Marcus & Millichap Inc (MMI) 2014 Q2 法說會逐字稿

Greetings and welcome to the Marcus & Millichap second-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Lasse Glassen of Addo Communications. Thank you, sir. Please begin.

Thank you, operator. Good afternoon and welcome to Marcus & Millichap's 2014 second-quarter results conference call. With us today are Marcus & Millichap's President and Chief Executive Officer, John Kerin; Chief Strategy 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, intend, plan, believe, seek, could, estimate, judgment, targeting, should, 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, including the recent conditions in the global markets and in particular the US debt markets; the Company's ability to retain and attract transactional professionals; the Company's ability to retain its business philosophy and partnership culture; 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 the risk factors included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 21, 2014.

Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that those 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 in 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 presents reconciliations to the appropriate GAAP measures and an explanation of why the Company believes such non-GAAP financial measures are useful to investors.

Finally, this conference call is being webcast. The webcast link is available on the Investors Relations section of our website at www.marcusmillichap.com, along with a slide presentation you may reference during the prepared remarks. With that, it is now my pleasure to turn the call over to Marcus & Millichap's President and CEO, John Kerin. John?

Thank you, Lasse, and thank you, everyone, for joining us this afternoon to discuss our financial and operational results for the second quarter of 2014. I'll begin today's call with an overview of the Company's performance and a review of our operational highlights for the second quarter of 2014. Hessam Nadji, Our Chief Strategy Officer, will follow with an update on market conditions. And Marty Louie, our Chief Financial Officer, will conclude by providing additional details on the Company's financial results. We will then open up the call to your questions.

The momentum we generated early in the year continued into the second quarter, producing strong results for Marcus & Millichap. Revenues for the first six months of 2014 increased 42%, totaling approximately $249 million, with real estate brokerage commissions up over 45% from the first half of the year, while our mortgage brokerage fees grew 22%.

Net income for the first six months was $19.6 million, up 103% from the prior year. Our adjusted EBITDA for the first half was $37.5 million, which was approximately 78% higher than the same period last year, along with an adjusted EBITDA margin improvement to 15% from 12% a year ago.

Year-to-date sales volume totaled $13.3 billion, representing an increase in volume of 32% compared to the first half of 2013. During the first six months of the year, we closed 3545 transactions, up 19% over the prior-year period. During the second quarter, we met or exceeded our goals for nearly all of the key metrics vital to our performance, including growth in average number of sales professionals and total number of transactions in total sales volume.

At the top line, second-quarter revenue of $134.3 million increased more than 27% compared to the same period in 2013. At the same time, net income rose almost 60% to $12.8 million over the prior year, and adjusted EBITDA of $24 million was nearly 41% higher than the prior year.

In the second quarter, we closed approximately $7.1 billion in sales, financing and other transactions comprising over 1900 transactions, a new Company high for any quarter. During the quarter, we averaged 1343 total investment sales and financing professionals compared to 1171 in the second quarter of 2013, registering a gain of 14.7%.

Our management team's focus on increasing the number of experienced sales professionals resulted in 92 such additions over the last 12 months. Experienced agents accounted for 19% of the total additions over the last 12 months. As I announced on our last earnings call, we have shifted our recruiting toward experienced professionals, which should result in higher productivity rates and better leveraging of our regional managers.

As you may recall, these are primarily agents from local or regional firms who understand the benefits of our national platform for their business development. As such, the acquisition costs for these agents are minimal.

For the second quarter, our investment sales sector generated approximately $5.6 billion in sales volume, with nearly 1400 closings reflecting year-over-year growth of 36% and 18% respectively. While multifamily and retail remain our dominant sectors, I am pleased with the expansion in various specialty groups. Specifically, sales of office and hospitality properties continue to accelerate at a nice space.

I am also happy to report positive results in our self-storage, tax credits and [long-term] housing sectors, as well as our institutional property advisors division, which continues to build momentum.

