Q4 2019 Earnings Call
Greetings and welcome to Marcus <unk> Millichap fourth quarter 2019 earnings conference call. At this time, all participants run to listen only mode. A question and answer session will follow the formal presentation.
Any much require operator assistance during the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded.
I will now turn the conference over to your host Evelyn Infurna.
I see our misinformation you may begin.
[music].
Thank you good afternoon, and welcome to Marcus <unk> Millichap fourth quarter 2019 earnings conference call with US today, our President and Chief Executive Officer, That's all neurology and Chief Financial Officer, Marty Louie.
Before I turn them over to management. Please remember that our prepared remark and the responses to questions. They contain forward looking statement.
Words, such as May we'll expect believed 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 do you do a variety of factors, including but not limited to general economic conditions and commercial real estate market condition, the company's ability to retain and attract transactional professionals.
The company's ability to retain its business philosophy and partnership culture, a mid competitive pressures.
The company's ability to integrate new agents and sustained its growth and other factors discussed in the company's public filings, including its annual report on form 10-K filed with Securities and Exchange Commission on March Onest 2019.
Although the company believes the expectations reflected in such forward looking statements are based upon a reasonable assumption. It can make no assurance that 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 financial information presented on this call represents non-GAAP financial measures.
The company's earlier earnings release, which was issued this afternoon and is available on the company's website represents reconciliations to the appropriate GAAP measures and explains why the company believes such non-GAAP measures are useful to investors.
Finally, this conference is being webcast webcast link is available on the Investor Relations section of our website Www Dot Marcus <unk> Millichap Dot com along with the slide presentation. You may reference during his remarks with that it's my pleasure to turn the call over to the song NRG.
Thank you everyone on behalf of entire Marcus <unk> Millichap team. Good afternoon, everyone and thank you for joining our fourth quarter 2019 earnings call.
We finished 2019 out of pocket it no achieving 3.3% revenue growth year over year on top of nearly 14% in the fourth quarter of 2018.
Strengthen our private client brokerage revenue and financing fees were key forces behind the strong finish.
Private client brokerage revenue expanded 6% after growing 15% in the prior period and financing revenue for the quarter was up 13.4%.
The fourth quarter benefited from transactions, but had been slow to consummate throughout much of the here as well as our expanded client outreach marketing campaign, an effort to replenish inventory.
These initiatives were launched in the first quarter of 2019 as the market down [laughter].
Hi, brokerage sales volume increased nearly 11% in contrast to market decline of 7% reported by third party sources.
Our financing volume rose nearly 20% supported by more refinancing transaction.
We saw strength in retail hospitality office, and industrial which currently represents a small base, but a significant growth opportunity for us.
For the year total revenue was just 1% lower 2018 record.
As we navigated through market aberration as a reminder, the urgency to transact throughout 2018 prompted by the federal reserve's aggressive interest rate increases well follow up by sharp course reversal in early 2019.
This contributed to sell decline many investors pod anticipation of lower interest rate.
These dynamics resulted in essentially flat revenue when our private client business in 2019, but particularly impacted our transaction mix.
The company's middle market and large transaction revenue had jumped 28.4 and 35.4% respectively. In 2018, two new records and subsequently declined by 7.7% and 8.4% in 2019.
Our finance Division MCC continued to gain momentum with for your revenue growth of 14.7% in a volume increase of 15%.
I think the share of total revenue grew 110 basis 0.28, 0.2% plenty of room for additional expansion as we increase our internal transaction capture rate.
We achieved these results in spite of net reduction to the roster as we reorganized the MMCC with emphasis on hiring experienced individuals.
Welcome and number of such originators throughout the from last year.
Well the sales force expansion was below recent years and our annual target.
As I mentioned on last quarter's call. This is primarily due to a higher termination of newer agents in light of our performance standards in a more challenging market environment.
Just want a competitive employer market. Our goal is to grow the self worth by 100 professionals per year and continue to build on our recent success in attracting established professional and teams.
Just over the past six month, we closed the acquisition of Forum in Vancouver, based retail brokerage firm and acquired major brokers and groups in Boston, Philadelphia, Los Angeles Nashville in Florida.
I like our Florida acquisition brought the Shelton grenade multifamily team to our IP Division.
Shelton and its partners are among the top institutional multifamily groups in the entire southeast with a 10 plus year track record and still or client relationships.
