Marcus & Millichap Inc (MMI) 2014 Q4 法說會逐字稿

Greetings and welcome to the Marcus & Millichap fourth-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, Mr. Steve Swett. Thank you, you may begin.

Thank you. Good afternoon and welcome to Marcus & Millichap's fourth-quarter and full-year 2014 earnings 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, which is expected to be filed with the Securities and Exchange Commission on or about March 9, 2015.

Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give 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 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 measure 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 investor relations section of our website at www.MarcusMillichap.com, along with a slide presentation you may reference during the prepared remarks.

With that, it's now my pleasure to turn the call over to Marcus & Millichap's President and Chief Executive Officer, John Kerin. John?

Thank you, Steve, and thank you for joining us today as we discuss results for the fourth quarter and full year of 2014.

I will begin today's call with an overview of the Company's performance and a review of our operational highlights. 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.

Before I get started, let me just say we are very proud to have completed our first year as a public company with very positive results and we want to thank our clients, our sales professionals, managers, and employees for this company's success.

Let me begin with review of our 2014 results, which reflect strong year-over-year growth across the board. 2014 revenue from real estate brokers, commissions, and financing fees totaled $572 million, which is an increase of 31% from 2013. Full-year adjusted EBITDA was $92.8 million, which was approximately 52% higher than the previous year. With this growth we achieved a significant improvement in our adjusted EBITDA margin to 16.2% from 14.1% a year ago.

In 2014, we closed a record 7,667 transactions, up 16% over the prior year with a total volume of $33.1 billion. This represents an increase of 38.2% and also a new record for the Company.

Turning to the fourth quarter, we had a strong finish to 2014 as we continued to execute our growth initiatives that drive the performance of our key metrics. These include growth in the number of sales professionals, total number of transactions, and sales volume.

Fourth-quarter revenue of $172.4 million increased by 15.7% compared to the same period in 2014. At the same time, net income rose to $16.4 million and adjusted EBITDA was $29.7 million, which was 21.2% higher than the prior year. In the fourth quarter, we closed approximately $9.9 billion in total transactions, which was a 27.2% increase over the prior year and comprised 2,144 transactions.

As we have discussed on prior calls, we have shifted our recruiting towards experienced professionals, which we believe will result in higher and quicker productivity rates, which also better leverages our regional managers. We continue to recruit experienced agents from local, regional, and national firms, whose experience allows them to utilize our national platform more effectively. The on-boarding cost of these professionals is low and we expect their productivity to be higher as measured by average transactions per individual.

We ended the year with a total of 1,494 investment sales and financing professionals, compared to 1,313 in 2013. This represents an increase of 14%. This also included the hiring of 141 experienced brokers.

Throughout the year, we saw impressive year-over-year growth in sales volume in our specialty divisions as a result of our growth strategy. In particular, our hospitality, self storage, industrial, single-tenant, net leased specialty divisions registered strong growth in 2014. In 2014, multifamily comprised 41% of our sales and financing transactions, followed by retail of 39%, and office accounted for 6%.

Turning to geography, the Western region represented approximately 39% of total transactions while the Midwest, Mountain, South, Southeast -- excuse me Southwest represented 33%. The Northeast, Mid-Atlantic, and the Southeast regions each represented approximately 14% of total transactions during 2014.

Over the past year we've made considerable progress expanding our platform in the Northeast, as this high-density region of the country represents significant opportunity for future growth. Our number of real estate brokerage transactions in this region for the full year increased by 37%.

Another growth driver for the Company is further expansion of our mortgage brokerage division, Marcus & Millichap Capital Corporation, or MMCC. During the fourth quarter, MMCC had approximately $1.3 billion in financing volume and 370 closings, which reflect year-over-year growth of 64.6% and 16.7%, respectively. In 2014, we grew our MMCC headcount to 82, which was up approximately 12% year-over-year.

For the full year, MMCC closed 1,332 financing transactions and $3.8 billion in volume, which reflects year-over-year growth of 14.3% and 41.2%, respectively. I am happy to announce MMCC's transactions and volume also set company records.

Looking ahead to 2015, our strategy remains the same: to increase market share in the core private client sector, to grow our presence in our specialty divisions, and to further expand our mortgage brokerage business, MMCC. We are committed to constantly improving our client service and agent support, tools, and training, and executing our growth plan successfully. We expect another year of favorable market conditions with growing demand for commercial real estate; however, at a more normalized rate than we have seen in recent years.