For the quarter, multifamily accounted for 38% of our total transactions. Retail came in at 42% and office accounted for 6%. Hospitality, self-storage, seniors housing, manufactured housing, industrial, land and mixed use and other together totaled 14% of total transactions.

Turning to geography, the Western United States represented the largest percentage of real estate brokerage transactions for the first half of 2014 at approximately 41%, followed by the Midwest Mountain South region at approximately 30%, the Southeast region at approximately 15%, and the Northeast Mid-Atlantic region comprise the remaining 14%.

I'd like to point out that one of our key areas of growth is to boost our presence in the Northeast region. During the second quarter of 2014, our number of transactions in this region increased 51% year over year.

As we have stated, expanding our mortgage brokerage division, Marcus & Millichap Capital Corporation or MMCC, is a critical part of our growth plan. During the second quarter, Marcus & Millichap Capital Corporation had approximately $900 million in sales volume and 349 closings, which reflect year-over-year growth of approximately 25% and 11% respectively.

During the quarter we increased the number of financing professionals to an average of 78, up 13% year over year. We continue to focus on increasing our internal financing market share by partnering our financing professionals with our investment sales team and branding Marcus & Millichap Capital Corporation externally as a leading source of financing.

We are pleased with our year-over-year growth in the first half of 2014 across the firm, and continue to expect positive results for the remainder of the year. We are excited to see our growth strategy take form, including the further expansion of our leading market position in the core private client segments, building out our market presence in specialty segments, and further expanding our market penetration in targeted regions.

With favorable market conditions providing support and our management team's execution of our growth plan, we expect to achieve positive results from Marcus & Millichap for the remainder of 2014.

With that, I would like to turn the call over to Hessam Nadji to speak further about overall market conditions and industry trends. Hessam?

Thank you, John. My comments today are intended to provide an overview of the commercial real estate market and, therefore, not necessarily specific to Marcus & Millichap.

The real estate market and broader economy reached several key milestones during the second quarter of 2014. Employers added [816,000] net new jobs, with total employment now exceeding the prior peak by 415,000 jobs. And for the first half of the year, that puts us at 1.4 million jobs added, making the first half of 2014 the best first half since 1999.

Then absorption of commercial space in the second quarter continued to gain momentum, with a shift favoring the lagging office and retail sectors. Both of these sectors are now performing much better, thanks to the reduction of excess space held by tenants for the past several years. As a result of all this, the first half of this year also marks the strongest period of occupancy gains for commercial real estate since the recovery began in 2010.

On the sales front based on preliminary estimates, the market suppressed 20,000 transactions in the first half of 2014, the highest first half since 2007, and 16% higher than last year's pace. Most importantly, the main forces behind the favorable investment market outlook are very much intact. These include low interest rates and expanding an array of financing options and competitive yields offered by the sector compared to alternative investments.

Apartments maintained their lead with an average occupancy of 95.6% nationally, and retail occupancies edged up 30 basis points in the first half to 93.1%. During the quarter, industrial properties showed further strength with a 92.3% occupancy rate, followed by office properties which had an 84.5% occupancy rate at the end of the quarter.

As John summarized, these underlying market conditions are supportive to our business growth, in that our dominant sectors of apartment and retail are very much in demand by investors across the board. At the same time, the market improvement in office, industrial, hospitality, self-storage and other niches is driving more capital into these sectors, which we're actively targeting as part of our growth plan.

Construction starts increased during the quarter, but production of new supply is still well below long-term averages for all property types except for multifamily housing. So the rent growth cycle for retail, office, industrial, and the specialty segments such as self-storage and hospitality is just starting to take form.

For the multifamily sector, average rents are now 11% above the prior peak, which is the driving force behind the construction of nearly 240,000 new units this year. This is the highest level in the last 10 years.

As I mentioned on our last call, the supply/demand equation for apartments still points to a balanced market with stable occupancies, thanks to a strong demand from the entry-level renter as well as the renter by choice or the higher-end renter category.

