Greeting. Welcome to the Marcus & Millichap First Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Evelyn Infurna, Investor Relations. Ms. Infurna, you may begin.

Thank you. Good afternoon, and welcome to Marcus & Millichap's First Quarter 2019 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 amidst competitive pressures; the company's ability to integrate new agents and sustain its growth; and other factors discussed in the company's filings, including its annual report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2019. 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 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 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 first quarter 2019 earnings call. As we anticipated and messaged on our last call, first quarter of 2019 was challenging for MMI's financial results. Revenue growth of 14% and tax-adjusted earnings growth of 25% in the first quarter of 2018 was a difficult comparison, while record transaction closings in the fourth quarter had depleted our inventory and pipeline. As we discussed, the elevated level of activity in the fourth quarter limited the amount of time our brokers had to work on new business. As such, our first quarter revenue declined roughly 8% on a year-over-year basis, brokerage transactions declined 11%, and net income decreased roughly 13%. Aside from our internal challenges basically rooted in our robust 2018 performance, the market experienced a larger scale deceleration. In fact, Real Capital Analytics reported a pronounced decline in the overall market, with more than a 20% drop in sales transactions for the first quarter. I will discuss the factors behind the market decline in a moment, but first, let me jump right into what we're doing to get MMI back on a growth track. As with other periods of growth disruption, the entire MMI team is fully engaged in numerous local, regional, national and even international initiatives to accelerate our inventory, pipeline and revenue growth. These include expanded marketing campaigns, investor outreach drives, cross-market investor forums and videocasts. These measures have proven effective in helping buyers and sellers update their strategies, evaluate acquisition and recapitalization option and execute transactions in a changing market environment. These efforts are similar to actions we deployed in 2017 and other periods of market change in our long history. Our content, training related to real-time market issues…

Thanks, Hessam. Delving further into factors that affected our results, total revenue in the first quarter decreased 7.9% year-over-year to $161 million as real estate brokerage commissions fell 10.8% to $145 million. The softness in real estate brokerage commissions, which accounted for 90.2% of our total revenues, was due to various factors Hessam shared earlier and challenging year-over-year comps when brokerage revenue grew 16% in the same period last year. The decline was partially offset by strong growth in financing fees, which were up 41% to $13.7 million as compared to a 3.3% decline in 2018. The increase was primarily driven by strong growth in refinancing transactions as well as contributions from a key acquisition made last year. This also highlights the opportunity for additional strategic acquisitions to expand our financing services. Looking at the underlying metrics driving our top line, real estate brokerage commissions for our Private Client Market segment account for approximately 66% of real estate brokerage commissions revenue in the first quarter. These commissions fell 9.4% to $96 million, reflecting a 9.2% decline in transactions. Our Middle Market Transaction segment faced a particularly challenging comparable given the 42% revenue growth in Q1 of 2018. Revenue in this market segment fell by 13.5% to $23.6 million. And finally, revenue from Large Transactions decreased 10.6% year-over-year to $20 million, also due to a difficult year-over-year comparison. We saw revenues increase approximately 47% for this market segment in Q1 of 2018. As we have mentioned consistently, these market segments can be variable from quarter-to-quarter. However, I want to emphasize that they continue to show long-term growth and positive contribution to MMI. Expansion into Larger Transactions is part of our strategy to supplement our Private Client business. During the first quarter, we executed 1,950 transactions, down 6.5% from the prior year.…

[Operator Instructions] Our first question comes from the line of Blaine Heck from Wells Fargo.

Hessam, you talked about how the strong financing fees were driven by growth in refinancing transaction. So I was hoping we could get a little bit more color on that part of the business and whether there were any specific segments of the market driving that refinancing activity. And assuming we continue to have a low rate environment, how sustainable would you say that level of refinancing activity is?

Sure. We saw the option to refinance pretty broadly across the business in general. There wasn't any one product type or any one component of the business that had more or less of it. And we've seen other periods were initially when rates come down, there is a propensity to refi versus transact, especially if there's a lot of uncertainty going around on the macroeconomic side of things. So it's not unusual to see this, and I do think that the trend to refi will probably be around for this foreseeable future. But it's not really, I think, a structural change or anything beyond what we really saw an increase on in the first quarter.

