Greetings, and welcome to the Marcus & Millichap Fourth Quarter 2018 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, Evelyn Infurna, Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Marcus & Millichap's fourth 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 condition; 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, 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 1st, 2019. 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 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, represents 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's now my pleasure to turn the call over to Hessam Nadji.

Thank you, Evelyn. On behalf of the entire Marcus-Millichap team, good afternoon everyone, and thank you for joining our fourth quarter 2018 earnings call. 2018 marked our fifth year as a public company and we achieved a number of key milestones. A few highlights include record revenue and transaction volume, record net income, a salesforce of nearly 2,000 professionals and 80 offices throughout the United States and Canada. We also successfully initiated a capital deployment program for a strategic acquisition. These milestones are a reflection of our clients' trust in us and our 48 year commitment to creating value in every transaction. They are also the result of the hard work, collaboration and skills of the entire Marcus & Millichap team, which we are very proud of. We view 2018 as just a point along the path towards realizing our long-term potential, while creating value for our clients and shareholders. For the year we achieved revenue growth of 13.2% and net income growth of 18.1% adjusting for lower tax rate. This was supported by incremental growth throughout the year and boosted by higher than expected sales in the fourth quarter, which resulted in revenue growth of 13.6%. The primary drivers of our results for the year were the internal initiatives deployed over the past two years. These include, increasing client outreach, focus on growing inventory levels and numerous educational campaigns to help investors navigate changing market conditions. Our intensified marketing campaigns resulted in record investor touches opinions of value and listing. Just as an example, our tax reform and Tax Reform/Opportunity Zone webcast alone attracted over 20,000 investors throughout 2018, illustrating the company's vast market reach. We also believe our investments in proprietary technology and brokerage support were pivotal in facilitating more transactions and achieving higher growth rate. In fact,…

Thanks Hessam. I'll be discussing our fourth quarter 2018 and full year results in greater detail. Total revenues in the fourth quarter increased 13.6% year-over-year to $230 million due to strong performance across the board. Revenue from our real estate brokerage business, which accounted for 92% of our total revenues, grew by 19% to $211 million due to meaningful contribution across all market segments. Revenue from our private client business, which accounted for approximately 63% of our real estate brokerage commission revenue, grew 15.5% to $134 million. Revenue in our middle market segment grew by 14% for a fifth consecutive quarter of growth. Lastly, revenue from our larger transactions were up 41% year-over-year. This was largely due to a number of $20 million plus transactions, for which we obtain higher than usual fees, and some performance related fee premiums collected in the quarter. For 2018, total revenues grew 13.2% to $815 million, driven by real estate brokerage commissions and financing fees, which were partially offset by a decline in other revenue. We saw strong top line improvement across all market segments during the year, with revenues in the private client market segment growing 9% and revenues in the middle and large transaction markets growing 28% and 35% respectively. During the fourth quarter, we executed 2,603 transactions, a 6.5% improvement from the prior year. For all of 2018, the total number of transactions executed by our professionals increased 5.5% to a record 9,472. Total sales volume for the quarter increased nearly 8% year-over-year to $13.2 billion and nearly 10% to $46.4 billion for the full year. Brokers transactions and volume during the quarter increased year-over-year 10.3% and nearly 14% respectively. Moving onto MMCC results, revenues from financing fees increased 6.8% to $16.6 million for the quarter, driven primarily by growth in…

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Stephen Sheldon with William Blair. Please proceed with your question.

Hi. Thanks for taking my questions. I guess first, just based on the commentary for 2019, especially on currently replenishing the pipeline, is it fair to think that there were some potential pull forward of activity, you know maybe out of the first quarter 2019 into the fourth quarter?

Hi Steven, this is Hessam. I'll take your question. There was a little bit of that, but not material enough as a real driver of our Q4 results. We just saw tremendous strength, as I explained in my comments in the latter part of the year, as interest rates came down and so forth -- because we closed a significant amount of our pipeline and the fourth quarter was so active, naturally, it just takes time to basically replenish inventory levels and rebuild the momentum. So pull forwards were somewhat of a factor, but not a major impact.