As a relates to our apartment brokerage business, it is also important to note that the vast majority of the marketplace consists of older, Class B and C stock or workforce housing, for which virtually no new product is being developed. This core product is very stable with steady rent growth and plenty of demand from private clients, as well as value added and opportunity buyers.

In terms of sales composition, the private client market segment, which typically represents $1 million to $10 million sales, once again accounted for 84% of transactions and an estimated 65% of the total commission pool in the marketplace over the past 12 months. For Marcus & Millichap, the segment comprised approximately 91% of sales and 80% of revenues, which illustrates once again the alignment of our business with the largest market segment.

Private investors are clearly becoming more active as properties become tradable and financeable, thanks to rising values. We're also seeing the appetite to trade up in size and quality come into play among many of our private client investors.

Our private clients are also taking advantage of the expanded financing sources to refinance and reposition properties or execute more opportunistic sales, because more lenders are willing to fund Class C and B properties as well as secondary and tertiary markets. In fact, the trend of cap rate declines among B&C properties as well as secondary and tertiary markets continued to play out in the second quarter.

The need for higher yields and more available lending options will continue to fuel this capital movement, which our platform and footprint were specifically designed to facilitate. It should be noted that lenders are still very much scrutinizing deals closely, and we are not seeing the extremes in loan-to-value ratios and other metrics that were present in the marketplace in 2006 and 2007.

Looking ahead, all key economic and commercial real estate indicators point to the continuation of these positive forces that we have summarized. Our concern over the geopolitical and financial market risks have obviously risen since our last call, given the recent events and tensions globally.

Barring any economic or capital market shocks, we continue to expect improving job growth in the back half of 2014, moderate increases in interest rates, and steadily improving property fundamentals.

With that, I would like to turn the call over to Marty Louie. Marty?

Thanks, Hessam. Now turning to our second-quarter 2014 numbers in more detail. Total revenues for the second quarter of 2014 were $134.3 million compared to $105.5 million for the same period in the prior year, and an increase of $28.8 million or 27%. The increase in total revenues is primarily driven by our real estate brokerage commissions. Revenues from real estate brokerage commissions increased to $123.3 million from $95.8 million for the same period in 2013, an increase of $27.5 million or 29%.

Revenues from financing fees generated principally by MMCC, increased to $8.4 million from $6.9 million in the second quarter of last year, for an increase of $1.5 million or 22%. Other revenues of $2.6 million were down slightly compared to $2.8 million last year.

As John explained earlier, our second-quarter revenue growth was strong, and we continue to expect positive results for the remainder of the year.

Now let's take a closer look at some of our revenue drivers within our investment sales activities, which generated more than 90% of Marcus & Millichap's total revenue in the quarter. For the second quarter, sales volume was $5.6 billion, up 36% from $4.1 billion in the last -- or second quarter of last year.

The total number of transactions was 1392 for an increase of approximately 18% from 1177 transactions in the second quarter of last year. The increases in sales volume and transactions are driven by key factors underlying our business model where we saw a 15% increase in average number of investment sales professionals, with a concentration in experienced sales professionals which contributed to an 18% increase in the number of investment sales transactions.

We also saw a 15% increase in average transaction size. This contributed to a 9% increase in the average commission size and a slight decrease in average commission rate in the second quarter of 2014, compared to the same period last year.

Moving on to our operating expenses, total operating expenses for the second quarter of 2014 were $112.5 million compared to $91.3 million for the same period in the prior year, for an increase of $21.2 million or 23%. The increase was primarily due to cost of services, which increased by $18.1 million during the second quarter to $79.6 million on a year-over-year basis.

As a reminder, cost of services are mostly variable commissions paid to the Company's investment sales professionals and compensation related costs in connection with our financing activities. Cost of services as a percent of total revenues increased to 59.3% compared to 58.3% for the same period in the prior year, primarily due to an increase in the proportion of transactions closed by our more senior investment sales professionals who are compensated at a higher commission rate.