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

Overall, 2014 was a strong year for the economy and for the commercial real estate sector. Economically we saw an acceleration of employment growth, low inflation, and lower interest rates. In fact, the 10-year Treasury yield closed the year at 2.2%, compared to 2.9% at the end of 2013 as a result of capital flight to safety, geopolitical issues, falling energy prices, and expectations that the Fed will remain accommodative for some time.

We added a total of 3.1 million jobs, the best year since 1999, and enough to bring total employment in the US 2.5 million above the prior peak. Commercial real estate saw further gains in demand for space across all property types with industrial, office, and retail showing the most improvement in overall occupancy. At the macro level, new supply remained in check industrywide including the apartment sector, which is the only property type that is seeing an above-average level of new development.

Apartments ended the year at a healthy 95.3% occupancy. Retail was at 93.4%, industrial at 92.8%, and office ended the year at nearly 85% occupancy. Specialty segments including hotels, self storage, seniors housing, all ended the year at their best occupancy levels since the recovery began in 2010.

In the property sales market we saw an increase of 12% in the number of transactions and a 14% gain in sales volume, which points to a period of more normalized and sustainable expansion ahead. Prior demand was strong across the board, particularly for the sub $10 million apartments and single-tenant net leased retail properties. These two private-investor-dominated sectors comprised 39% of total sales in the marketplace, which bodes well for Marcus & Millichap's market position as the clear leader in both of these segments.

Sales in secondary and tertiary markets, as defined by size, rose by 14% and 17%, respectively, in 2014, reflecting the continuation of capital expanding outside of primary metros and chased higher yields. This is another advantage of our platform, footprint, and marketing system as 41% of our transactions were sold to out-of-state buyers.

In terms of sales composition last year, the private client market segment, which typically represents $1 million to $10 million sales, once again accounted for 85% of transactions and an estimated 64% of the commission pool in the marketplace. For Marcus & Millichap, the segment comprised approximately 90% of sales and 78% of revenues, which once again illustrates our alignment with the largest and most active segment of the market.

Looking ahead at 2015, all these indicators that I just reviewed for 2014 positioned the market for another year of economic expansion, moderately higher job growth, improvements in commercial property fundamentals, and most importantly, continued growth in property sales. Lower oil prices are generally expected to be a net positive for the economy this year. We are already seeing a boost on the consumer side, which should help momentum by midyear, particularly for retail.

Lower prices at the pump were also deflationary, as is the stronger dollar, which in turn lowers the price of imports. With inflation in check domestically and central banks in Europe and Asia lowering our rates and taking additional stimulative measures, the Fed is likely to remain in more of a wait-and-watch see, better than being eager to raise interest rates.

As it relates to our business, the biggest benefit in the current environment is the extended period of low interest rates at a time of rising occupancies and rents. Commercial property yields are still very attractive compared to alternative investments and the key factor of capital flows into the sector.

In fact, our Investor Sentiment Index, based on fourth-quarter surveys of investors, hit an all-time high with 68% of investors planning to allocate more capital to acquiring commercial real estate in 2015 as a result of all the factors that I reviewed.

In our view, the biggest risk to this favorable forecast this year is still limited to an unexpected event or economic shock.

With that, I'll turn the call over to Marty for an in-depth look at our financials. Marty?

Thanks, Hessam. Now I would like to discuss our fourth-quarter 2014 numbers in more detail.

Total revenues in the fourth quarter of 2014 were $172 million compared to $149 million for the same period in the prior year, for an increase of nearly 16%. This increase in total revenues was primarily driven by increases in our real estate brokerage commissions, which grew to the $157 million from $134 million through the same period of 2013, an increase of nearly 17%. This growth was driven by both an increase in the number of investment sales transactions as well as larger average commission size partially offset by a slight decrease in average commission rates.

Average commission rates decreased due to an increase in the proportion of commissions from larger transactions, which generally earn lower commission rates. Revenue from financing fees generated principally by MMCC increased $12 million from $7 million in the fourth quarter of last year for an increase of 59%.

Other revenues of $4 million were down compared to $7 million last year, driven primarily by a decrease in referral fees from other real estate brokers and a decrease in fees generated from consulting and advisory services.

Our strategy has produced strong growth over the past year. Looking ahead, we expect that market conditions will remain favorable with continued demand for commercial real estate. We also believe, however, that growth moving forward will be at a more normalized rate.

Now let me provide some color on our revenue drivers within real estate brokerage, which generated more than 90% of Marcus & Millichap's total revenue in the fourth quarter.

