Marcus & Millichap Inc (MMI) 2015 Q1 法說會逐字稿

Greetings and welcome to the Marcus & Millichap first-quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Sweat of ICR. Thank you, Mr. Sweat. You may begin.

Thank you. Good afternoon and welcome to Marcus & Millichap's first-quarter 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, commercial real estate market conditions, including 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 to 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 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 obtained. 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 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 about why the Company believes such non-GAAP financial measures are useful to investors.

Finally, this conference call is being webcast. A 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 is 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 all for joining us today as we discuss our results for the first quarter of 2015. I will begin today's call with an overview of the Company's performance and a review of our operational highlights. Hessam Nadji 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 them open up the call to your questions.

Before I get started, I wanted to congratulate Hessam Nadji on his promotion to the position of Senior Executive Vice President. Most of you are familiar with Hessam and know that he is a talented executive who has done an excellent job in his current role. We are very pleased that he will be taking on additional responsibilities, which include overseeing Marcus & Millichap Capital Corporation and a number of corporate functions, including finance and information technology.

Let me begin with a review of our first-quarter results, which produced a revenue increase of 28% year-over-year to $146.5 million and net income growth of 102% to $13.7 million. Adjusted EBITDA for the quarter was $26.3 million, which was approximately 95% higher than the prior year. Our adjusted EBITDA margin improved to 17.9% from 11.8% a year ago thanks to the quarter's strong revenue growth.

These numbers reflect a combination of a solid market environment and more importantly the successful execution of our growth strategy. I believe we have effectively positioned the Company to leverage the market very well through our national platform and at the same time moved forward through a number of initiatives we put in place a few years ago.

As we have communicated on past calls, we have pursued a strategy to add more experienced sales and financing professionals, build our geographic market coverage and headcount in all of our offices and expand our presence in various specialty groups. As a result, we entered 2015 having hired more experienced brokers. We saw many of our newer professionals we hired over the past two to three years become productive and we benefited from many of our tenured brokers' ability to capture larger transactions.

In the first quarter, we closed approximately $8.1 billion in total sales volume, which was a 29.5% increase over the prior year and comprised of 1877 transactions, which was a 14.6% increase year-over-year. The growth rate in transactions illustrates the normalization we touched on during our last earnings call and a trend we expect to play out into the future. We also believe that our investor expectations for an interest rate rise later in the year led to increased closings in the quarter to some degree.

Short-term volatility in transaction timing can be expected in our business and we are cognizant of the fact that current conditions will shift at some point in time. Most importantly, we continue to see significant long-term growth opportunities across all areas of our business.

Let me now review some of the key metrics for the first quarter of 2015. We had an average of 1506 sales and financing professionals for the first quarter, up 15% over first-quarter 2014, which includes the hiring of 164 experienced brokers over the past 12 months. This combined with increased productivity among many of our emerging brokers and a number of large deals that closed in the quarter contributed to a 19% increase in the average brokerage transaction size.

During the quarter, multifamily comprised 38.8% of our sales and financing transactions, followed by retail at 38.4% and office accounted for 6.1%. We saw strong year-over-year growth in sales volume in our specialty divisions as a result of our growth strategy, particularly in industrial, self storage and mixed-use.

Turning to geography, the Western region represented approximately 38% of total transactions while the Midwest Mountain South/Southwest represented 35%. The Northeast, Mid-Atlantic and the Southeast regions each represented approximately 15% and 12% of total transactions respectively during the first quarter. We continue to make strides in expanding our platform in the Northeast where we see considerable opportunity for growth.

Our number of real estate transactions in the Northeast increased by approximately 23% year-over-year. Additionally, we continue to grow our mortgage brokerage division, Marcus & Millichap Capital Corporation, or MMCC. During the first quarter, MMCC had approximately $900 million in financing volume and 311 closings, which reflects a year-over-year growth of 41.3% and 8% respectively. We grew our MMCC average headcount nationally to 83 during the quarter, which was approximately 9% year-over-year.

As we move through 2015, our strategy remains the same -- to increase marketshare in the core private client sector, to grow our presence in our specialty brokerage divisions and to further expand our mortgage brokerage business. As of early 2015, results confirm our national platform, our collaborative approach, our team of professionals and proven growth strategy create long-term growth opportunities for MMI. We are pleased with our results and we expect to generate solid growth in our operating metrics going forward.

