Q1 2020 Earnings Call
Readings and welcome to Marcus and Millichap first quarter of 2020 earnings Conference call.
This time, all participants Arnold it's an only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press start zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Evelyn Inferno with I.C.R.
Thank you you may begin. Thank you good afternoon, and welcome to Marcus and Millichap first quarter 2020 earnings conference call with US today, our President and Chief Executive Officer has some naji and Chief Financial Officer Mardi Louie.
Before I turn the call over to management. Please remember that are prepared remarks, and the responses to questions may contain forward looking statements.
Words, such as May will expect believe estimate anticipate goal and variations of these words in similar expressions are intended to identify forward looking statements.
Actual results could different materially from those implied by such forward looking statements do double variety of factors, including but not limited to the Kobe 19, pandemic general economic conditions and commercial real estate market conditions, the company's ability to retain and attract transactional professionals the company's ability to retain.
And it's business philosophy, and partnership culture amid competitive pressures the company's ability to integrate new agents and sustain it's gross 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 1st 2019.
Although the company believes the expectations reflected in such forward looking statements are based upon reasonable assumptions. It can make no assurance that its expectations will be attained the company undertakes no obligation to update any forward looking statements, whether as a result of new information future events or otherwise.
In addition, certain financial information presented on this call represents non gap financial measures.
The companies early earnings release, which was issued this afternoon and is available on the company's website represents reconciliation to the appropriate gap measures and explains why the company beliefs, such nongaap measures are useful to investors.
Finally.
Conference is being web cast to web cast link is available on the Investor Relations section of our website W.W.W. Marcus smell chap Dot com along with the slide presentation, you may reference during the prepared remarks.
With that it is my pleasure to turn the call over to <unk>.
Thank you Evelyn on behalf of the entire Marcus and Millichap team. Good afternoon, everyone and thank you for joining our poll.
We'd like to extend their well wishes for health and safety to everyone.
We have correspond ourselves in a dramatically different landscape from the promising start 2020, we had shared with you in February.
Vehicle aspects of executing real estate transactions, such as property showing inspections appraisals and even arranging for a notary became disrupted by mid March as a result of the shelter in place mandate.
Even with the onset of these impediments to our business late in the quarter.
She 19% revenue growth in the first quarter, including a 12% increase in financing fees on tobacco, 42% increase in the first quarter of 2019.
These results reflect last year's expanded Klein outrage and marketing initiatives, coupled with ongoing hiring and acquisitions.
Transaction velocity and all segments proceeded at a healthy pays through mid March when the effects of the pandemic and shelter and plays began to constrain credit markets and real estate sale.
At the onset of the health crisis, we executed a business disruption action plan comprised of five key components.
Including keeping our team safe and ensuring business continuity.
Intensified internal education and deal Troubleshooting sessions comprehensive special report.
And research content production and large scale Kline outreach.
Decisive expense reduction to preserve the company's strong financial position.
And last but certainly not least a strategic plan to maximize growth in the recovery and beyond.
A little highlights specific actions in a moment, but let me start by sharing that by March 15th the entire organization has shifted to fully remote operation.
This was achieved with extreme adaptability collaboration and through said of the our technology and infrastructure investments completed over the past three years, we quickly adopted virtual property towards video conferencing and collaboration tools to facilitate transaction.
As a result, we continue to close transactions market listings insecure financing in a very difficult environment.
These efforts to solve problems amid abroad disruption may not make up for normal trading volumes, where they clearly reflect our commitment to our clients.
Looking closer at the first quarter I private client revenues increased 19% with strength across all property types.
Most of which benefited from our business development efforts in the second half of the year and the bottoming of interest rates in October of 2019.
Revenue from larger transactions posted a 46% improvement driven by a mix of rebounding institutional sales by R.I.P. 18, and a number of larger sales executed by major private investors.
We're also proud to report that our sales transactions increase nearly 15% in contrast to a market decline of 7% reported by R.C.A.
Are financing volume rose, 20% driven by double digit growth in both purchased and refinance transaction.