We're very excited to see their synergies with our existing self worth well, Florida and the rest of IP crossing you Western Canada come to fruition.
I'm happy to report better acquisition and senior level recruiting pipelines are active and encouraging for the rest of 2020.
Notwithstanding our frustration with last year's financial results. We're encouraged by the improved momentum in the fourth quarter early contributions from recent acquisition and the benefit of strategic investments.
Growth initiatives and measures to counteract short term headwinds take time to produce result, as reflected in our 2019 quarterly trends. However, the company's commitment to build on its track record of long term growth is unwavering. We believe that our business is best viewed through this long term left.
Looking ahead at 2020 and beyond let me emphasize our strategy for achieving long term growth and shareholder value with six major component.
First we're constantly enhancing the execution of our organic growth model.
At the same time, we're supplements in growth through strategic and accretive acquisition that fills service and geographic coverage gaps and provide revenue diversification opportunities.
During our financing business and adding more capital markets capability is another major focus, which aligns very well with our acquisition strategy.
The fourth component of our growth strategy is increasing market share and repeat business by enhancing our client services investor outreach and further propelling the firm's advisory based brand.
Investing in proprietary technology infrastructure and brokers support also remain a priority to enhance productivity and competitive advantage.
And last but certainly not least we're actively preserving and augmenting the best of our culture to attract and retain the most talented professionals in the industry.
We are keenly aware of the need to balance strategic investments with earnings growth in any given year last year earnings were adversely impacted by increased costs related to acquisitions higher investments and brokers business development.
Elevated marketing proprietary technology development and growing at footprint virtually all these investments are directly aimed at strengthening our market position and revenue growth in the years ahead.
We kept controllable costs flat last year under tight controls and meaningfully reduce management compensation in light of the Companys financial results.
We believe the stage is set for improved performance this year with cautious optimism. This real estate market is now in an 11 year of expansion, but not what other cycle commercial real estate supply demand fundamentals remain imbalance.
We're seeing steady rent growth and a pullback in new construction.
You overall economy is healthy capital remained disciplined but plentiful.
Well priced deals are getting done and we believe the propensity to transact is incrementally more likely given the bottoming them interest rate reduction.
Our biggest challenge is a persistent bid ask spread as sellers seek a premium to replace current assets and justify trade risk while buyers want higher returns at a late cycle stage.
Action year, Gyrations may skew transaction flow, but the overall market environment is clearly favorable.
In a nutshell the processes advising clients presenting investment option and strategies to enhance value simply requires more education time contact and deeper advisory services.
We are well positioned to provide this level of service to our clients and investors large and are doing so everyday across the firm.
Executing strategic acquisition remains our top priority for capital deployment as we continue to out evaluate synergistic and high quality opportunities.
As we've shared on previous calls, we're applying thorough underwriting and diligence and have added resources to scale, the company's acquisition capacity, while mitigating risk.
We are in active dialogue with a number of quality targets and look forward to sharing additional details as we proceed through the year.
And I might enter 2020 with a brand that is stronger than ever as salesforce of over 2000 professional comprising the largest of its kind of the industry.
Most of new tool in our technology development pipeline and a proven ability to supplement and effective organic growth model with complementary acquisition.
With that I will turn the call over to Marty to discuss results in more detail Martin.
Basis.
In the fourth quarter total revenues increased 3.3% year over year to $238 million. This was primarily driven by real estate brokerage commissions, which account for approximately 91% of total revenues, increasing 2.1% to $216 million.
Our quarterly brokerage results were led by our private equity transaction business, which saw revenues increased to $442 million.
In addition revenues from the middle market business grew 1.4% to $31.3 million compared to the prior years fourth quarter growth of 14%.
The middle market business had been down throughout 2019 after a record year in 2018.
Our larger transaction business, which also set records in 2018 remain challenged into fourth quarter with a year over year decline of 6.5% to $35 million.
It's important to note that in the fourth quarter 2018 to larger transaction market segment experienced outsize growth of 41%.
For 2019, total revenues decreased 1% to $806 million due to real estate brokerage revenues, decreasing 2.4%, which was partially offset by increases in financing fees and other revenues.
We saw slight year over year improvement in our private client business.
But it was offset by our middle and larger transaction businesses.
While we have been working to cultivate the middle and larger transaction businesses through our IP division and specialty niches. These larger deals tend to be more variable from quarter to quarter.
And then my executed 2807 transactions in the fourth quarter, a 7.8% improvement from the prior year.