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. The commercial real estate market environment continues to be defined by improving property fundamentals, low interest rates, ample availability of debt and equity capital and most importantly competitive yields. Much as we have seen over the past two years, these macro forces resulted in rising prices and property sales during the first quarter of 2015.

Besides the near-term performance, investors also appear to have a positive outlook on supply/demand conditions and rent growth for the foreseeable future based on our most recent investor survey responses. With this backdrop, it is not a surprise that sales rose once again during the first quarter with the number of transactions up an estimated 10% year-over-year and dollar volume up an estimated 20%. It should be noted that the rate of growth in sales is trending toward a more normalized base as we had anticipated on our prior call.

As we also shared on the last call, we believe that low inflation, a strong dollar and the recent round of stimulative measures by central banks outside the US give the Federal Reserve flexibility in timing and scope of eventual interest rate increases. That being said, higher interest rates should be expected at some point. However, we still believe that increases should happen in an orderly fashion and in conjunction with the improving job growth and further commercial property occupancy and rent [gains] that should come with it. Meanwhile, the US economy continues to expand. We are adding jobs at a healthy pace and demand for all categories of commercial space continues to grow as a result.

The first quarter contributed 590,000 jobs, slightly ahead of the first quarter of last year, bringing the total employment in the US 2.8 million jobs above the prior peak. It should be noted that the pace of hiring in March was well below expectation as were a few other economic readings. However, the reported level still supports sustained economic growth and creation of demand for commercial real estate. It is too early to declare the slowdown a trend given some noise in the first-quarter data, but ironically steady but slower job growth would have the benefit of maintaining low inflation expectations.

The 10-year treasury closed the first quarter this year at 2% compared to 2.7% at the end of first quarter 2014. Lower interest rates are still reflective of the US being viewed as a global growth leader among advanced economies and the gold standard of safety. The drop in energy prices and strong dollar are also contributing to the current low inflation environment.

We are seeing strength in absorption of space across all property types with industrial leading during the first quarter followed by office and retail. Corporate investment and space commitments still reflect a conservative attitude by companies, so we are not seeing a surge in commercial space leasing, but rather a steady pace of growth. The retail segment ended the quarter at 93.5% occupancy followed by industrial at 93% and office properties at 84.4%.

Still the market leader, apartments continue to show impressive strength with a national occupancy rate of 95.5% for the first quarter. This is despite completion of 232,000 new units in 2014 as consumers favor renting and demographics provided tailwind for the rental market. Most of our apartment clients are reporting better-than-expected rent growth, particularly in the midmarket or Class B workforce-oriented housing, which makes up the vast majority of the marketplace and is not impacted by the new construction of higher end product being built around the country. Specialty segments, including hotels, self storage and seniors housing, all maintained momentum in the first quarter with occupancies hitting post-recession highs.

In the property sales market over the past 12 months ending Q1 of 2015, buyer demand was strong across the board. [The $110 million] private client market segment once again accounted for 83% of transactions and an estimated 59% of the total commission pool in the marketplace. For us here at Marcus & Millichap, the segment comprised approximately 90% of sales and 76% of revenues at the same timeframe, which once again illustrates the alignment of our business with the largest and most active segment of the market.

Further amplifying this point, sub $10 million apartments in single tenant lease retail comprised nearly 40% of total sales in the market. For Marcus & Millichap, these are our top two largest business segments, which is another major advantage given their size and very strong buyer demand.

Sales in secondary and tertiary markets continued to gain momentum during the first quarter and clearly outpaced the overall market showing an increase of 21% and 20% respectively over the prior year. The migration of capital to these markets in chase of higher yields is intensifying, which is another positive indicator for MMI as 45% of our transactions were sold to out-of-state buyers.

For the remainder of 2015, we expect further job gains, improvement in commercial property fundamentals and continued growth in property sales, albeit at a more measured pace. Commercial property yields are still very attractive compared to alternative investments and the key driver of capital flows into the sector. Low interest rates and high liquidity levels are also benefiting the sector as investors [walking] debt and favorable terms for the long term. In our view, the biggest risk to a favorable forecast for this year is still limited to an unexpected event or economic shock of some sort. And with that, I'll turn the call over to Marty for an in-depth look at our financial results. Marty.

