Greetings, and welcome to Marcus & Millichap's Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the former presentation. [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 Fourth 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 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 and 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 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 and is available on the company's website, represents reconciliations to the appropriate GAAP measures and explains why the company believes such non-GAAP measures are useful to investors. Finally, this conference 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, and thank you for joining our fourth quarter 2019 earnings call. We finished 2019 on a positive note, achieving 3.3% revenue growth year-over-year on top of nearly 14% in the fourth quarter of 2018. Strength in our Private Client brokerage revenue and financing fees were key forces behind the strong finish. Private Client brokerage revenue expanded 6% after growing 15.5% in the prior period, and financing revenue for the quarter was up 13.4%. The fourth quarter benefited from transactions that had been slow to consummate throughout much of the year as well as our expanded client outreach, marketing campaigns and efforts to replenish inventory. These initiatives were launched in the first quarter of 2019 as the market downshifted. Our brokerage sales volume increased nearly 11% in contrast to a market decline of 7% reported by third-party sources. Our financing volume rose nearly 20% supported by more refinancing transactions. We saw strength in retail, hospitality, office and industrial, which currently represents a small base but a significant growth opportunity for us. For the year, total revenue was just 1% below our 2018 record as we navigated through market aberration. As a reminder, the urgency to transact throughout 2018, offset by the Federal Reserve's aggressive interest rate increases, was followed by a sharp course reversal in early 2019. This contributed to sales declines as many investors paused in anticipation of lower interest rates. These dynamics resulted in essentially flat revenue in our Private Client business in 2019 but particularly impacted our transaction mix. The company's middle market and large transaction revenue had jumped 28.4% and 35.4%, respectively, in 2018 to new records and subsequently declined by 7.7% and 8.4% in 2019. Our financing division, MMCC, continued to…

Thanks, Hessam. In the fourth quarter, total revenues increased 3.3% year-over-year to $238 million. This was primarily driven by real estate brokerage commissions, which account for approximately 91% of total revenues increasing 2.1% to $216 million. Our quarterly brokerage results were led by our Private Client transaction business, which saw revenues increase to $142 million. In addition, revenues from the Middle Market business grew 1.4% to $31.3 million compared to the prior year's fourth quarter growth of 14%. The Middle Market business has been down throughout 2019 after a record year in 2018. Our Larger Transaction business, which also set records in 2018, remained challenged in the fourth quarter with a year-over-year decline of 6.5% to $35 million. It's important to note that in the fourth quarter of 2018, the Larger Transaction Market segment experienced outsized growth of 41%. For 2019, total revenues decreased 1% to $806 million due to real estate brokerage revenues decreasing 2.4%, which was partially offset by increases in financing fees and other revenues. We saw a slight year-over-year improvement in our Private Client business, but it was offset by our Middle and Larger Transaction businesses. While we have been working to cultivate the Middle and Larger Transaction businesses through our IPA division and specialty niches, these larger deals tend to be more variable from quarter-to-quarter. MMI executed 2,807 transactions in the fourth quarter, a 7.8% improvement from the prior year. For 2019, the total number of transactions increased approximately 3% to 9,726. Total fourth quarter sales volume increased 12.3% to $15 billion, while for the year, total sales volume increased 7.2% to $50 billion. Financing fee in the fourth quarter grew 13.4% to $19 million. This growth was a result of double-digit improvement in loan transaction and financing volume primarily from finance, refinancing activities. For…

[Operator Instructions] Our first question comes from Josh Lamers with William Blair.

Yes. Thanks for the margin commentary on the call. That's helpful in framing 2020. Maybe just to kick things off, curious if you could provide some commentary on the CFO search. And Marty, as you look to transition to your new role, could you help us frame a bit better maybe what your top priorities are in the new year?

Let me weigh in first, and then Marty can add any comments. Our search has been going on now since the beginning of the year and has produced a number of candidates that we are looking at both within the real estate industry and financial services in general. And there's some very interesting talent out there that we are considering. As a reminder, Martin is fully engaged and 100% focused on his role as CFO and will be until the appropriate person is found and brought on board and has had some on-boarding and transition period with Marty's help. So he's not going to be moving over to his new function until all of that is done in a very sound and detailed fashion. And he will, really will be essential to helping us better organize and manage all the projects that the company has taken on related to growth initiatives. That includes a lot of internal projects that we've launched where we could use additional bandwidth from somebody who's very familiar with everybody in the firm, in our history and in all of the different projects and its background as well as helping as a participant in the acquisition process, both in the front end and post-closing integration, and sort of being another resource to making sure that the companies and groups that we acquire are integrating well and being supported well.

Sure, sure.

Marty, anything to add to that?

Yes, right. My, first and foremost, my job is really to make sure that this new CFO gets up to speed. And so I'll be spending a lot of time with this person to make sure that it's a very smooth transition as well as transitioning to my new role. So I'm really looking forward to it. Thanks.

Sure, yes. Maybe turning to MMCC, you noted some progress in hiring there. So I'm just wondering if on a gross basis, you guys had hired some professionals, but due to some departures, you saw the year-over-year and sequential decline in head count. And then also on the productivity gain in the segment, really strong in the quarter. And I'm wondering if that's mostly attributable to the refinance volumes that you noted in the quarter or whether it's a combination of that and bringing in more tenured experienced professionals and whether we should expect some of this productivity gain to continue into the new year and beyond.