For 2019, the total number of transactions increased approximately 3% to 9726.
Total fourth quarter sales volume increased 12.3% to $15 billion, while for the year total sales volume increased 7.2% to $50 billion.
Financing fee in the fourth quarter grew 13.4% to $90 million.
This growth was the result of double digit improvement in loan transaction and financing volume primarily from finance refinancing activities.
For 2019, our financing business finished the year strong as revenues increased nearly 15% to $66.3 million or 8.2% of total revenues.
This strong result came from higher overall volume in an acceleration in refinancing activities.
Our financing business remains a focal point of our long term growth strategy.
Other revenues comprised primarily of consulting and advisory fees, along with a referral fees from other real estate brokers in the fourth quarter increased 43% to $3.6 million compared to the year ago period.
For 2019, other revenues increased about 12% to $10.8 million driven by consulting and advisory assignments closely tied to brokerage activities and clients.
Lastly, we finished the year with 2021 professionals for a net addition to 44 over to last 12 months.
However, when looking at the previous three years, we've averaged 123 net hires annually.
We continue to add more experienced investment sales professionals to our team increasing our head count by 59 professionals over the last 12 was to 1925.
However, our financing professionals headcount shrunk during the year by 15 professionals to 90 cents. That's part of our continued efforts to reorganize and fine tune the financing team with more emphasis on performance standards in hiring experienced professionals notwithstanding the reduction in headcount in 2019 MCC.
Produced solid results.
During the quarter total operating expenses increased 6.6% to $211 million, primarily due to an increase in cost of services and SGN today.
In the fourth quarter 2019, custom services rose, 4.5% year over year to $155 million due to the increase in total revenues as a percent of total revenues cost of services rose 70 basis points to 65.2% due to mix in deal execution by senior.
Professionals.
As a reminder cost of services is primarily comprised of commissions paid to the company's investment sales professionals and compensation for financing team.
Yes, DNA increased 12% year over year to $53 million due to higher cost associated with recently executed acquisitions and their related payroll and operating costs.
Business development and marketing support for our sales force.
Legal costs us.
Expansion of offices in an increase in certain data and marketing analytics licensing fees. These increases were partially offset by decreases and stock based compensation.
On a full year basis total operating expenses, which include cost of services as junaid depreciation and amortization rose 1.1% to $710 million. This reflects our ongoing effort to manage controllable expenses tightly while investing in strategic areas vital to the firm's long term success.
For the fourth quarter 2019, net net income was $20.7 million or 52 cents per diluted share compared to $26.2 million or 66 cents per diluted share last year. It should be noted that our tax rate for the quarter was 31.3% versus 21.5 person for the.
Year ago period.
This was due to a onetime adjustment related to the new tax law that eliminates certain operating expense reductions.
In addition, 2018 sports quartered low tax rate was due to a large windfall tax benefit that was recorded during the period related to deferred stock units steadily in 2018 with no such activity during 2019.
For the year net income was $76.9 million or $1.95 cents per diluted share compared to net income of $87.3 billion or $2.22 per diluted share in 2018.
Adjusted EBITDA during the quarter with $32.5 billion with a margin of 13.7%.
For full year adjusted EBITDA ended at $115.6 million with the margin of 14.3%.
The decrease in margin from a year ago period was due to slightly lower revenues cost associated with our acquisition activities expense increases related to growing and supporting our business for the long term, partially offset by lower stock based compensation.
Moving to the balance sheet, we finished the year with strong liquidity with approximately $399 million of cash cash equivalents and core cash investments as we lifted 2020, our top priority for capital deployment will be to scale. Our acquisitions now that we have built the foundation for sourcing underwrite.
And executing deals.
Before closing I like to point out several key factors, which may have an impact on our results for 2020.
In our opinion and based on third party sources the transaction market appears to be essentially flat and expected to remain so in the foreseeable future lower pipeline has improved and we believe we are gaining market share overall growth remains somewhat challenging.
Second we anticipate seeing expense leverage in 2020, the cadence of SGN days should be similar throughout the year.
Also note that during the first quarter of each year, our expenses increased due to award recognition programs for our brokers to acknowledge their previous years achievements asset should we expect first quarters SGN date to be approximately 4% to 6% higher than the fourth quarter at 2019.
Third cost of services in the first quarter 2019 were historically low at 57.1% of revenue, we expect cost of services in the first quarter of 2020 to be in a range of 58% to 58.5%.