Commissioned rate or costs of services as a percentage of total revenues increased 250 basis points as more senior professional <unk>.
Closed a larger portion of transactions during the core.
This was the key factor in the disconnect between your over your revenue and earnings growth trends.
The broker sales force expanded 5% or by 91 professionals over the past year.
Managers continue to recruit through virtual career fairs, and interviews with a number of successes that we're excited about.
View this period as an opportunity to bring highly skilled professionals to the for who will benefit from our stability tools and long term grow plants.
That said, the economic shock and real estate transaction disruption will the major challenges in overall sales force expansion for the foreseeable future.
Are financing division M.C.C. remains a key component of our growth plan and it's benefited from recent creative acquisition.
Just after the end of the first quarter, we announced the acquisition of Metropolitan capital advisers in Dallas.
Yeah edition of this from within 20 at your history of success and great reputation <unk> nine experienced originators and to managing partners to the M.C.C. roster.
Expansion would complement are existing and successful and M.C.C. presence in Texas and add value for our entire team through numerous client and lender relationships.
Notwithstanding the company's positive first quarter results, the pandemic and economic shutdown have impacted their rules that industry and our business dramatically and differently than past downturns, including the 2008 2009 global financial crisis.
This is due to the physical impediments to conducting business I mentioned earlier combined with as yet unknown economic impact on tenants.
Recollections and occupancy.
This in turn is causing pricing uncertainty unconstrained financing availability.
There are clearly differences by property diet. However, the result is an unprecedented business disruption adversely impacting our revenue production.
This is undoubtedly temporary and we'll begin ease as the economy reopens, but the timing in stages of recovery real estate transactions are very difficult to forecast.
In the spirit of controlling the controllable our plan is designed to bridge the company from the current state of business disruption to a recovery that could be unprecedented in its own right.
I'm happy to report that our first goal of keeping the team safe and ensuring business continuity has gone extremely well.
With a stable virtual network technical support and connectivity working in tandem.
We continue to place health and safety ahead of all other matters as we prepare to bring our offices together again in person.
Our internal education and troubleshooting efforts include weekly seminars, featuring the most experienced managers agents and loan originators addressing specific topics and aspects of deal execution.
In a tough market environment.
This is produced an exceptional array of best practices and training content benefiting the entire organization.
Oh advisory approach to client relationships does it cornerstone or the Marcus and Millichap culture.
Comprehensive Klein outreach campaigns are nothing new for us.
But given the magnitude of this crisis, we've taken our client connectivity to yet another level as the third component of our plant.
It's mid March we have produced over 50 special research reports alerts briefs videos to keep our clients up to date on the latest data and our perspective.
We have held three special client web cast with over 20000 attendees, coupled with weekly outreach to a record number of investors and clients by our sales force.
And then X. 30 days, we will host 10 properties specific client web cast as our research Division continues to produce real time content.
Well this exceptional volume of of advisory based content may not immediately result, and transactions during the market disruption.
Reinforces our beliefs and long term client relationships and will enable us to execute more transactions as the market recovery forms.
Through this period, we recognize the advantage of having built ample cash reserves.
At the same time, we strongly believe that preserving our favorable financial position through any crisis is crucial.
<unk> reduction.
Which is the fourth component of our plan reflect this philosophy, while providing sufficient support for our sales force.
We've also allowed flexibility through employee furloughs to increase capacity and leading the recovery once business conditions improved.
In addition to reducing support staff and other controllable expenses base salaries, where the leadership team management and corporate employees have been reduced at varying levels.
This reinforces our commitment to the from our sales force and shareholders by doing our part.
Offensively, we continue to attract highly experienced professionals in groups as we pursue strategic acquisitions.
Underwriting evaluation and deal structures have been adjusted to lower risk, we believe them I will benefit from adding service and market coverage and strategic areas that will boost our business in the recovery and most importantly, well beyond.
The company strong financial foundation at platform advantages are even more compelling to many quality individuals and firms during turbulent times.
We're encouraged by active dialog with a number of recruits an acquisition targets as a result.
