Greetings. Welcome to Marcus & Millichap's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen mode. A question-and-answer session will follow the formal presentation. [OperatorInstructions] Please note this conference is being recorded. I will now turn the conference over to your host, Evelyn Infurna. Thank you. You may begin.

Thank you. Good afternoon, and welcome to Marcus and Millichap's Second Quarter 2020 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, the COVID-19 pandemic, 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 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, 2020. Although the company believes the expectations reflected in such forward-looking statements are based on 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 reconciliation 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's my pleasure to turn the call over to Hessam Nadji. Hessam?

Thank you, Evelyn. On behalf of the entire Marcus & Millichap team, good afternoon, and thank you for joining our second quarter 2020 earnings call. We extend our well wishes for health and safety to everyone on the call. As expected, the health crisis and corresponding economic shock created a major disruption in the commercial real estate transaction market during the second quarter. Uncertainty regarding occupancies and rent collection challenged asset valuations, while physical impediments, such as the inability to inspect or tour properties and meet with investors, made it difficult to bring buyers and sellers together. Conditions were further aggravated by lender caution and tightened underwriting. Based on preliminary estimates from Real Capital Analytics, transactions in the marketplace dropped by 60% year-over-year. For the quarter, MMI's revenue of $117 million reflected, a 44% decline, while a 41% reduction of controllable costs contributed to adjusted EBITDA of $4.2 million and positive net cash flow from operations during this very challenging period. This was achieved despite a 180-basis point increase in our commission rate due to a larger share of revenues coming from our more senior brokers, similar to past market disruptions. Revenue was supported by the residual momentum of our record pipeline prior to the pandemic and resurrection of a number of transactions that had been canceled or delayed in the earlier part of the quarter. Examples include creative solutions such as seller financing and contract modifications to accommodate buyers for short term uncertainty. Notwithstanding our disappointment and frustration with these results, we take some encouragement in meeting our primary goal of preserving the company's strong balance sheet, while marching forward with strategic infrastructure investments and strategic acquisitions. As we shared on our last call, we moved the company to remote operations immediately after the pandemic hit and delivered a…

Thanks Hessam. Total revenue in the second quarter declined 44% year-over-year to $117 million, reflecting a rapid and broad-based decline across all of our business lines as a consequence of the health crisis. Revenue from real estate brokerage commissions accounting for 88% of our revenue fell 45% to $103 million, while financing fees fell 28% to approximately $13 million. Our private client market segment which accounted for 69% of our real estate brokerage revenue for the quarter was down 45% to approximately $71 million with transactions falling by 43%. Revenue from larger brokerage transactions for the same period also contracted to $16.4 million for a smaller decrease of 37% due to an easier comparable to last year. Both market segments were affected by declines in multifamily and retail transactions, our largest product types. Although apartments, single-tenant, and necessity retail have been impacted much less by the shelter-in-place, these sectors' overall declines reflect the broad nature of the market disruption. Financing fees down 28% to $13 million fared better bolstered by an active refinancing market. Refinance transactions which accounted for 66% of total origination fees declined year-over-year by just 5% for the quarter, which helped offset a much larger 38% decline in the financing of purchase transactions. Financing revenue from private client and middle market segments reflected moderate declines of 2.6% and 6.5% respectively during the quarter. However, the financing fee of larger transactions declined 50% during the same period. Other revenues comprised primarily of consulting and advisory fees along with referral fees from other real estate bookers fell 58% to $1.3 million for the quarter. During the second quarter, we executed 1,587 transactions, down approximately 37% from the prior year. Total sales volume for the quarter was $6.9 billion, a 47% decline from last year. Sequentially, transactions and volumes were…

Thank you. [OperatorInstructions] Our first question is from Blaine Heck with Wells Fargo. Please proceed.

Great. Thanks. Good afternoon. Can you just talk about the amount of competition your agents are facing to win deals, when there are so few transactions on the market? And whether that could potentially have any effect on the commission rate given that everyone is kind of reaching for those same deals?