Thanks, Hessam and thanks again, everyone, for joining us on today's call. Now I'd like to discuss our first quarter's results in more detail. Total revenues in the first quarter of 2015 were $147 million compared to $115 million for the same period in the prior year, an increase of nearly 28%. This increase in total revenues was primarily driven by increases in our real estate brokerage commissions, which grew to $134 million from $105 million for the same period in 2014, an increase of approximately 28%. This growth was driven by both an increase in the number of investment sales transactions, as well as larger average transaction size partially asset by a slight decrease in our average commission rate earned on transactions.

As you may recall, larger transactions generate lower commission rates. The increased proportion of larger transactions is a reflection of our emerging agents and our focus on hiring experienced sales and financing professionals. The increase in the number of sales transactions and increase in average commission size were also driven by an overall strength of the market, as well as investors' anticipation of future increases in interest rates, which we believe was a factor that may have caused an acceleration in sales volume during the first quarter.

Additionally, as John mentioned earlier, we have increased our headcount over the past two years. It is the seasoning of these sales and financing professionals that have contributed to our growth. Revenues from financing fees generated principally by MMCC increased to $8 million from $6 million in the first quarter of last year, or an increase of 32%. Other revenues of $4.3 million were up slightly compared to $3.7 million last year driven by an increase in consulting and advisory services, which was partially asset by a decrease in referral fees from other real estate brokers.

As we look ahead, our platform and path for growth remain strong as demand continues to be robust for commercial real estate. We believe that the market will moderate during the remainder of 2015, but we are well-positioned to generate continued positive results as we execute our strategic initiatives.

Now let me provide some color on revenue drivers within the real estate brokerage business, which generated nearly 92% of Marcus & Millichap's total revenue in the first quarter. For the first quarter, sales volume was $6.1 billion, up approximately 39% from $4.4 billion from the same quarter of the prior period. We executed 1374 transactions, which represents an increase of 16.3% from 1181 transactions in the first quarter of 2014.

Notably, we experienced a significant increase in average transaction size in the first quarter. We achieved an increase of approximately 19% in the average transaction size, which contributed to a 10% increase in average commission per transaction compared to the same period last year. Over time, we are seeing an increase in average transaction size with our sales professionals closing larger transactions as they gain experience on our platform.

Moving on to expenses, total operating expenses for the first quarter of 2015 were $123 million compared to $103 million for the same period in the prior year, or an increase of $20 million or 20%. This was primarily driven by an increase in our cost of services. Cost of services increased from $68 million in the first quarter of the prior year to $86 million in Q1 of 2015. As a reminder, cost of services is mostly variable commissions paid to the Company's investment sales professionals and compensation related for the costs in connection with our financing activities and should track fairly closely with our brokerage commissions and financing fees on a quarterly and annual basis. Cost of services as a percent of total revenues decreased to 58.8% compared to 59.7% for the same period in the prior year, primarily due to an increase in the proportion of transactions closed by our newer team members who are compensated at a lower commission rate.

Selling, general and administrative expenses increased by $2.5 million, or 7.4% primarily due to four areas. First, an increase in our stock-based compensation expense driven by an increase in the Company's stock price as grants to the Company's independent contractors are required to be measured at fair value and stock-based compensation expense for incremental awards granted since the first quarter of 2014. Secondly, an increase in management's performance compensation driven by our operating results. Third, an increase in sales and promotional expenses driven by an increase in our annual sales recognition event and marketing expenses to support our increased sales activities. And finally, an increase in salaries and related benefits driven by an increase in the headcount and corporate support in connection with our growth. These increases were primarily offset by a decrease in legal costs due to a settlement with an insurance carrier and a settlement of outstanding litigation.

The effective tax rate was 41.4% for the first quarter of 2015, which was comparable to the first quarter of the prior year. The Company's net income for the first quarter of 2015 was $13.7 million compared to $6.8 million in the first quarter of 2014. And the Company's adjusted EBITDA for the first quarter was $26.3 million, or 18% of total revenues compared to 13.5%, or 12% of total revenues in the first quarter of the previous year reflecting continued releveraging of our SG&A costs.

