Q2 2019 Earnings Call
Greetings and welcome to the markets and Millichap second quarter 2019 earnings Conference call.
At this time all participants are in a listen only mode. A question answer session will follow the formal presentation. If anyone should require operator seasons. During the conference. Please press star zero on your telephone keypad. Please note that this conference is being recorded I will now turn the conference over to your host Evelyn Infurna Investor Relations.
Missing from <unk> you may begin.
Thank you good afternoon, and welcome to Marcus <unk> Millichap second quarter 2019 earnings Conference call.
With us today are president and Chief Executive Officer facade, lodging 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 believe 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 due to a variety of factors, including but not limited to 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 its business philosophy and partnership culture amid competitive pressures.
The company's ability to integrate new agents and sustain its growth and other factors discussed in the Companys public filings, including its annual report on Form 10-K filed with the 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 statement, 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 earnings release, which was issued this afternoon and is available on the company's website represents reconciliation to the appropriate GAAP measures an explanation of why the company believes such non-GAAP 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 Www Dot Marcus <unk> Millichap 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 Hessam Nadji.
Thank you Evelyn.
On behalf of the entire Marcus <unk> Millichap team. Good afternoon, everyone and thank you for joining our second quarter 2019 earnings call.
I'm happy to report that our intensified client outreach and marketing campaigns in the past several months combined with steady hiring and acquisitions resulted in revenue growth of 5.1% for a second quarter record of nearly $210 million.
This reflects sequential progress in replenishing, our transaction pipeline and listing inventory, which had been depleted in the fourth quarter of 2018 due to our record closings.
Renewed momentum in our brokerage revenue growth after a record breaking 2018 has been gradual and more challenging this year due to a shift in investor sentiment.
As we noted on our last earnings call heightened economic concerns and the fed interest rate course reversal of course, many investors back into a wait and see mode, particularly in anticipation of falling interest rates.
As a reflection of this shift overall market sales declined by an estimated 7% in the second quarter and 13% for the first time according to our CFO .
One of the hallmarks of the markets more kept flat.
Is our ability to mobilize our salesforce and fine tune the educational advisory service value our team brings to investors at times of market change.
This remains our core strategy combined with a steadfast focus on broker hiring in developed while supplementing organic growth with acquisitions.
For the quarter revenue growth of nearly 9% in private client brokerage and 14% in our financing business we're points of strength.
We also closed some delay transactions from the first quarter and resurrected some transactions that had fallen out of contract.
Also on a positive note. Our died transaction ratio has he's back to its three year average and our sales force grew by 124 or 7% over the past 12 months.
This includes the addition of many experienced sales and financing professionals.
Our middle market and larger transaction revenues declined by 8% and 11% in the first half of this year.
Combined revenue in these categories have grown 37% in the first half of 2018 as a comparable.
As we have shared many times in the past these transactions involve major private investors as well as institutions and these tend to be more variable for us.
Buyers have become particularly cautious this year and these higher price categories, given record valuations and interest rate volatility.
Were also challenged by a slowdown in multifamily sales this year after posting exceptional revenue growth in 2018, particularly the larger multifamily assets.
Well multifamily remains the Darling of the industry, we're seeing some pushback on a record low cap rates as one of the concerns regarding potential rent control measures in some major metros.
Affordable apartment sales have been adversely impacted by delays in HUD financing and their backlog throughout the first half which stems from the government shutdown earlier this year.
Despite these factors multifamily property fundamentals remain exceptionally strong, especially in the workforce housing segment, which makes up the vast majority of the U.S. rental stock and minimize multifamily brokerage business.
We believe this is an adjustment period that will work its way through the market, especially given the recent drop in interest rates.
Our growth in office industrial self storage seniors housing revenue helped offset declines in our multifamily sales.
From a market perspective, we continue to see solid occupancy rents strong loan performance and ample availability of debt and equity capital.
All of which is supported by steady job growth.
Notwithstanding the roller coaster ride of trade wars, and the effect of tires nibbling at GDP growth do you economic expansion continues at a moderate but steady pace.
The challenge for US is extended marketing and transaction closing timeline and lingering price expectation gaps.
It is simply taking longer to bring buyers and sellers together and the process requires more investor education and tighter underwriting.
Let me emphasize that well priced assets are still clearing the market and there is plenty of buyer demand for a full spectrum of investments ranging from core to value. It.
Therefore, we are cautiously optimistic that investor sentiment will be bolstered by lower interest rates as the permeate through the marketplace in the coming months.
Most importantly, our growth strategy remains on track.