Blaine, good afternoon. Good to have you on the call. Obviously, competition is a constant in our business. But I will say that in market disruptions, especially this one we've seen a lot more of an advantage in increasing our client contact, our brokers really staying the course and being in front of clients and our advantage in having had lots and lots of relationships, especially on the private client side for many years. So that is all paying off, in the fact that we were able to complete almost 1,600 transactions in the quarter and reflects what we believe to be share gains. In terms of the commission rate, we have not seen any kind of a degradation in what our clients are willing to compensate us for. If anything, because there is a market disruption and more of a problem to solve for our clients, we believe our value is even more pronounced than in a normal market environment. So, no concerns in that area at all.

Great. That's helpful. And then Hessam or maybe even if Marty wants to chime in in his new role, can you just talk about the opportunity set that you guys see in front of you with respect to business acquisitions? Are you seeing a lot of agencies out there that are much more willing to entertain an offer than maybe they would have been five months ago? Or is it still too early for that sort of kind of motivating selling to occur?

Well, first of all, this is Hessam. I'll start with some comments. First of all, the business itself is really temporarily in this logjam that we're experiencing because of the uncertainty around pricing and of course the economy and so on. Once the building blocks of a transaction become more normal such as, visibility on pricing, a little bit more flows on the financing side and a little more clarity on where the economy is we're expecting a robust recovery to form because of that. And in the meantime, we're seeing a lot of the companies and groups that we've had discussions with over the past several years that had decided to stay the course as independents or being wherever they are come back to us, because of the fact that they're seeing Marcus & Millichap play a leadership role in front of clients in terms of branding, in terms of research. And the outreach that we have executed over the last few months is having as much impact on potential candidates for us as it is on potential clients. So interesting that you should ask this question, because a few of our discussions that are going on right now are renewed ones from some parties that we talked to before. And for whatever reason, we didn't find common ground. And it's not so much of a pricing adjustment per se, as it is the realization of the value of the Marcus & Millichap platform. Now in terms of our underwriting and valuing companies and groups that we're looking to acquire, of course, all of that has been adjusted to accommodate for the fact that currently we're in a bit of a window of uncertainty. But almost every one of these discussions are about the long-term, are about synergies, are about how coming together really helps the target company as well as Marcus & Millichap. And we've done a very tight job in making sure that the companies we're talking to are complementary that they bring coverage in a property type or a market area, where we don't have coverage especially on the financing side. And all that makes it far more of a tight fit than just randomly trying to add headcount.

Great. That's helpful. Thanks guys.

Thanks, Blaine.

[OperatorInstructions] Our next question is from Josh Lamers with William Blair. Please proceed.

All right. Thanks and good afternoon. And thank you Marty for your efforts over the years.

Thanks, Josh.

Hi, Josh.

Hi. Hi guys. So just want to start with headcount. Better net headcount growth in the quarter than we had expected, and you noted that you're continuing to do some virtual recruitment and interviews, which is good to hear. But are you finding it easier to keep brokers in this environment as well, so it's helping on the retention side? And then on the other side of the pandemic, would you allow for upside in your recruitment efforts? Or do you think the normal course of hiring that you guys have targeted in the past still makes sense?

I'm not sure if I understand the second part of your question. Can you repeat that Josh?

Sure. Yes. I'm just wondering if post pandemics given the success that Marcus & Millichap has seen as well as some of your peers in terms of taking market share, you've obviously got better capabilities. I'm just wondering if you're going to find post pandemic maybe it's easier to recruit agents and as a result you would allow for more upside than your kind of normally targeted 100 net additions per year. Or if that pace of hires will continue to make sense and that's what you'll shoot for.