Now turning to our balance sheet, our cash balance as of the end of the quarter was $124 million compared to cash balance of $149 million at the end of the fourth quarter of 2014. The Company's use of cash is greatest in the first quarter as accrued management, performance compensation and deferred commissions from the prior year are settled during the period. Other cash uses are typically related to limited working capital requirements during the year, the payment of taxes and the purchases of office equipment as needed. Excess cash is invested in money market funds and in fixed and variable income debt securities until needed in accordance with our investment policy approved by the Board of Directors.

Other than the outstanding principal balance of notes payable totaling $11.5 million and SARs liability of approximately $20.8 million, both resulting from the spinoff related to the IPO during 2013, the Company has virtually no debt outstanding. We believe our strong cash position, flexible balance sheet and access to capital remain a competitive advantage for the Company and positions us well as we grow over the long term.

In closing, we are very pleased with our strong performance in the first quarter. We've continued to maintain our market position and execute on our growth plan. Looking ahead, as the market normalizes, we believe our national platform, including our robust private client segment, our growing specialty sector business and our financing services will continue to drive value to our clients and shareholders.

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

Thank you. (Operator Instructions). Phil Stiller, Citi.

Congratulations on the good results and, Hessam, congratulations on the promotion. I guess I wanted to ask about market conditions. Obviously, you guys had a very strong quarter, but you also talked about some pullforward of revenue and kind of a normalization for the rest of the year. Is there anything you are seeing in your transaction trends early in the second quarter or listing volumes that are leading you to make those comments, or is this just kind of a broader cautionary tale that you are talking about?

I think the normalization we are talking about is last quarter if you looked at our fourth quarter 2013 and the increase in transactions in the fourth quarter 2014 equates to about 14%. We saw the same thing in the first quarter of 2015 versus first quarter of 2014, so we are kind of in some type of a normalized transaction [game] so to speak. But everything else is still normal. We are still doing our business the right way, but there is really nothing that has really changed too much from what we've been experiencing in the first quarter.

From the standpoint of the market, Phil, as you know, the 10% increase in the first quarter is really reflecting a slowdown from the last several years and that is really the trending toward a more normalized pace of growth that we've been talking about for a while. But, again, we don't anticipate any market issues. The market is very active. It's just the rate of growth is beginning to slow.

Okay, that makes sense. I guess looking at the geographic breakout that you guys provide, the transaction growth in the West was a bit below average. Just wondering if that is indicative of any market issues there, or is this just an indication of where the hiring has taken place over the last couple years?

Yes, there's no real indication of any weakness on the western part of the country. I think a lot of our growth has been in the Northeast. I think the Northeast has grown rather nicely. Texas was very good. But there's really no -- I think you mentioned it. We've recruited more people. More people I think came out of the Midwest, Texas and the eastern part of the country. So -- there might be the way it's allocated at that point in time.

Okay. And then last one and I'll turn it over, was on margins. So obviously very good performance in the first quarter. I know margins typically rise throughout the year. Is this something, a level that you think can continue to increase through the course of the year?

Okay, so let's look at the typical year at an investment brokerage company. We have a number of agents this year who have kind of moved into -- been out two or three years who started making some more deals. So therefore, they are on a little bit of a lower split at the time. Some of these people go up during the year based on the splits they are on. Our senior agents is probably where the splits move a little bit more because, in the first quarter, they are on a lower split and they graduate during the year. So our cost of services will go up a little bit. Our margin will go down a little bit. But we did a pretty good job in the first quarter, but to keep that margin is going to be difficult because the splits will go up as the years move forward.

Okay, great. Thank you, guys.

Mitch Germain, JMP Securities.

John, you mentioned, and I think you have it in your text too, about maybe an acceleration of activity due to some rate fears in the back half of the year. Just maybe put that into context. Is that just an opinion, or is that something that you are hearing from some of the customers that you are working with?

Okay, so in the end of March, we had a number of transactions that were really not scheduled to close by March 31. So what I did was I really went around to a lot of our offices and tried to find out what happened with some of these transactions and there was a number of the managers in the field that basically said this deal is supposed to close later in April. It closed a little bit earlier. This larger transaction was an all cash transaction and they wanted to get out and start the refinance process now rather than wait for another month or so with possibly interest rates rising at some point in time. So yes, there was a little bit -- I can't quantify in how many millions or whatever, but that was an issue and going around to the offices and talking to the local management team, that was really what came out of it.