Okay. And then just in thinking about you know the 2018 brokerage revenue growth, it seems like roughly one third of your top line growth was from recruiting and roughly two-thirds is driven by productivity gains. So I guess as you're thinking about 2019, can you maybe share your thoughts on the expected pace of recruiting, and whether there's an opportunity for productivity to continue churning higher after the really strong performance this year?

Sure. You know, it's very hard to try and quantify a forecast on that, because any year is configured based on the type of talent that you can bring on that particular year. And our discussions with people sometimes take anywhere from 12 to 18 months before they result in an actual change in company for the experienced folks that we hire, and the ramp up -- the newer folks that we hire. So it's very difficult to tell you in a quantified fashion what those ratios will be in 2019. But just know that, we're constantly recruiting training and developing new professional. We've had an emphasis for the past three years on increasing our focus on bringing in more experienced professionals, which has been successful. And of course with the technology investment, the broker's support focus, infrastructure improvements, and productivity is a very-very critical aspect of everything that we do. It just makes it easier for our team to do business, spend less time on administrative activities and more time with clients. So all of it is a major focus. I don't know if I can really quantify a forecast for how much of the growth will come from each of those pieces. All of them are very important to us in 2019 and beyond.

Hey Stephen, this is Marty. And let me just add to that that, you know we continue to strive towards our 100 agents -- net agent growth for 2019. Not going to be any different.

Okay, got it. That's very helpful. And then just within the larger transaction market, you know, really strong performance there again this quarter, composition was a little different in terms of mid-single digit growth in dollar volume, significant increase in the commission rate. I think you briefly mentioned it, but can you walk through again what drove the commission rate there, higher this quarter? And would you expect that to revert back to more normal levels, looking forward, I think it's typically been less than 1%?

Yeah. We definitely would expect it to revert to normal fee percentages. We had a number of situations where we helped clients out of some specific assets that were higher in value, where we were able to earn larger than usual fee percentages. And as Marty mentioned in his comments, there was also some performance related fees that really increased the overall fee for the $20 million plus larger segment. So going forward, it's always best to assume normal activity, and normal fee ranges as you do your forecast for 2019.

Great. Thank you and congrats on a solid end to the year.

Thanks a lot Stephen.

Our next question comes from the line of Brendan Flynn with Wells Fargo. Please proceed with your question.

Hey, guys. Good afternoon. I guess Hessam, in your prepared remarks, you talked about a more favorable acquisition environment than in previous quarters. And since you guys have closed several acquisitions recently, I guess, are you looking to do acquisitions of a similar size in 2019, and then are there markets that you're looking to acquire in?

Hi Brendan. Yes. There are obviously numerous markets where we have either a service gap or a property type coverage gap that we can acquire into. A lot of that has to do with expansion of our financing division, but a lot of it has to do also with just bringing in brokerage teams that are value-add to what we're doing in a particular office. So, we definitely have a geography driven acquisition plan, but we also have -- kind of opened our minds to the fact that the size of the target isn't something that we can dictate, if you will. We know that there are a number of larger firms that will be very synergistic with our model. It would be good for them, it would be good for us. We're in discussions with a couple such targets. But from the standpoint of a business, the acquisitions that we executed, were very much of a ground up, locally driven, relationship driven set of deals that we did, which in our in our minds are the best type, because there's you know, culture, similarities, there is some existing relationships that helps with integration and so forth. So obviously, we would like very much to scale our acquisition bargaining and we're actively doing that. But it all has to do with the quality of the targets and the fact that there is a really good business and cultural fit. We're not going to force acquisitions, because of some esoteric goal. We're very sensitive to that. So I hope that answers your question.

Yeah that's definitely helpful, thanks. And then you guys have also talked about expanding your market share in some very non-traditional asset classes, I guess like senior housing or self-storage or industrial. So are there any certain asset classes that you guys are focused on, for expanding your market share in 2019?

