than it was before the tax reform. Those take time to work through the system. I think the marketplace is still digesting. In fact, there’s still some unanswered questions in IRS rulings that are still coming in. And I think it’s going to take time for that to work its way through as one of several positive factors as to why investing in commercial real estate is favorable. And one of the most important things that’s sitting here today is that unlike more expansion cycles, the industry hasn’t been overbuilt and it hasn’t been overleveraged, which are the two most common reasons we see a major correction cyclically. Those have not been present in this cycle, which has given us confidence that this expansion has – still has lags [ph].

In terms of your client base focused on the affluent middle market buyer, is the – the changes in rules regarding opportunity zones in the favorable tax treatment, their ability to roll in equity gains into real estate investments, for example, and qualified opportunity zones, is that an organizing [ph] theme in which you’re focused currently?

Yes, it’s garnered a lot of interest from clients all over the country. In fact, we have an upcoming webcast with some outside guest speakers to speak to the nuances of the rules. There is a lot of interest in that aspect of the new tax law, for sure. And we are seeing even new interest pop up as people begin to understand the implications of it. So yes, it’s absolutely been a positive factor.

Is there any way to quantify the potential impact to 2019 volumes? Is it potentially a material amount?

It will be impossible to really quantify it because of the rules and regulations and the fact that its geographies are fairly limited, and there are a lot of nuances that an investor has to digest before coming into it as a strategy. So I would not consider it a needle mover in terms of the broader market trends, but it’s certainly a positive effect.

Thanks for taking the question.

Thanks a lot.

[Operator Instructions] There are no further questions at this time. And I would like to turn the call back to Hessam Nadji for closing remarks.

Thank you very much, operator, and thank you, everyone, for joining our third quarter earnings call. We look forward to having you all join our fourth quarter call as we wrap up the year. Thank you very much.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.