For the fourth quarter, total sales volume was $7 billion, up approximately 27% from almost $6 billion for the same period of the prior year. This was driven primarily by favorable market conditions as well as continued execution of our strategy.

We executed 1,571 transactions, which represents an increase of 10% from 1,423 transactions in the fourth quarter of last year. The increases in sales volume and transactions are primarily driven by key factors underlying our business model, which we have discussed in the past, including our ability to attract and retain experienced sales professionals.

During the full year of 2014 we increased the average and number -- our average number of investment sales professionals by 15%. Notably we experienced a significant increase in the average transaction size in the fourth quarter. We realized an increase of approximately 15% in the average transaction size, which contributed to a 6% increase in average commissions per transaction compared to the same period last year, primarily driven by a few unusually large transactions.

Moving on to expenses, total operating expenses for the fourth quarter of 2014 were $145 million, compared to $157 million for the same period in the prior year, a decrease of $12 million or 8%. This decrease can be primarily attributed to the $31.3 million of stock-based and other compensation in connection with our IPO that was recorded during the fourth quarter of 2013 with no such comparable costs during the fourth quarter of 2014.

Offsetting this was an increase in cost of services, which increased during the fourth quarter by nearly $16 million over the prior year to $110 million. As a reminder, cost of services is mostly variable commissions paid to the Company's investment sales professionals and compensation-related costs in connection with our financing activities and should generally track closely with our brokerage commissions and financing fees on a quarterly and annual basis.

Cost of services as a percent of total revenues increased to 63.7% compared to 63.2% 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 higher commission rates.

Moving on to selling, general, and administrative expenses, it increased by $4 million, or 12%, primarily due to four areas. First, an increase in non-IPO stock-based compensation; secondly, an increase in sales and marketing expenses incurred to support our increased sales activity; third, an increase in management performance-related compensation, driven by strong operating results; and, finally, net increases in other expense categories, which are primarily driven by our expansion and business growth.

Our effective tax rate was 38.5% for the fourth quarter in 2014. This is not comparable to the prior year as we had a net loss in the fourth quarter of 2013. The Company's net income for the fourth quarter of 2014 was $16 million compared to a loss of nearly $9 million in the fourth quarter of 2013.

Net loss for the fourth quarter of 2013 includes $22.3 million of non-cash stock-based and other compensation charges in connection with our IPO and net of related income tax benefits of $9 million. The Company's adjusted EBITDA for the fourth quarter was nearly $30 million, or 17% of total revenues, compared to $24 million, or 16% of total revenues, for the fourth quarter of last year. This reflects continued leveraging of our SG&A costs.

Turning to our full-year results, the Company reported total revenues of $572 million, which represented an increase of approximately $136 million or 31% over the prior year. Full-year operating expenses were nearly $488 million, an increase of 18% over the prior year. Cost of services as a percent of total revenues increased to 61.2% compared to 60.7% for the prior year.

Net income for the year was nearly $50 million compared with $8 million for the prior year. As mentioned earlier, net income for 2013 includes $22.3 million of non-cash stock-based and other compensation charges in connection with our IPO and related income tax benefits of $5 million. 2014 adjusted EBITDA was $93 million, which represents an increase of $32 million, or 52%, as compared to $61 million for the prior year.

Turning to our balance sheet, our cash balance as of the end of the year was $149 million compared to 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, payment of income taxes, and to a lesser extent, purchases of computer hardware, software, furniture, fixtures, and equipment.

Other than the outstanding principal of notes payable to former shareholders totaling $11.5 million and SARs liability of approximately $21 million, both resulting from spinoff related to the IPO during 2013, the Company has virtually no debt outstanding.

We continue to see our strong balance sheet, access to capital, and cash position as a true advantage for the Company and we believe we are able to maintain flexibility for future growth plans.

To close, we are pleased with our performance for the full-year 2014 and believe that our strong results are a testament to the durability of our business model and the dedication and hard work of our team.

As we look ahead, we expect that we will continue to produce meaningful growth, but that our growth will moderate to a more normal pace than in recent years. Additionally, in 2015 we believe that the seasonality with regards to transaction timing that we have discussed in the past will continue to impact our quarterly results as we move forward.

That concludes our prepared remarks. At this time I would like to open the call up to questions. Operator?

(Operator Instructions) Brandon Dobell, William Blair.

Focus first on headcount. As you guys think about the people that you added during 2014, any sense of experienced guys versus fresh-out-of-college guys? And obviously a pretty strong finish to the year in terms of adding headcount. Was there any difference in the fourth-quarter adds as we think about experienced versus non-experienced compared to how the full-year looked?