In addition, our investment in key technology upgrades branding and client outreach will continue given their strategic importance.
This reflects our commitment to lead the recovery gain share and propelled affirm forward stronger than ever.
As we look forward. It is important to keep in mind, a number of factors for the market and for M.I. related to recovery and it's prospects.
From a market standpoint, the speed and magnitude of of the government response has been unprecedented.
Moreover, we believe banks much stronger capital position prior to this crisis.
As compared to the peak before the 2008 2009 financial crisis will result in faster circulation of stimulus and liquidity injection throughout the economy.
No amount of stimulus will fully compensate for an economic shut down there will be residual damage to the economy and commercial real estate fundamentals.
However, the fifth commitment to backstop the system and continue to provide liquidity will go a long way to minimize damage.
Real estate transaction could increase well ahead of abroad and sustainable economic recovery.
Let me explain that for just a moment.
Investors ability to assess post shutdown occupancy is in prospect for tenants ability to pay rent will help form clarity on valuations. So first building block <unk>.
<unk> with some improvement in financing flows this should generate more transactions as pent up demand is released.
This scenario supported by a record capital on the sideline and more owners needing to sell or recapitalize assets in the aftermath of the shock.
Let's not forget that extremely low interest rates have yet to support the market as financing remains constrain right now with lenders taken an extremely cautious stance.
Historical precedents point to the scenario as evidence by three quarters of substantial real estate sales increases.
Before jobs, even turned positive coming out of the 2008 2009 crisis.
We've added this graphic to our slide deck to illustrate the point.
Let me reiterate that the timing of this cycle is extremely difficult to predict I'm not suggesting that a jump in sales is around the corner, but a rebound will eventually occur and we're doing everything possible to position delete it.
To this point and minimize advantages in the recovery include a private clients dominance and active network of experts covering every major property type.
Our market leadership, and 10 31 exchange transaction.
<unk> sales and financing into our client service delivery and are proven ability to connect institutional assets with private investors.
We believe that record levels of Klein contacting connectivity through our research and advisory content during the business disruption will be instrumental in expanding our client base as the market recovers.
We also expect apartments and certain segments of the single parent at least business to lead the growth in sales as market clarity emerges.
The fundamentals of these investments are expected to whether the economic shots better than other sectors and M.M.I. is well positioned to benefit from this given our leading market position in both second.
Let me also emphasize the private investors normal tendency and need to tranzact due to personal circumstances or financial hardship is currently hampered by a constraint transaction market again, we believe this is temporary.
The entrepreneurial nature of our private client base, an apple capital waiting to be deployed will eventually foster transaction velocity.
Let me conclude my former comments by expressing our appreciation to our clients for entrusting their real estate decisions him transactions to us.
We thank our team for their unwavering commitment to our clients and the firm as well as everyone on the support management teams working tirelessly to Usher the company through this period of disruption.
Not only will be come out of this as we have an every other downturn since 1971, we will be stronger for it.
I would now like to turn the call over to our CFO Marty Lily Marty.
Basis.
Total revenues in the first quarter increase 18.7% year here to $191 million do strength across all business lines.
Revenue from real estate brokerage commissions rose and impressive 18.6% to $172 million, which can't afford 90 per cent of our revenues, while financing fees increase nearly 12% to $15.4 million.
Our private clay market, which accounted for 67% of real estate broker revenue increase 90% to $114 million due to a 17% increase in transactions.
While revenue from our larger transaction business increase nearly 46% year over year $229 million.
Financing fees grew 12 per se $250 million for the quarter, driven primarily by increases in both purchase and refinance transactions.
Other revenue comprised primarily of consulting and advisory fees, along with referral fees from other real estate brokers cruise, 74% two $3.5 million.
During the first quarter, we execute a 2250 transactions for an increase of 15% from the prior year, while total sales volume for the quarter increase 90 per cent year over year $12 billion.
<unk>, we finish the quarter with 1900 for sales professionals at 89 financing professional sport total headcount 1993, four year over year increase of 4%.
That's part of our continued efforts to shift our financing unit towards more experience and protected professionals. We continue to evaluate our team too sure. We have the best players on the field.