In addition, selling, general and administrative expenses increased by $3 million or 10%, primarily due to, one, an increase in salaries related to benefits driven by an increase in headcount in areas of recruiting, and corporate support in connection with our growth and being a public company. Two, an increase in legal costs and accruals. Three, an increase in management performance-related compensation driven by the increase in our operating results. And finally, increases in other expense categories, primarily driven by the growth in our business.

These increases were partially offset by a decrease in stock-based compensation expense due to the replacement of our pre-IPO stock-based compensation award program.

Our effective tax rate was 40.9% for the second quarter of 2014, as compared to 43.5% in the second quarter of 2013. The difference in the tax rate was attributable to being a standalone taxpayer in the second quarter of this year, as a result of our separation from our parent Company as part of the IPO.

The Company's net income for the second quarter was $12.8 million compared to $8 million in the second quarter of 2013. The Company's adjusted EBITDA for the second quarter was $24 million or 18% of total sales, compared to $17.1 million or 16% of total sales in the second quarter in 2013, reflecting continued leveraging of our SG&A costs.

Turning to our balance sheet. Our cash balance at June 30, 2014 was $104.6 million compared to a cash balance of $101 million at December 31, 2013. The Company's use of cash is typically related to limited working capital needed during the year and the payment of taxes. Other than the outstanding principal balance of notes payable to former shareholders totaling $11.5 million and SARS liability of approximately $20.5 million, both resulting from the spinoff related to the IPO during 2013, the Company has virtually no debt outstanding.

In summary, the Company has strong operational and financial performance in the second quarter, and we are looking forward to continued solid performance for the remainder of the year. That concludes our prepared remarks. Thank you for your attention, and at this time I'd like to open the call up to questions. Operator?

(Operator Instructions) Phil Stiller, Citi.

Hi, guys, thanks for taking my questions, and congrats on the strong results. I guess I wanted to ask about the higher average transaction size. It was up about 15% this quarter; it was up 10% last quarter. Just looking for a bit more color on what is driving that.

Is that above, I guess, market from what you're seeing, any contributions from IPA? And then, I guess secondly, does that tie back to the commission rate decrease that you saw this quarter?

This is John, Phil. Thanks a lot fill for bringing that up. What we did in this quarter, we had a large transaction close which skewed the numbers a little bit upward. But typically, if you took that transaction out, we would be about the same transaction amount, same pricing. And maybe it had a little bit to do with our commissions going down slightly on average.

There was a single transaction that caused that?

Yes.

So you're saying if that was not included, the average transaction was about $3.5 million?

Approximately right.

Okay. And then on the headcount growth, I think, John, you mentioned -- not sure if I got this number right -- the new hires, 19% were experienced. Just wondering what the plans were for additional headcount for the remainder of the year, and what you think you could get that experienced mix to over time.

I mean our headcount at this point in time, I mean is moving up gradually. But really our strategy right now is to be able to hire more people who have some experience in the marketplace. A lot of smaller competitors, local competitors in all of our marketplaces can see the value of our platform. We have been pretty successful in getting them to come on board, which then takes us less time to get them into becoming revenue producers.

It is hard for us right now because we started this program about three quarters ago, maybe at the end of 2013. We are starting to see some success and then we're starting to see some better productivity. But right now, our goal right now strategically, is to continue to try to hire more experienced people.

As far as how many at this point in time, I really -- we have a goal to hire as many as we possibly can, but it is not necessarily we are saying we are going to get X amount of people, but that is our goal right now. I bet you in another quarter or two, we might be able to really hone in on that type of number.

Okay, great. And then last question and I will turn it over. The SG&A expense was down sequentially. Just wondering what caused that and what we should look for for the remainder of the year.