Thank you. Now I understand your question. Well, let me address the first part of the question and that has to do with the fact that our ongoing hiring is resulting in bringing on a lot of new talent, a lot of talent without prior experience as well as our focus on experienced agent hiring. Right through the pandemic, we've never slowed it down. In fact if anything we tried to speed it up. At the same time, while that effort brings in new people a more difficult market environment is naturally going to increase the turnover rate and the fallout rate of trainees and newer agents that have been with the company for two years or less because it is a challenging business and it becomes even more challenging during times of market disruption, and that's a very normal pattern that we've seen. We do believe that after the pandemic and really speaking of real-time, during the pandemic the value of the platform is becoming more appreciated by the marketplace, whether it's among new people frankly as well as experienced seasoned brokers. So we believe it's going to help us now and in the future. Does that mean we're going to change our target number of net hiring? It's too soon for me to declare that. Because remember the other side of that equation is the higher fallout rate in a market disruption. So we're just basically putting one foot in front of the other in terms of making sure we're in front of the right people, we're applying the right evaluation, filtering, interviewing process with the candidates that are coming in and bringing on the best and brightest every which way we can.

Great. Thank you. Now moving on to the client outreach and marketing efforts that you guys have continued for a couple of quarters now maybe and then some. I'm just wondering how you're finding clients and prospects. Are they still receptive to that kind of increased outreach and informational webinars? Or do you end up hitting some kind of plateau at some point with that effort?

Well I'm not so sure if we're going to plateau anytime soon. I'll give you a couple of examples, Josh. In late March when I hosted our first broad client outreach after the pandemic had really impacted the markets, we had 18,000 people attend our webcast which was a record. I think the previous record for Marcus & Millichap had been around 11,000 and that was in advance of the 2017 tax reform. So when there is market news people rely on us for guidance and it's been a major advantage of years of building our research reputation, transactional leadership and of course technology leadership. Another case in point that I can share with you Josh is, our annual ICSC Retail Conference which we host in Las Vegas as part of Recon in May of every year that event usually draws a couple of thousand clients because it's a physical event. We of course held it virtually. We always feature a leadership panel of major CEOs of retail owners and public and private companies and so on. And instead of our typical 2000 clients being the audience of it there was 10,000 clients on that particular webcast. So the silver lining of both our investment in research technology and the massive outreach relationships that our 2000-plus salesforce maintains all the time is the added need for information and our advertising and branding that we are available to help drawing in these kinds of numbers. We're very confident that this level of escalated touch points and interactions with clients, follow-up after the events is eventually going to generate more business and more importantly more long-term relationships.

Yes. That's helpful and good to hear. And then last one for me and I know it's still maybe a bit early to ask but seeing as how we're approaching November sooner rather than later 1031 is back on the table for high earners. And I'm wondering to what extent that tax benefit is been leveraged in transactions across your platform today? And maybe how significant would it be if there were changes to that?

Sure. It's remaining an important part of our business. Typically, somewhere between 25% or so of our transactions involve 1031 exchanges and that's been a steady part of our business for a long time. As a reminder there have been many periods where the 1031 Exchange was a subject of discussion whenever there is a change in administration or discussion of tax laws. And one way or another it's very hard to predict what will happen with the election outcome. And if anything actually does take place that will affect 1031 Exchanges. We've always felt that if for any reason 1031 Exchanges were to be eliminated that doesn't necessarily eliminate the need to sell. It is of course an attractive vehicle for deferring taxes for many, many of our clients, but it's not the only reason that they transact. There is always a driver behind that transaction that is at the root level of what the client needs. Typically for the private client it's the personal drivers, debt divorce, partnership breakups a particular asset reaches a level where it makes sense to take some profits and move money around and so on. We're not overly concerned about it at all. There's been lots of rhetoric around this topic for many, many years. And so far our clients are not reacting one way or the other. Business on that front is actually robust right now because of the fact that the capital that we bring out of apartments especially into 1031 Exchanges of capital into single-tenant net lease retail is the most popular movement of capital. Where a lot of apartment owners run their course of investing in that product type and want a less management intensive investment vehicle through a single-tenant net lease. We're also seeing the movement of capital also from apartments into other property types, but the single-tenant net lease is the most popular and is quite robust right now.

Okay. Thanks for your time.

Thank you, Josh.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Hessam for closing remarks.

Thank you, Operatorand thank you for attending our call. We look forward to interacting with you during the quarter maybe not in person, but definitely via video and looking forward to getting back to normal and being able to get on the road and seeing many of you in person. Thank you. The call is adjourned.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a pleasant evening.