I think throughout the year it has probably been about the same each quarter. In our prepared remarks we talked about 141 new experienced agents that joined our firm. We still take some inexperienced agents and they have their roles with whatever office they are in, but I don't think there's really any big difference.

In the fourth quarter sometimes we hire more people because after Labor Day things get really moving in a number of different areas, but I think it has been pretty normalized throughout the year.

Okay. From a, I guess, headcount relative to different property types, are you getting to the point where you can or want to be specific in certain markets? We're going to go after these kinds of specific people that are good in retail, that are good in secondary office, stuff like that.

And I know there is different holes across the platform where certain cities are better in certain property types than others. I guess I'm trying to get at how specific you are getting in filling those property type holes or opportunities by different market.

Okay, good. Each regional manager, each region has needs to hire people in different product types. So, yes, they will come; they will look specifically in a particular product type. They will have our recruiters there actually out looking specified product type or a geographical area. So you're right along the lines there; that's what happens typically when we are looking for experienced agents.

Also, Brandon -- Hessam here. Remember that our specialty divisions are each charged with growing their own segments. So office retail, in particular hospitality, self-storage, we have very specific recruiting targets by market for each of those specialties.

Okay, that's helpful. Thinking about the market in general, maybe, Hessam, for you. Are you seeing any signs -- maybe it's the LTVs, the debt covenants, assumptions that guys are making on their pro forma financials. Have you seen any signs that are worrying you about the health of either the debt markets or just people's perspective on the health of the property that they are acquiring?

We monitor that very closely, as you know, based on our previous discussions. The LTVs in particular is something that we track very, very closely. We're averaging 59.7%, which is very healthy and well below other periods.

We do sense that there is a lot of competition among vendors. They are trying to put dollars out to the marketplace, but because the recovery has broadened so much, you see occupancy improvements really across different kinds of metros including secondary and tertiary markets now. We are seeing it across different property types.

The fundamentals look very good. Even though there is a lot of competition among lenders, we are still seeing pretty good underwriting, pretty good buyer qualification, and really no sign that there is a crack in the integrity of the loan to values or how debt is being placed just yet. But we are monitoring it very closely.

Okay. Then final one from me. As we think about 2015 a couple of questions. Should we expect you guys to open any new offices or how many should we expect you guys to open?

And then, Marty, remind us, as we think about the first quarter of 2014, was there anything in there that was kind of out of the usual for transaction size, transactions got pulled or pushed into or out of the first quarter that would --? Recognize your comments about seasonality; just want to make sure we're not missing anything from last year that would make the first quarter look a little strange.

This is John. I will answer your first question and I will let Marty answer after myself.

As far as office openings, I think that most of what we've talked about over the last year has been really going into the offices that we have opened already and to fortify them in a number of ways, Specifically in Manhattan where our headcount has grown a lot. I think we talked about Boston, where we opened up a strong regional office and our headcount has grown there.

There may be and we have -- they are always on the horizon to possibly purchase a small little team in an area that we do not have representation, so that's always a possibility. But there isn't a grand scheme because we are in 80 or so locations that we don't really -- it's something that we look for an opportunity, but it's not something we are actually out there planning to open a large office someplace.

Marty, do you want to --?

Right. Brandon, in terms of your second question, for 2015 I think we mentioned that we were expecting a more normalized growth. We had a fantastic growth rate for 2014. Obviously that's not going to be sustainable.

In terms of Q1 of last year, there wasn't anything materially large or what we would call unusually large, that would affect the numbers.

Great, thanks. I'll turn it over. Appreciate it.

Mitch Germain, JMP Securities.

Thanks for taking my question. Just curious, you guys have in the past provided a slide that offered up your market share ranking relative to peers. I noticed that slide wasn't included in the quarterly presentation.

Just curious, has there been any change there? I know that certainly, given some of the hiring effort, was hoping that we might see a change to the upside.

Sure, Mitch. It's Hessam. There should have been -- I will check, double check the overall $1 million to $10 million ranking of brokerage companies with our current market share of 7.5% and that has increased gradually over the past 18 months.

We are seeing the biggest movement in our market share in the retail and office segments. Obviously that is a major focus of ours, especially multi-tenant retail. And our apartment share is also inching up, but at a slower pace than retail and office, just given the fact that we have much bigger presence already in the apartment market.