All right. That's helpful. And then throughout last year, and, I think, again this quarter, you guys highlighted the large bid/ask spread as a headwind to [your] transaction volume. I guess again, Hessam, is there any way to get more granular on that statement and quantify where that spread is today versus the historical standards? And maybe where that tipping point is where the spread is low enough to support increased transaction?

Sure. Well, on average, we've seen about a 7% to 10% range depending on property type, of course, location of an asset. And that has been fairly consistent in the last few quarters. The difference though in the market environment was that in 2018, with interest rates rising, that was getting actually more challenged. But because the Fed had messaged that the interest rates will be rising not just in 2018 but well into 2019, there was an urgency created in the marketplace that drove a lot of transactions. Fast forward to 2019 when that reversed and the Fed messaging changed pretty radically to more of a dovish stance, that actually created more of a delay in transactions as investors took their time to look for more favorable financing. So the bid/ask spread will actually be helped by lower interest rates going forward given the expectation of ongoing job growth, very, very strong fundamentals and ongoing rent growth. So down the line, it's actually going to be helpful to bring the bid/ask spread a little bit closer, but that was the real contrast we saw in 2019 first quarter versus 2018.

Our next question comes from the line of Corey DeVito from JMP Securities.

I was just wondering about the hiring trends we can expect to see in the remainder of 2019. Is it going to be kind of continued emphasis on experienced producers and alternative property sectors?

Corey, as we have shared with you before, the emphasis on hiring more experienced professionals has not reduced the emphasis on our ongoing and very much proven organic growth hiring in, hiring of unexperienced people and then training them. We're actively doing both. So it's not really a shift in strategy, it's a combined strategy. And we've seen a pretty steady success in the roughly 7%, 8% rate of growth in our sales force over the last 1.5 years or so. And we don't foresee any reason that would change. We are having more and more success with the experienced hiring, mainly because the company's brand is expanding. We've now been a public company for 5 years, so there is more visibility to who we are. And that's actually been very favorable for us.

Okay. That's very helpful. And as far as pricing trends within M&A, the EBITDA multiples on those, is it consistent with what you've seen over the last 12 to 24 months, let's say?

Yes. They have been. What I'll tell you about that is the sentiment of target companies in terms of how they view the upside of being part of Marcus & Millichap has become more important than the actual every bit of a multiple or every bit of a initial valuation. The biggest shift that we've seen in the last, let's say, 12 to 18 months versus for several years before that was the valuation expectations were so frothy that it really wasn't practical for us to engage heavily in M&A discussion. That really changed about a year ago, a little over a year ago. And so we've continued to be encouraged by a lot more reasonable expectations. And as importantly, the understanding of how 1 and 1 would equal 3 in a lot of these situations where we have executed transactions, not just based on the accretive valuation, certainly that's an important part of it but also the growth potential because of the company coming and becoming a part of MMI.

Our next question comes from the line of Josh Lamers from William Blair.

I just want to build quickly on Corey's question a second ago about hiring trends for 2019. Does the first quarter result change your expectations for adding about 100 net new agents in 2019? And does market activity, as we've seen in the first quarter and what you talked about through Q2, impact your expectations for hiring trends for the rest of the year?

The simple answer is no. Obviously, a quarter is a very narrow window of time. We're building for the long term. And so our hiring plans, the managers' efforts to continually be out in the community recruiting talented people, like recruiting team here at corporate doing their jobs and our specialty directors doing their jobs in pursuing more senior targets is all ongoing. We have a great opportunity to add more capacity in a variety of property types and markets, and nothing is slowing that down at all.

Sure. Okay. And then you mentioned some aspects of the Q1 deal flow, some of the delays that we saw there. Will interest rate movements seem to be a big impact? I'm just wondering if at this point, the tax legislation from over a year ago is fairly understood and baked in at this point or if there's any delays that are still attributable to that. And then I guess beyond interest rates, is there anything else in particular that you would call out that might delay pipeline replenishment?

