Greetings. Welcome to Marcus & Millichap third-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 of ICR. Ms. Infurna, you may begin

Thank you. Good afternoon, and welcome to Marcus & Millichap’s third-quarter 2019 earnings conference call. With us today are President and Chief Executive Officer Hessam Nadji and Chief Financial Officer Martin Louie. Before I turn the call over to management, please remember that our prepared remarks and the 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 are 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 statements, 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 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 my pleasure to turn the call over to Hessam Nadji.

Thank you, Evelyn. On behalf of the entire Marcus Millichap team, good afternoon, everyone. Thank you for joining our third-quarter earnings call. MMI faced some headwinds during the third quarter, culminating in revenue and net income declines of 5.9% and 7.5% year over year. Investor sentiment became increasingly clouded by headlines on recession and trade fears while many investors opted to postpone transactions in anticipation of lower interest rates. This is a sharp contrast to the urgency in the marketplace we saw last year, given the fed’s four consecutive rate hikes and aggressive forward messaging. Internally, we experienced more variability in transaction closing and overall execution time line, as well as a persistent bid-ask spread. A transaction mix during the quarter also contributed to the revenue decline despite the company’s total number of transactions and volume actually being essentially flat with last year. Given the natural variability of the real estate transaction market, we have continually balanced optimizing results in the short term while reinvesting in the company for the long term. In this spirit, a five-year look back at MMI reflects revenue growth of 46%, pre-tax income growth of 39% and sales force growth of nearly 40%. This is based on trailing 12-month results through the third quarter of this year versus the same period five years ago. These numbers were achieved in light of flat to declining market sales in three out of the past five years. Now looking forward, let me highlight a number of factors that we’re encouraged about. First, despite a choppy sales environment, real estate fundamentals remain healthy across virtually all property types. The historical tendencies to overbuild and over leverage during an expansion have not occurred in this cycle. The economy continues to generate solid job growth, fueling consistent real estate demand and…

Thanks, Hessam. Before diving into our financial results, I want to thank Hessam and the board for allowing me to focus my attention toward the company’s growth initiatives. I’m very excited for this new opportunity to help our team take the company to the next level. And now for our financial results. In the third quarter, MMI executed 2,435 transactions for the total sales volume of $12 billion, which was slightly higher than the year-ago period. Our average commissions per transactions came in lower due to transaction mix during the quarter. Total revenue was $198 million, which reflected a 5.9% decline over last year’s third quarter, which has increased approximately 15% year over year. Real estate brokerage commissions, which account for 91% of our revenue, decreased 6% to $180 million while financing revenues grew a modest 40 basis points to $16 million. We experienced a 3.7% decline in private client revenue for the quarter, which came in at $121 million as a result of a slower sales environment as many investors opted to hold on to assets in the immediate term and/or refinance. Revenue in the Middle Market and Larger Transaction businesses declined nearly 17% and 7%, respectively, as activity levels in Larger Transactions continue to slow this year after a robust increase in 2018. As we have noted, larger deals, particularly executed by private clients tend to be more variable over time. Additionally, we were boosted last year as interest rates were rising, and the fed was aggressively messaging further increases into the future. As a comparison, combined revenues from our Middle Market and Larger Transaction businesses were up nearly 27% in the third quarter of 2018. As Hessam noted, we have seen less urgency to transact in the market this year in anticipation of declining interest rates. Year…

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

Hi, guys. Thanks for taking my questions. And congrats on the new role, Marty. You talked a little about the opportunity in the industrial sector and the boost it probably had to overall industry volumes. I think you break out some vertical exposure, but I don’t think you do an industrial lease that I’ve seen. How big is that vertical for you right now? And how do you think about going out for that opportunity? Is it a major focus in the near term? Or are you talking more longer term?

Stephen, thanks for your question. Right now, industrial is one of our smaller product segments. And we have a very aggressive plan to expand it. We’ve had some success in a number of metros in the last 18 months since we really put the plan together. And that has shown us that there is a very good opportunity for us to penetrate the market. It’s a little bit more complicated in that there’s a lot of owner user billings, and our value proposition is a little bit different. And therefore, we’ve had to kind of tailor our approach to the client base. There’s a lot of sale-leaseback opportunities. These are a lot of small businesses that have a lot of capital tied up in their real estate. And so there is a pretty significant educational part that we bring to these small businesses. They have to be private investors, so from that standpoint, it’s very much right down the fairway of the kind of a customer base we’re used to servicing. And it’s shown very good success, and we’re looking for different ways to scale it in a variety of metros. But today, it’s a relatively small revenue base for us. And that’s why when we compared our performance to what’s happened in the market, we had to dig a little deeper to understand why the normal pattern of how we outperform the market from a transaction perspective, penetration perspective, a market share perspective didn’t look right if you look at the headline numbers. And it turns out, if you exclude industrial, which again, is a small base for us, the market contracted by 11.5% when we were essentially flat on a year-over-year basis. So that’s why it was important to point it out.

Got it. Makes sense. On the elongated deal time line, is there any way to frame how much they may have expanded? And then any potential quantification of the degree of impact from the transaction pushout that you noted?