Great. Good commentary, appreciate it. Just back to the hiring, I'm just curious -- maybe, John, do you expect to continue hiring at similar levels in 2015? Or do you think that maybe you're just going to be like you talked about, keeping the office count relatively flat and just trying to back fill a little more rather than continued growth in new markets?

Well, really the experienced agent hiring is really one of our big focuses, so if we are looking for experienced agents in retail in a certain marketplace we're going to be going after those type of agents.

So are you looking to hire 500 people? Not necessarily. We are looking to strategically fill our offices with good people and move forward. And that is the ability that we have right now because we did do a lot of recruiting from 2010 on.

We're still going to recruit. We always recruit, because there's always a need in each marketplace. There's so many transactions in the $1 million to $10 million marketplace that we do recruit. It's an everyday business for managers, our specialty group directors, and our in-house recruiters.

But the bottom line really is strategy, trying to figure out exactly who we need, where we need it. It's not just put a number of people into an office and see what happens. There's a little bit more to it than creating large numbers. Creating quality numbers is really what we looking for.

Okay. And then with regards to the financing business, net I think you guys added about 10 professionals and seeing some really good growth. Clearly, Hessam's commentary regarding lending market's strong; why not try to make a greater effort in placing an emphasis on building that out to an even greater extent?

That is pretty much our strategy at this point in time. And you're right; we have had great success and growth in MMCC. And there is probably where we have the ability to bring out on a number of more people, which we are focusing on at this point in time. You hit that right on the head.

Great, I appreciate it. Last one from me. I believe it's $150 million -- sorry, I don't have a model open in front of me but -- of cash. Any thoughts about potentially instating some sort of recurring or special dividend?

Mitch, it's Marty. Right now we don't -- like I said, we don't have a dividend policy. And, quite honestly, we think having a good, strong balance sheet, the amount of cash that we have is really a huge, strong strategic advantage for us. So right now we have reviewed the cash needs and cash balances with our Board every quarter and right now we have decided not to issue a dividend just yet.

Great. Great year, guys. Thank you.

Phil Stiller, Citigroup.

Thanks for taking my questions. I guess I just wanted to follow-up on the comments around more normalized growth in 2015. Just wondering what that is in relation to; whether you are talking about relative to the full-year growth rate of 31% revenue growth or what you posted in the fourth quarter, which seemingly was more normalized already. Thanks.

Right, exactly. So you can see that the transaction volume growth is moderating during the fourth quarter, so we kind of see more of that growth rate being in line for the next coming years. So more normalized, that would be high single-digits, low teens growth rates.

For transactions or for revenue?

Revenue.

Okay. And then you guys have talked about in the past agent productivity, improving that. It was up nicely this year and obviously with the hiring of the experienced agents should benefit from that.

Is there much further room for that to go up? I know part of what we've talked about in the past was kind of a maturation of people you've hired in the past. Just wondering how that mixes in with a lot of new people coming in.

Yes, I mean can it go up? Sure, I could go up. You have more mature agents; they are going to get better and better each year and it will go up.

The question is that we bring our experienced agents -- keep in mind sometimes they have to close out their book of business from their previous broker, so sometimes the first six months of their tenure at Marcus & Millichap may be a little bit slower because they are still closing out of the transactions.

So really it should go up based on us being able to hire more seasoned professionals. I can't really tell you how much it's going to go up, but I think there is a swing that you could look at that would make sense that there would be some rise in productivity.

Okay. Could you guys perhaps comment on the competitive environment, both from a hiring perspective as well as competition levels on transactions or commission rates?

I will jump in; it is Hessam. On the commission rate front, we are not seeing any new pressures, especially in our core business, of the $1 million to $10 million segment, as we've discussed before. Commission rates there have been very stable and remain stable.

From a competitive perspective, really we have made a lot of headway since becoming a public company and then a lot more people are aware of the Company's strengths and are hearing the story much more often. We're in dialog with a number of groups across the country that have interest in joining the firm. And so, if anything, our position has really been boosted in the past 18 months or so.

It's a competitive market out there without any question, so there is a lot going on on the competitive front, but I think we are at the forefront of it and getting a lot of traction.

Okay. Last question, perhaps for Marty. The tax rate in the fourth quarter was down a bit, just wondering how we should think about the tax rate going forward. Thanks.

I think if you look at the annual number, I think that's a good starting point.

Great, thank you.

Ladies and gentlemen, we have reached the end of our Q&A period. I would like to turn the call back over to John Kerin for closing comments.

Thank you very much and thank you, everybody, for joining us today. We look forward to spending more time with you at our next call in the first quarter. Thank you very much and have a good day.