As a thumb mentioned earlier, despite the first quarters decline and headcount we were able to increase the number of transactions and volume for M.S.C.C. demonstrating progress in our continued efforts to increase the overall quality of our sales force.
Total operating expenses for the first quarter, where $171 million 20 per cent. Your every year as <unk> as compared to $142 million during the year ago period.
Increase in total operating expenses in the first quarter was primarily as a result of higher cost of services.
Cost of services Rose, 24% your year 210, $14 million due to an increase in real estate brokerage commissions.
Per cent of total revenues costs of services, what's 59.6% increase I 250 basis points over the last year.
This was due to an increase in a proportionate transactions close by our senior investments sales professionals.
S G.N.A. increase by 12% year over year $255 million, primarily due to increases in sales support sales recognition programs related to 2019th revenue performance.
Position related expenses legal costs expenses related to the renewing of office leases as well some initial cost related to workforce reductions.
Increases these increases were offset by a reduction in compensation related expenses.
Diluted earnings per share for the quarter was 33 cents compared to 40 cents per daily to share in a year ago period, our tax rate for the quarter was 31.2% versus 26.6% for the first quarter last year.
The change in tax rate was primarily driven by the effect of permanent items, including like deferred compensation plan assets as well as income generated from hired taxing states before jurisdictions.
Adjusted EBITDA decrease by 3.4% to $22.4 million during the quarter, while our adjusted EBITDA margin was 11.7%.
Given the uncertainty surrounding the impact of the cold in 19 pandemic. We expect are adjusted even in March and to remain under pressure for the foreseeable future.
Moving onto the balance sheet.
We finished a quarter with strong liquidity levels with approximately $337 million of cash in court cash investments, even with a strong bell sheet, we have taken significant actions to reduce expenses and preserve capital.
Our top priority per capita employment is to ensure that continues mood execution of our day to day operations provide the most current market research to our agents and clients and to continue to invest in our platform.
In addition, we believe that current business environment by incremental opportunities to acquire complimentary businesses and brokerage teams.
Before closing I would like to point out a number of key items and highlights which may have an impact on our 2020 results.
First the current health crisis and the subsequent shelter in place orders have limited the opportunity for agents to me with place.
Underwrite and inspect properties and in many cases determine property values.
These impediments have also negatively affected lenders appraisers and other ancillary businesses critical for a functioning investment sales market.
While these serious challenges will continue to negatively affect our business. We believe our business will improve as the physical impediments are lifted.
Second we are reducing controllable expenses by 25% to 30% over the next few months.
Assets, we believe we will be able to achieve savings in total S.G.N.A., which includes fixed costs between 14 and 17% during that that time, the kato's of adjust the S.U.N.A. should be similar throughout the remainder of 2020. These overall reductions include salary cuts as well as ongoing investor.
And key areas I mentioned earlier.
Third cost of services will most likely be higher than usual at senior ages, who are typically on hired conditions plus close a higher percentage of our deals during times the market disruption <unk>.
<unk>, such we expect costs of services during the next few quarters to be in a range of 62% to 64%.
Lastly, we expect our tax rate to be approximately 31, 233%.
I would like to now open up the call for Q.N.A. operator.
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Our first question comes along.
Oh please.
Oh I think that was mean thanks. Good afternoon, guys. Just I guess more of a big picture question for some you know you eat like you said your transaction volume held up very well and the first quarter, but you know as you guys going out the whole new world here in the second quarter. So you know given that we're.
Over a month into the second quarter can you just talk about what you've seen those sort of April on the transaction side and maybe what's what's a reasonable assumption for us to to make for the decrease in second quarter deal activity. You know if we assume that's things stay pretty consistent with where they are today as we look out through June.
Yeah.
Let me give as much my thoughts on the the question as I, possibly can.
You're absolutely right and then the first quarter had the benefit of a couple of very strong once in January and February and March or a started out very strong as well and as we went through the <unk> of course, the the effects of the shelter in place in in the capital markets.