We don’t really quantify it. We certainly track it internally. But from a disclosure perspective, that’s not information that we normally publish. However, I can tell you that transaction time lines have expanded somewhere between 7% to 10% over the last year or so. And it’s just a natural byproduct of the fact that it’s taken more time to bring a buyer and seller together, certainly because of the bid/ask spread in the marketplace, the negative headlines and some of the uncertainty that I spoke to during my formal remarks, but also to get the loan secured and this new element of timing, given the expectations of falling interest rates. That has been a factor this year more so than we’ve seen before. And it’s a combination of all those things that we are working our way through.

Stephen, this is Marty. One of the things I’d like to add to that is that the good news, though, is that when you look at some of our other metrics like died deals that were under contract, as well as expired listings, all of those metrics are at historical low levels. So that’s the promising part about our pipeline right now.

Great, thank you.

[Operator instructions] Our next question is from Mitch Germain, JMP Securities. Please proceed with your question.

Thank you. I know you’re doing some marketing and other client outreach, and you said – I’m curious, based on your comments, how long until you start to see results from those efforts?

Mitch, normally, when we have intensified marketing campaigns and the kinds of additional activities that we have been implementing over the past six months, it takes one or two quarters to see additional listings that come out of that process and additional closings and maybe a little compression of time lines because we tend to reach bigger buyer pools through these activities. In this environment, it’s taking longer for all the reasons that we’ve discussed earlier. So I can’t really quantify it, but I can tell you that the interest level of the clients is there, the attendance levels are definitely there, which really tells you that our clients are looking for direction. Our clients are trying to decipher all the conflicting data points that are coming in and what does this mean to them. And so from the standpoint of getting closer to more private investors, more institutions and everything in between that we’re targeting for relationships, this is really helping us get the brand out there and open dialogue with a lot more people, and – but it’s taken longer for all of that to translate into specific listings and closings.

Got you. I know you used to talk about the cross-regional sales activity. I’m curious where that percentage sits.

Well, to your point, Mitch, we have continued to engage in those, not only in the United States, but also internationally through our Global Capital Markets initiative, where we have brought a Marcus & Millichap’s lag representatives and our inventory to about half a dozen international symposiums around the world predominantly capturing private investors from different countries and regions around the world that are very interested in U.S. real estate. But domestically, the connectivity between all of our various regional activities has become much more inventory-based. For example, we just had an event in Florida, we had an event in Southern California, we just had an event in the Bay Area. All of these events are now pivoted toward featuring inventory and connecting local buyers, especially coastal buyers that are looking to move capital to a higher cap rate markets or rotate capital from one product type to another, and we’re getting a lot of traction. And so far, the results have been great from an attendance perspective. And one of your questions last time, Mitch, was about the tracking of the metrics from all these events and some of the expenses that are related to it. And as a reminder, we track every attendance, both physical and online and follow-up with the clients and track how much business eventually comes from these activities.

I’m curious about the cadence of transactions in the quarter. It seems like – did you see a pickup as the quarter progressed? I know it’s not a metric you’ve shared in the past, but I’m just curious about momentum in the business.

Actually, sentiment and activity slowed down in the latter part of August and the first part of September. So a lot of the headwinds that I referenced in my formal remarks really intensified in the latter part of the quarter. If you recall, in August, there was just a lot of negative headlines regarding the inverted yield curve, trade wars and recession fears, a lot of which has not subsided, thankfully. But there was lots of activity, incoming phone calls, a request for information from our clients as a reaction to all of that. So it was a really later part of the quarter that showed the increased concerns.

Great. Last for me. Curious about the performance of the M&A that’s close. I guess, there’s been, if I’m not mistaken, four transactions, I believe, three of which have kind of been absorbed, and I believe one newer one. I could be off on that, but I apologize. But I’m just curious about how performance is tracking relative to your expectations.

Sure, Mitch. We have executed six transactions since June of 2018. And obviously, their maturation time with us is a key point as it takes some ramp-up for each of these companies to get listings, have a chance to market them, to say nothing about getting acclimated and integrate it into our system and so on. So they’re at various stages. Some of our transactions closed in late 2018 and early 2019 with Form being the last one that closed in October. So they were at various stages. But what I can tell you is the amount of interconnectivity, common client opportunities is really encouraging. It’s – we’ve seen it across the board, especially when you look at some of the Canadian opportunities where capital is looking to deploy various product types for United States, our expanded Canadian presence has already turned into a few referrals. And the integration of financing and our brokerage in Cleveland throughout the Midwest has been very successful. And they were very encouraged. This is one of the key reasons we’re looking to scale our acquisitions, we’re looking to very carefully in a calculated fashion, dedicate more resources to it because I think we’re doing it right. It’s all ground-up organic types of common cultures that drive the interest on both sides. And part of dedicating Marty’s experience and time and energy to it is tied into that strategy.

Well, I wish Marty the best.

We have reached the end of the question-and-answer session. And I will now turn the call over to Hessam Nadji for closing remarks.

I’d like to thank everyone for joining us for our third quarter call. We look forward to seeing some of you on the road and your attendance on our next quarterly call. Thank you very much.

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