Hey, Phil, it's Marty. You know, SG&A I think I mentioned before, typically the run rate for SG&A is around $32 million to $33 million a quarter. And it really isn't so much as a factor of a percent of sales or percent of revenues. So I am still confident that that is our run rate. Probably Q4 is just a little bit higher than that. At least, that is what we are seeing right now.

Okay, great. Thanks, guys.

Thanks.

Brandon Dobell, William Blair.

Thanks. Good afternoon, guys. I was hoping to focus on the producer for one second. When you hire somebody that has got a couple years' experience at a smaller shop -- I guess a two-part question -- one, does there book of business follow them over to you guys? And then two, kind of related to that, are we talking a couple quarters before they start getting into the flow of producing transactions or is it going to take them, I don't know, a year and a half to start making an impact for you guys?

All right, well, let me answer the first question, the book of business. I mean they have clients that I'm sure will follow them over, but really I think what we're looking for more is that they actually know how to do a real estate transaction. And then as they come into our Company, I think our value proposition will enable them to be able to do more business because we have more inventory. We have exclusively listed inventory. We have other people that are professional around in their offices that they can actually bounce ideas off of.

So we are looking for their book of business, but the book of business is really more -- it is really our platform that is going to help them succeed even quicker.

As far as how long it takes, if we get a person that is five years' experience or more, it shouldn't take more than a quarter and a half, two quarters, for them to get their first deal moving forward. If they have limited experience, a couple of years in the business, it won't take them a year and a half, but maybe 6 to 9 months until they get themselves moving in the right direction.

But it is a lot better than some of the statistics we've had with taking brand-new people out and taking 9 months to 15 months for them to make a couple of deals.

Okay. And I guess sticking with the producers but relative, John, to your comments about the office sector showing some good traction. Are you targeting experienced people with an eye towards a specific property type; i.e., let's see if we can get our office business going faster, so let's go after people that have spent some time in the office market? Or is it really just about let's go find some good guys in that local market because we think our market share across every property type has some room?

Well, absolutely what you said secondly is a good indication of what we try to do. But we do look at certain marketplaces and we have our recruiters focused on, say, office buildings in a certain particular marketplace because maybe our market share is a little lower, and there is a lot of velocity and a lot of stock in the market that fits our parameters. So we do both.

Strategically, we are looking for people in certain areas that do office or retail, but at the same time if we run into people in the marketplace, we are going to try to get as many people that are qualified as possible.

Okay. And then maybe, again, sticking with headcount here for a second, as you look across the offices and the guys that are managing those offices, where are you on a scale of 1 to 10 in terms of how happy the board and the management team is with the people at those levels?

And I guess another way to ask it would be how much churn should we expect over the next handful of quarters in that kind of managerial or office head layer in the business?

I mean on a scale of 1 to 10, I would say we are an 8 of our satisfaction with the management team. I mean some people manage for four or five years and do a good job, and then they really want to go back into production sometime. So I would say that currently, we have a few offices that are unmanaged, that maybe somebody else is managing two offices at one time if they are nearby.

So I would say the churn wouldn't be that big, but usually in a year, two, three, four people are replaced or move into a different role in the Company.

Okay. And then final one for me. It is kind of a transaction size question, but not only in the brokerage business but in the financing business, average transaction size increased. So I guess, again, two-part question; was the one big transaction, did that impact both kind of regular brokerage numbers we see, but also the capital corporation? And if it didn't, was there something else going on in the capital corporation side that is driving the average transaction size higher?

Well, in terms of the average transaction size for MMCC, I think it actually -- I think they are starting to do larger -- little larger size loans. It wasn't necessarily one or two single transactions that kind of skewed the numbers. I mean it is just kind of the flow of the business right now.

Okay, great. Thanks, guys, appreciate it.

(Operator Instructions)

Operator, are there any additional questions?

We have no questions in queue at this time.

All right. Well, thank you very much for participating in today's call. And we'd like to remind everyone that we will be presenting at the JMP Conference in New York next month, and we hope to see many of you there. Thank you very much.

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