Sure, Josh. Let me take the first part of your question. On the top line hiring side of the equation, both for MMCC and the brokerage operation, we've had great success and continue to have success attracting new talent and more and more shift going toward experienced professionals. So you are very accurate in your assessment that the net number decline had to do with both attrition and some proactive terminations on our part as our performance standards have always been very high, and in a slower market environment, it's not unusual for us to expedite some of those departures. And so we are very confident that we'll be able to continue to hire and continue to improve the quality of both our investment brokerage team as well as the finance team. On the productivity front, certainly, the refi increase had an effect on the productivity without a doubt. And we would expect productivity to continue to grow and improve gradually. I don't, wouldn't expect the kind of spike that we saw in the fourth quarter to be replicatable every quarter. But the general trend line of productivity for MMCC should be on the rise.

Sure. And then I guess if I can sneak in one more, I'll just turn to multifamily just given some of the commentary that you provided. It's marginal, but it did tick down again in the quarter and on a year-over-year basis, the exposure to that asset class. And so I'm just wondering how you're approaching that asset class or whether you're prioritizing it given the broader rent control measures versus the value opportunity you see within multifamily, right, how you balance that versus some of the alternative asset types that you talked about and the opportunity there. So yes, and if you could just sum that up.

Sure, you bet. The advantage of who we are and where we are in our evolution of the firm is that not only do we have this market dominance in the private client sector, especially in the multifamily front, we still have substantial growth opportunity both within the broader private client sector and within multifamily. So there is no change in the marketplace that would make us twice about the ability to grow share, deploying more agents into multifamily and do a better job of capturing more of that market. Remember, there are more than 17 million apartment units throughout the United States. It's a huge industry and a very active one. Last year, there was upwards of somewhere between $185 billion to $200 billion of apartment trades. So it's a massive market, and we are the leader in it. We plan to stay the leader in it, if anything, increase our margin of leadership in it. The rent control topic has been a serious one and clearly an influence over the past probably 2 years. In 2018, we saw a lot of sellers decide to sell assets ahead of some rent control concerns in California, in New York and in Oregon. Some of those laws have passed, and sales velocity has dropped substantially in some of those markets. But the market will recalibrate. It is recalibrating as we speak. There's no doubt that there are some short-term pains, but there is nothing from the market that makes us change our strategy related to a very aggressive growth plan for multifamily and, at the same time, diversifying into office, industrial, multi-tenant shopping centers and other product types. So we have this tremendous advantage of having growth opportunity across the board.

[Operator Instructions]. Our next question comes from Brendan Finn with Wells Fargo.

So you noted in your press release that you have an encouraging pipeline of potential acquisitions. I recognize you probably can't get too specific, but could you just maybe expand upon what's in that pipeline and more specifically, I guess, in terms of what you're looking for in terms of size of acquisitions and maybe geography as well?

Sure, Brendan. The strategy has been to focus on those areas geographically and by service capability where we have a gap. And we've been very fortunate to have come across the firms that we've acquired over the past 18 months or so. And their acquisition, integration and early performance have all been very encouraging and very positive. So we are very excited about continuing this strategy of acquiring complementary firms that really bring very little overlap and bring a whole new value internally to our existing sales force that can collaborate with new colleagues that cover different property types or cover financing where we have no financing and then, of course, expand our geographic coverage as well and, of course, the service delivery to our clients. So that's what's been driving our strategy both within investment brokerage as well as financing. We see opportunities in both segments of our core business. Right now, the pipeline of active dialogue is a little bit more heavily tilted toward financing firms, but there are other conversations happening with investment brokerage groups that may be a little bit further behind just in their development, but there's definitely some opportunities on both sides. And we don't see any change to the strategy. If anything, we have brought on some resources and added some infrastructure in order to be able to scale this process and not only do it more effectively and do more deals but also mitigate that risk with careful underwriting and very detailed understanding of these firms before they're acquired. Let me just also emphasize that this acquisition strategy is really a supplement to our organic growth model. We are not, in any way, shape or form, taken the foot off the gas on executing our core business in an organic fashion better and better all the time. That's where our training enhancements, our technology enhancements, improving our internal communications and best practices, a lot of things that we've shared with you in the past, really go to this mission of doing better and better work around our organic growth execution. And that is absolutely our continued top priority.

Got you. That's helpful. And then the Larger Transaction segment is kind of notoriously volatile. So I guess after a down year in 2019 relative to 2018, are you guys expecting more strength in that kind of market segment in 2020?

Yes, I would look at that business on a longer-term basis for us in that it is a part of our strategy to penetrate larger transactions for 2 reasons. One is the retention of our brokers. As they mature with the company, they naturally want to engage in larger transactions, and we need to provide the tools, the platform, the brand to enable them to do that. That's what we've done over the past 5 years. And if you look at the overall trend line of how much of our business is now coming from these larger transactions, over the long term, it's steadily grown. So it has ups and downs in a given year because of some market conditions. And remember, most of the clients we service even in larger transactions are private clients. A lot of them are private investors that have joint ventures with institutional capital. And of course, a lot of them are true institutional clients that we service through our IPA division. So because of the private client nature that shows up in the larger transactions, there could be market movements and changing conditions that affect sales from 1 year to the next. In terms of how we see this playing out, we're continually adding more brokers, both internally through organic growth and through the external hiring of new talent to do more and more larger deals. So the strategy is to continue to expand it. 2020, it will be very hard to forecast because that segment tends to be more volatile. It wouldn't be responsible for me to give you a forecast. But if you think about the fact that we grew somewhere between 28% to 38% in those 2 segments in 2018 and the declines were around 7% to 8% in 2019, over the 2-year period, that business segment continues to show very healthy growth.

We have reached the end of the question-and-answer session. At this time, I would like to turn the call back over to Hessam Nadji for closing comments.

Thank you very much, operator, and thanks to all of you for joining our call. We look forward to seeing some of you on the road and look forward to having all of you back on our next quarterly call. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.