And we are hearing a lot about obviously liquidity in the markets. How sensitive are some of these acquirers or sellers if we do see a rate rise? What is your view if we are looking and staring at 3% treasuries?

I've been in this business for a long time and there's always something that disrupts the business for a very short period of time. If you look back in May of 2013 when we had a little bit of an interest rate rise, we continued to do very, very well, but there was a two, three, four-week period of time when some of the local banks might look at their underwriting, some of the sellers might look and say am I selling -- it was buyers, excuse me -- looking to say am I buying too much, but usually that last a few weeks and then we go back to business as usual. That is typically what has happened. But the key is that you don't want to lose that two or three-week process in the year, which could affect our ability to do transactions for a short period of time.

Mitch, the only thing I will add too is that if you look at the occupancy outlooks, the rent growth outlooks, the job market holding up really well, all those positive factors are way overshadowing the amount of interest rate increase that may be in the pipeline. There is really nothing that indicates that whatever interest rate increases we will experience at some point is going to be significant or disruptive to the balance of the marketplace.

Great. Last one for me. Stellar quarter, guys, in terms of the amount of volumes. I know that historically speaking the first quarter is X percent of total volume and then kind of graduate your way up to the fourth quarter. Should we think that there is any change in that pattern or probably business as usual?

I have always said -- we've always said -- that the first quarter tends to be about 17% to 20% of our total year. I also said in mid-last year that we started seeing kind of what I call a flattening of the seasonality curve. I think that started mid-year last year and we still see it. So now we think that Q1 is probably going to end up being in the kind of high part of our spectrum in that range, maybe even plus 1 or 2 points.

That's helpful. Great quarter, guys. Thank you so much.

[Brad Burke], Goldman Sachs.

I wanted to ask about the GSEs, which is something that we've been hearing a lot about in the quarter and since you do so much within the multifamily space, wanted to get your thoughts on whether or not that might have driven an outsized increase in multifamily volumes at the start of the year? And just related to that, if we did see the GSEs start to pull back and it seems like that maybe already started, your thoughts on whether or not that would impact your business at all.

I'll take that one. We've been hearing a lot about that and obviously there is some anticipated slowdown in GSE lending for obvious reasons, but given the size of the transactions that we normally finance that are well below $5 million, the vast majority are being financed by local, regional, national commercial banks and there is ample availability of lenders that are willing to lend in that category. So we don't anticipate any issues at all in our core private client business, which is by far the vast majority of what we do.

Okay. That's actually interesting and helpful. And then just wanted to get your thoughts on headcount at this point. It looks like you added a couple transaction professionals from Q4 and I realize that the first quarter isn't going to be necessarily the biggest quarter for adding headcount, but just a sense of how you are thinking about momentum for headcount growth over the balance of the year.

I think it is really the same as it has been over the last couple of years. Part of the local manager's job is to really bring new people onboard. Hopefully bringing more experienced people onboard is what we have been really focusing on over the last couple of years. So I don't think there's any real difference in headcount. I think if you are talking about what happens at the beginning of the year typically, you might lose a couple of people because they're coming to the end of the year and deciding what they want to do. So I would say that our net headcount will probably move up throughout the year.

And also what we've indicated to everyone, and it still holds true, is that our goal is adding a net headcount of about 100 agents, 75 to 100 agents.

Okay. And that is unchanged?

That is unchanged.

Okay. Great. And actually, Marty, while have you, just wanted to touch on the cash balance. Obviously very good quarter and that helped out the liquidity and I think that if I look at cash plus the marketable securities balance, which continues to increase, you are up about $60 million just from last year. So just wanted to get your thoughts on how you are thinking about deploying that cash and also thinking about how much liquidity you really think that you need for this business.

Obviously to operate our current business, it generates quite a bit of free cash flow, but I have said that having this amount of cash that we have gives us great flexibility in considering how we are going to strategically deploy our capital. So right now, we are currently looking at various ways to invest that that is going to ultimately increase the value for all stakeholders.

Is there anything you can do to elaborate on how we might think about you investing?

We spoke about a lot of different things, but that also includes potential for opportunistic M&A.

Okay. That's it for me. Appreciate it. Thank you.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you. I want to thank everyone for joining our call today and we look forward to speaking with you after our second quarter. Thank you very much.

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