And lastly, we expect our tax rate to be approximately 27% to 28%.
We'd like to now open up the call for acuity operator.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, Hey confirmation to all indicate your line is in the question Q you May press star to feel like to remove your question from the Q.
For participants use and speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we pull for questions.
Our first question comes from Josh Lammers with William Blair. Please proceed with your question.
Great. Thanks, guys good afternoon.
Hey, Josh Josh.
And yeah. Thanks for the margin commentary on the call. That's helpful. One frame in 2020, maybe just a kick things off.
I'm curious if you could provide some commentary on CFO search and Marty as you look to transition to your new role.
Could you help us frame a bit better maybe what your.
Top priorities are in the new year.
Let me, let me away and at first and then Marty can add to any comment our search has been going on now since the beginning of the year and has produced a number of candidates that we are looking at both within the real estate industry and financial services in general and Theres. Some.
I can comment out there that.
We are considering.
As a reminder, Marty is fully engaged and 100% focused on his role as CFO and will be until the appropriate person has found and brought onboard and has had some onboarding and transition period with marty's helps so he's not going to be moving over to his new function until all of that is done in a very.
You sound and detailed fashion.
Sure.
No really.
We'll be essential to helping us better organized and manage all the projects that the companies taking on related to growth initiatives that includes a lot of internal projects that we've launched where we could use additional bandwidth from somebody was very familiar with everybody in the from that our history.
And all the different projects and its background as well as helping.
As a participant in the acquisition process, both in the front end and post closing integration and sort of being another resource to making sure that the company's in groups that we acquire are integrating well and being supported well.
Sure sure Marty.
No no.
First and foremost.
My job is really to make sure that this new CFO gets up to speed and Safi spending a lot of time with this person to make sure that is a very smooth transition as as I as well as transitioning to my new role. So I'm really looking forward to it. Thanks.
Sure Hi, Thanks, maybe turning to MCC.
You noted some progress in hiring there. So I'm just wondering if on a gross basis you guys had hired some professionals.
But due to some departures you saw the year over year in sequential decline decline and headcount.
And then also on the productivity gain in the segment.
Really strong in the quarter and I'm wondering if that's mostly attributable to the refinance volumes that you noted in the quarter.
Or whether it's it's a combination of that and bringing in more tenured experienced professionals and whether we should expect some of this productivity gain.
To continue under the new year and beyond thanks.
Sure Josh Let me take the first part of your question on the topline hiring side of equation, both for MCC and the brokerage operation. We've had great success and continue to have success, attracting talent and more and more shift going toward experienced professionals. So you are very.
Accurate in your assessment that the net number decline had to do with both attrition and some proactive terminations on our part as our performance standards.
Always been very high and slower market environment, it's not unusual for us to to expedite some of those departures and so we're very confident that we'll be able to continue to higher and continue to improve the quality of both our investment brokerage team as well as the finance team on the productivity.
Front, certainly the Rifai increase had an effect on the productivity without a doubt and we would expect productivity too.
Continuing to grow and improved gradually I wouldn't expect the kind of spike that we saw on in the fourth quarter to be Replicatable every quarter, but the general trend line of productivity productivity for MMCC should be should be on the right.
Sure.
And then I guess, if I can sneak in one more I'll just turn to multifamily just given some of the commentary that you provided it's marginal but it did tick down again in the quarter and on a year over year basis, the exposure to that asset class and and so I'm just wondering how you're approaching that asset class or whether you're prioritizing that given the broader rank in 12 countries.
All measures versus the value opportunity you see within multifamily.
Right, how you balance that versus some of the alternative asset types that you talked about in the opportunity there.
So yeah, if you could share in that up.
You bet the advantage of who we are and where we are now our evolution as a firm is that.
Not only do we have this market dominance in the private client sector, especially in the multifamily front.
We still have substantial growth opportunity, both within the broader private client sector and within multifamily.
So there is.
No change in the marketplace that would make us think twice about the ability to grow share deploy more agents into multifamily.
And do a better job of capturing more of that market remember there are more than $17 million apartment units throughout the United States. It's a huge industry and a very active one last year, there was upwards of somewhere between $185 billion to $200 billion of apartment trades. So it's a massive market.
We are the leader in it.
We plan to stay leader and if anything increase our margin a leadership in it the rent control topic has been.
A serious one and a.
Clearly a an influence over the past.