Basically starting to freeze up at began to affect transaction velocity.
There's probably a good benchmark to look at is if you look at our C.A.S publish transaction numbers.
For the first quarter, they record or 7% decline in total, but if you look at their April numbers. It was about a 45% in 44% decline.
For the month, so they I'm sorry for the month of March.
And so as you carry that afford the assumption is that more and more or the affects than the constraints in the marketplace took shape and transaction velocity drops or even further than that March number that would be the same case for us as a reflection of what's happening in the broader market.
The other thing that I can say is that this is a highly unusual window over time in that we've been through downturns before we went through the <unk> Oh nine downturn before of course, but that market impact played out over approximately eight quarters in terms of the peak.
Sales activity in the marketplace and for us to the bottom. This has happened over one quarter. So it's going to be a very dramatic.
And Steve disruption, but a temporary one because of the fact that you're compounding a a market disruption from a standpoint as you know the financing availability pricing uncertainty the economic uncertainty, which is a physical impediments doing business due to the shelter in place. So when you combine those three.
Affects together you do get this extreme disruption as that we expect to be temporary here in the second order.
Right that makes it makes a lot of sense. That's very helpful. Color and then my second question just on the recruiting and retention side of things I think there seems to be kind of two competing forces there in my estimation and correct me if I'm wrong, but.
It seems like her attention could get a little bit tougher the longer the crisis persists just given that you know you're brokers or paid on commission alone and some might not be able to bridge that gap between.
A year this year when the investment sales marketing wide open and whenever recovers, but then you've also got the opportunity to maybe go out and you use these recruiting fairs. He mentions in in your prepared remarks or even acquire some of these smaller firms like you have been doing and hopefully the pricing on those deals it's been approved.
You guys, but you know with those acquisitions, obviously come additional professionals. So you know I guess is that the right way for us to be thinking about it and how do you think those competing forces kind of net out this year does your workforce increase or does it decreased.
Sure.
Well, if you look at a history.
Your comment is confirmed that in a tougher market environment newer professionals that just don't have the experience yet or their client relationships yet find it harder to basically survive in a lower velocity environment, we've seen that happen many times and.
You know our normal fallen out rate of newer professionals increases during market disruptions I don't think this will be any difference. So there will be a higher degree of natural water of newer and less experienced brokers because of that.
The same time your to your point, we are shifting more of our hiring toward experienced professionals, that's doing very well if anything that might pick up in fact, we are working very hard to make sure it picks up a and on the front on the.
Sort of the offensive front of hiring new talent, we're not stopping the interviewing the selection the evaluation of new inexperienced professionals, if anything through these virtual fairs and virtual interviews we've kept that that.
Focus.
Very much and part of what our managers do and kit and planned to continue to do so because there's still talent out there. There are a lot of people who liked this business and whether there was a downturn or not there are going to want to join our company, but at a time of disruption. There are usually fewer people that are looking for a commission only type of.
I'm sure now we have grown our teams in the past now we are able to add a lot of an or folks as men t.'s or as insurance within the some of our existing too. That's another strategy. That's been working very well for us not in that this year is going to be a very challenging time for us in terms of increases to the to the sales force.
It's very hard for me to forecasts were rounded up for the years part of that has to do with whether this is one quarter disruption or a two quarter disrupt <unk> and the timeframe just being very uncertain at this point, but we're not slowing down any over traditional efforts, those new age or recruiting and training and <unk>.
<unk> recruiting and acquisitions because of the disruption.
Great. Thanks, a lot for the color.
Thanks for the questions.
There are no further questions I'd like to hand, it back to management for closing remarks.
Thank you operator, and thank you to everybody for joining this call. We look forward to getting back on the road and seeing a lot of you wouldn't person in time, we wish to everyone health and safety as the economy reopened being very careful related to house and this this virus.
Stays a very very high priority hopefully not just for our company, but for everybody. So that we don't have the risk of a another wave of this disruption.
You very much and the call visitor.
[noise], there's still there's conclude today's teleconference. Like you for your participation you may just kinda caroline's at this time and have a wonderful day.