Absolutely. If you look at the composition of our business by property type over the past five years since we became public, you would notice that our multifamily share of our own business has basically gone from about 40% to 35%. That's at a time where the business actually grew, but the share declined, because in the other categories being office, industrial, self-storage, hospitality and so on, the share went from 20% to 25%. So our efforts to diversify the specialization of the company is happening, as we speak, and it will be a major focus going forward. The beauty of our model, is that we have growth opportunity in virtually every property type, including apartment, where we're by far the dominant broker, including retail, whereby we are by far the dominant broker by transaction count, and virtually every one of those property types still offer a lot of growth opportunity for us in a lot of markets. So it's -- I get the question a lot about, what would you like the business composition to be, X years from now? Obviously we wanted to diversify as much as possible, but we really look at it as growth opportunity. Where there is growth opportunity, in every property type, we're out there pursuing it. Office industrial is particularly important to us because of the synergies, that I think those markets will bring to our client base. And if you look at the linkages between our apartment investors doing 1031 exchanges into single tenant retail, or now looking at self-storage or looking at student housing, those cross border, cross product type flows of capital are very important for us and the value that we create for client. So diversity is very important

Got you. Great. Thanks guys.

Thank you.

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

Hey guys. It's Mitch here with Corey. How are you?

Good afternoon. We are doing great, Corey. How are you?

It's actually Mitch here for Corey.

Hi Mitch. I'm sorry I couldn't hear your voice. Hey, Mitch.

That's okay. You previously talked a little bit about the pipelines and how they you know 4Q saw a bit of a pickup as the quarter proceeded and the rates move lower. But I'm curious if there were a lot of deals that throughout the quarter were broken or postpone and did that take some time away from the brokers from building the pipeline as you head into the quarter one and quarter two of 2019?

Sure. I'll say that I will say that a lot of investors that have been on the sideline and not quite ready to pull the trigger, did move in and pull the trigger more than expected before. There was the broken deal syndrome that we have faced before. Mitch, as you may recall in Q4 of 2016 when the interest rates had a movement in the other direction, interest rates went up about 70 basis points in just a matter of a few weeks. There was a lot of broken deals and re-pricing that was a major distraction. In the case of Q4 28, it was a little bit of the reverse of that and that the lower rates and a lot of people kind of moving back in off the sidelines to take advantage of those lower rates. Of course, it kept us busy, but kept us busy for a different reason. That is to core with a lot more transaction than we had in prior Q4. So that said, that was a positive distraction if you will, instead of a negative distraction. And, of course, when you have an outside quarter and still a larger portion of the of the pipeline move forward and inventory moving forward, it takes a little bit of time to replenish but all in a positive sense, not from the sense of anything being broken

I wanted to talk about the cadence of SG&A Marty, two-third. I guess, I understand you know Q1 about 5% higher. How should I think about the quarters after that? I mean relatively you know kind of within band of what the Q1 levels are or do I see a dip into 2Q, some years we saw depth in some years we saw it grow. So I'm just trying to understand kind of how we should think about that line item as we look at the look forward.

Right, Mitch. Yeah. You got it right. We mentioned that if we see Q1 growing 5% to 7% from Q1 2017. Going forward and I think if you look at the previous years that the cadence of SG&A is typically around Q1's level. You're right, it may go up and down of a million dollars or so but it's right around there.

Got you, okay. I think Corey had a quick question as well.

Yes. Hey guys. Thanks for taking my question. I was just wondering if you guys if you guys could quantify what the windfall tax benefit recognized in the fourth quarter were. I know in the last call you guys said it was going to be around $0.03 to $0.04?

Right. Right. It was it was around $1.8 million.

Okay. And then for 2019, what can we expect the normalized tax rate to be?

It'll be -- we believe it's going to be between 26% and 27%. Yeah. So you are so pretty much tax rates to be very similar from quarter to quarter.

All right. Well thank you very much.

Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Hessam Nadji for closing remarks.

Thank you, operator and thank you everybody for joining our fourth quarter 2018 earnings call. We look forward to our next earnings call and see some of you on the road as we travel the country. Thank you very much.

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