Sure. Regarding the tax reform, you're absolutely right. More and more details have come out. I think there was just even more clarity on the opportunity zones that came out not too long ago, so that process has run its course for the most part. And I think there is a hell of a lot more appreciation for the advantages of investing in commercial real estate due to the changes in the tax law. We certainly saw a lot of that in the marketplace in 2018 and that's -- an advantage of that is that it's here. But the reaction of the marketplace to this change in the direction of interest rates is probably the most profound element that we experienced in the first quarter. In addition to just a lot of noise in the market, whether it's trade wars, whether it's initially in January, the concerns about the inverted yield curve. So there's just been a lot of noise. It's not any one element that slowed the pace of things in the first quarter, it was a combination of them. But I would say that with the Fed coming out in September of last year of basically, formally -- and the quote was "We're a long way away from rates being neutral." And the market anticipation -- the market bets were at 90% that were expecting interest rate increases in 2019. And by January, that was down to 0 because the Fed statement in January was, "We don't see a strong case for moving rates." So that shift, first of all, was unusual in this expansion in that we've had other periods of 50, 75 bp interest rate movements. But we've never had a Fed that came out and gave such a hawkish outlook, not just for the current period but the following year. That is what created a little bit more drama.

Sure, sure. Last from me, it's nice to see the specialty and other property types continue to tick up as a percentage of brokerage revenue. So just two questions related to that. I'm wondering if there are still other property types that you're evaluating and considering moving into. And then what does a general timeline look like before you can get the insights, market knowledge, et cetera, et cetera, up-to-date where you feel confident that you can start seeing some impact of the results on those property types?

Sure. Ironically, we have the good fortune of having plenty of growth room, even in our largest product type, which is apartments and followed by retail in that there's plenty of metros around the country where our market share could increase substantially. So we have growth, lots of growth room in our core main property types, for sure. On top of that, we've shared with you that office and industrial are two very important specialty niches for us to expand into. We've done a lot and had made a lot of progress on hospitality. We have a very significant presence now in the hospitality business. Ranked as one of the top brokers in that niche. Self-storage, seniors housing, every one of these segments has plenty of room for growth. So we're not limited to one or two specialties that we had no presence in. I would say, if there's one that really stands out, it would be industrial. That's where our current market share is minimal and offers the most significant upside. But one of the advantages of our company is that we have growth room across the board.

[Operator Instructions] Our next question comes from the line of Jade Rahmani, KBW.

This is actually Ryan on for Jade. Just following up on the bid/ask spread commentary from earlier, I was wondering if you can elaborate on any notable differences you're seeing between property types or certain markets, perhaps where that spread is the widest today.

That hasn't changed a whole lot. I will say that apartments, of course, have the narrowest. And the one thing we are seeing on the apartment side is that there was such a robust increase in sales both in the market and for us last year, that there has been a little bit of a slowing this year. And the driver of that last year, if you might recall, is that apartment rents have all of a sudden regained momentum because we saw a new surge of demand, a new surge of people opting to rent versus buy. And the, for sale housing market was really slowing last year at a time when apartments were doing really, really well. So there's been a little bit of follow-on slowdown, probably as a result of the big boost last year, but they still have the lowest bid/ask spread. And then if you look at the other end of the spectrum, multi-tenant shopping centers that are in suburbs away from or further away from job notes and population centers have some of the widest bid/ask spread as do some of the older hospitality projects that we've worked on, especially in secondary and tertiary markets. So it's a wide range. And that's one of the key messages that we're taking to our clients right now, in that the market offers so many different opportunities, we're moving capital from market to market or from product type to product type.

And then in terms of the pipeline, you spoke to this in your prepared remarks, but can you elaborate on how that trended through the quarter and post quarter end? And perhaps how it looks by asset type and by product across both your investment sales platform and the debt brokerage business?

Sure. So there is really no specific pattern to a particular property type. We have the, kind of the natural depletion of our pipeline coming into 2019 because of the extremely robust 2018 fourth quarter results where our brokerage revenue was up 19% on a year-over-year basis. And the amount of business we're doing in the fourth quarter to complete for our clients really limited the amount of time our agents and loan originators had to work on a new business. So coming into 2019, that was then compounded by this overall slowdown in the marketplace for the reasons we've talked about. And it was a combination of the 2 that challenged the quarter more than it would have had it just been a depletion of our pipeline. So timing-wise, it's February and March showed more of the slowdown because it just takes time for the extended timelines to start to show up in the numbers. And again, no one product type or region really stood out.

We have reached the end of the question-and-answer session, and I would now like to turn the call back to management for closing remarks.

Thank you very much, operator, and thank you very much for all of you who attended our call. And we look forward to seeing you on the road and in having you on our next earnings call. Thank you very much.

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