Probably two years in 2018, we saw a lot of sellers decide to sell assets ahead of some rent control concerns in California in New York and Oregon. Some of those laws have passed and sales velocity has dropped substantially some of those markets.
But the market were real recalibrate. It is recalibrating as we speak Theres no doubt there is that there is some short term pains, but there is nothing from the market that makes this change our strategy related to a very aggressive growth plan for multifamily and.
At the same time diversifying into office industrial.
Multi tenant shopping centers and other product type. So we have this tremendous advantage of of having growth opportunity across the board.
Okay. Thanks for your time commentary that's it thanks Josh.
As a reminder, if you like to ask a question. Please press star one on your telephone keypad one moment, please while we pull for questions.
Our next question comes from Brendan fend with Wells Fargo. Please proceed with your question.
Hey, guys. Thanks for taking my question.
So you noted in your press release that you have an encouraging pipeline of potential acquisitions.
I recognize you probably can't get too specific but could you just maybe expand upon what's in that pipeline and more specifically I guess in terms of what you're looking for.
In terms of size acquisitions, and maybe geography as well.
Sure ended the strategy has been to focus on those areas geographically and by service capability, where we have the gap and we've been very fortunate to have come across the firms that we've acquired over the past 18 months or so and their acquisition.
Patient and early performance have all been very encouraging and very positive. So we're very excited about continuing this strategy of acquiring complimentary firms that really bring very little overlap and bring a whole new value internally to our existing.
Salesforce that can collaborate with new colleagues that cover different property type recover financing, where we have no financing.
And then of course expand our geographic coverage as well and of course, the service delivery to our to our clients.
So thats whats been driving our strategy, both within investment brokerage as well as financing.
We see opportunities in both segments of our core business.
Right now the pipeline of of active dialogue as a little bit more heavily tilted toward financing firms.
But there are other conversations happening within investment brokerage groups that maybe a little bit further behind just in their development, but there's definitely some opportunities on both sides.
And.
We don't see any changes in strategy if anything we have brought on some resources and added some infrastructure in order to be able to scale. This process.
Not only doing more effectively and do more deals, but also mitigate risk with careful underwriting and and very detailed understanding of these firms before they're required. Let me. Let me just also emphasize that this acquisition strategy is really supplement to our organic growth model, we're not in any way shape or form.
Taken that put up a gas on executing our core business in inorganic fashion better and better all the time, that's where our training enhancements our technology enhancements.
Improving our internal communications and best practices and one of the things that we've shared with you in the past really go to this mission of doing better and better work around.
Our organic growth execution and that is absolutely our continued top priority.
Got you that's helpful. Thanks, and then the larger transactions segment is kind of notoriously volatile.
So I guess after down here in 2019 relative to 2018, or you guys expecting more strength and that kind of market segment in 2020.
I wouldn't.
Look at that business on it on a longer term basis for us in that it is a part of our strategy to penetrate larger transactions for two reasons. One is the retention of our brokers as they mature with the company.
They naturally want to engage in larger transactions and we need to provide the tools the platform the brand to enable them to do that that's what we've done over the past five years and if you look at the overall trend line up how much of our business is not coming from these larger transactions over the long term is steadily grown so it has its ups and down.
I was in a given year, because it's a market conditions and the remember most of the clients we service even in larger transactions are private clients.
One of a more private investors that have joint ventures with institutional capital and of course, a lot of them are true institutional clients that we service through our IP Division.
So because of the private client nature that shows up in the larger transactions there could be.
Market movements and changing conditions that affect sales from one year to the next.
In terms of how we see this playing out we're continually.
Adding more brokers, both internally through organic growth and through the external hiring of new talent to do more and more larger deals. So the strategy is to continue to expanded.
2020, it will be very hard to forecast because that segment tends to be more volatile we.
Wouldn't be responsible for me to give you a forecast, but if you think about the fact that we grew somewhere between 20% to 38% in those two segments in 2018, and then the declines were around 7% to 8% in 2019 over the two year period that business segment continues to show very healthy growth.
[music].
Gotcha that's helpful. Thanks, guys.
Thank you.
We have reached the end of the question answer session. At this time I'd like to turn the call back over to Tom Naji for closing.
Thank you very much operator, and thanks to all of you for joining our call. We look forward to seeing some of you on the road and look forward to having all of you back on our next quarterly call. Thank you very much.
This concludes todays conference you may disconnect your lines at this time and we thank you for your participation.