In the immediate term we are further refining our client outreach of brokerage training to help more investors navigate real time market conditions and take advantage of ample opportunities across various property types and mark.
Expansion efforts in our financing business IP, a division and diversification in various property types are successfully moving forward.
Specific to our financing business, we continue to enhance our platform through developments in technology training and loan originators support while expanding our lender programs expanding agency lending capacity and pursuing additional acquisitions.
As mentioned on our previous calls.
We are managing our expenses tightly while making strategic investments that we believe are critical to the companys long.
He's earned during the quarter.
And lastly, we finished the quarter with 1965 sales and financing professionals for a net addition of 124 over the past 12 months.
During the quarter total operating expenses increased 7.1% to $183 million.
The increase was due to higher cost of services, SGN, ne and depreciation and amortization.
Cost of services rose, 6.7% year over year to $128 million in part due to higher revenues as well as increased commissions to more experienced agents in the quarter.
As a reminder cost of services is primarily comprised of commissions paid to the companys investment sales professionals and compensation related to financing activities.
As a percentage of total revenues cost of services rose 90 basis points to 61% offsetting first quarters lower than normal commission rate, which was 110 basis points lower on a year over year basis.
For the first half of 2019 commission rate is on par with the previous year, which illustrates the importance of viewing our business on a long term basis.
As she M&A increased 7.7% year over year to $53 million. This was primarily due to compensation related costs investment in our sales and financing professionals business development and stuff and support systems expansion of existing offices in strategic locations in support of our growing sales force and expenses related to certain data licensing fees.
The increase also includes support staff from entities that were acquired during the past 12 months.
Most of these companies are in ramp up and are making solid progress in their integration in future revenue contribution.
These increases were partially offset by decreases in legal costs and stock based compensation.
Let me reiterate we are managing expenses tightly and balancing cost containment with key investments.
We believe are essential to the company's long term competitiveness.
Diluted earnings for the quarter were 54 cents per share compared to 56 cents in Q2 of 2018.
It should be noted that our results were impacted due to a higher tax rate.
This was primarily caused by the elimination of certain operating expense reductions caused by recent IRS guidance related to the 2017 tax law.
Going forward, we expect our effective tax rate for the full year to be between 26.8% and 27.5%.
Adjusted EBITDA decreased 5.1% to $32 million during the quarter, while our adjusted EBITDA margin decreased to 15.3%.
As we have discussed in the past our adjusted EBITDA margin like our overall performance should be viewed on a long term basis and that there is variability from quarter to quarter.
Moving onto the balance sheet, we finished the quarter with strong liquidity liquidity levels with approximately $361 million of cash cash equivalence and core cash investments.
Our capital deployment priority remains centered on strategic acquisitions that broaden our market coverage and service offerings.
We are pleased with our growing pipeline of acquisition opportunities, which are in various stages of discussion.
Before closing I'd like to point out a number of key items and highlights which may have an impact on our results for the remainder of the year.
First we are facing difficult year over year comparisons for the third and fourth quarters of 2019, which saw total revenues increased nearly 15 and 14% respectively.
This was in large part due to revenues from transactions greater than $10 million growing 27, and 28% during those periods respectively.
Second rebuilding our inventory and pipeline have been more gradual than usual given the market conditions that has some summarized we anticipate that these key metrics will continue to build throughout the remainder of the year as we continue to execute our outreach and investor education programs.
Lastly, the time to market and close transactions are above historical norms. We are cautiously optimistic that lower interest rates continued job growth and healthy real estate fundamentals may support more market momentum.
I'd like to now open up the call for Q name.
Operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation tone will indicate lies in the question queue. You May press star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith.
One moment, please while we poll for questions.
Our first question is from Mitch Germain JMP Securities. Please proceed with your question.
Thank you.
So the decline that you referenced in the multifamily sector.
TV that is temporary on the heels of.
Some of the Grand reform and other legislation that's out there or do you think that.
Is it based on inventory as a pricing what do you think is causing that.
Decline.
Hi, Mitch This is Tom first of all I want to apologize to everybody for some technical difficulties.
That may have affected some of our attendees.
And I believed to have been resolved and hopefully everyone is able to get back on.
Mitch Thanks for the question the.
A trend that we're seeing right now we believe is temporary and that multifamily fundamentals are extremely strong. Yes. There has been a lot of discussion and concerns about rent control and various metro's.
But if you look at the totality of the marketplace. There is.
So much inventory and so much investment opportunity for our clients everywhere. We did have an exceptionally strong year last year.
And.
The market was also up last year versus a market decline in terms of sales so far this year.
And so it is for sure and internal challenge for Us.
After a big.
Exceptionally strong and record year last year, but also we've seen a slowdown in market transactions as well that we believe will work its way through the market in the next couple of quarters.
Great.
How do you quantify the return.
On the marketing and Investor Education events, I mean, it sounds like that activity is up.
I'm, assuming that it's a bit of an initial drag how how does that how do you.
I kind of view, the progress and and return on those different events.
Every one of these events that we host and every one of the campaigns that we run has benchmark goals.
That we compare to previous campaigns and previous events, we look at the Investor attendees. We look at the number of listings that or committed prior to the events. We look at the listing to eventual sales ratios and also track the clients that attend whether its webcasts or physical events. So there is.
A pretty wide array of metrics that we measure on all of our events and activities because we want to know if they are working and what else we need to do to enhance them.
The incremental cost of these you're right can be a drag in any given quarter or two when we accelerate these activities and different things that we do to.
Promoted listings or increase our client outreach.
But.
Over the long term there are not significant incremental increases from quarter to quarter.
We are very mindful of the fact that it all has to result in additional listings and closings eventually.
Got you I think last one from me hiring obviously up and kind of in line or even ahead of kind of what you typically guide for a year.
Adjusting.
You know curious if.
That the composition of hiring are you back to looking toward more entry level or is still there a significant focus on experienced producers.
Sure Mitch about three years ago as you recall, we launched the initiative to.
Increase our focus on experienced broker and loan originator hiring and that has resulted in some very good additions to our company that has not changed at all we continue to emphasize that if anything we're getting a little bit more traction.
So at the same time, we have not slowed down our entry level organic growth.
Based hiring and development, either we're going down both paths and both are very important to the future growth of the company.
Thank you.
Thank you and good morning.
As a reminder, we're now conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q4 participants using 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 next question is from Stephen Sheldon William Blair. Please proceed with your question.
Good afternoon, and congrats on the results.
You sounded pretty cautious last quarter with the need to rebuild the pipeline. It seems like you're able to do that pretty quickly. So a couple things. There. One can you talk about how trends this quarter kind of played out relative to your own expectations and then too.
Any detail you can provide on maybe what allowed you to return to growth. So quickly was that more of the impact of what you did on your side with the.
The outreach in the marketing efforts or or did in investor urgency, maybe pick up at least a little throughout the quarter too.
Hi, Steven.
Yes, as I mentioned on our formal remarks actually replenishing the pipeline and increasing our little listing inventory has been gradual and what we feel to be below.
Normal in a situation, where we had a record fourth quarter in 2018 actually really have a record year in all of 2018.
And so we are making incremental progress there is definitely a visible improvement in there was for the second quarter as well, which contributed to our results but.
The degree of it is below normal in our estimation and that's because of the wait and see attitude that has re emerged in the market primarily as a lot of private investors.
Have notice.
Interest rates coming down starting in February March and in anticipation of further interest rate reductions have.
Become slower to act both in terms of acquisitions that were underway and new acquisitions.
So thats the primary headwind that we faced in.
Gaining the kind of momentum, we'd like to see in our pipeline and our inventory.
So I wanted to clarify that commentary from our formal remarks and the pace continues at about the same rate in.
In the current period, we're not really seeing much change obviously, there was a lot of market uncertainty I mean, just in the last couple of days Theres been a lot of negative headlines and.
Concerns about.
Global economic issues trade wars, escalating and so on those do affect investor sentiment and.
Our segment is not immune to it.
But it comes down for us it comes down to contacting more clients getting closer to more investors assessing their situation, bringing in our platforms variety of investment choices.
And being able to really connect with more people on what their options are which includes refinancing and transactions in the first quarter as the news was really.
Emerging with a shift from the fed raising interest rates and signaling toward more increases to the opposite revise really became more popular auction we saw.
That evening out of that in the second quarter as the market absorbed into the fed reverse if you will so it's really a combination of all those dynamics that are driving us we'd like we'd like to see our pipeline and inventory grow at a faster rate.
And we're working through the headwinds and the current that.
That's been caused by these market factors.
Got it that's helpful. I guess on the timing issues I think you'd mentioned some delayed closings.
In the first quarter that subsequently closed in the second quarter is there any way to quantify that impact and then and then just with all the puts and takes can you can you provide any commentary on where the pipeline currently or I guess at the end of the quarter kind of stat year over year on a year over year basis.
Let me address your first question regarding delay transactions, yet we did see a a portion of our business that was scheduled to close in the first quarter get delayed and that did contribute to the second quarter. It was one of many contributors to the results and second in the second quarter. It was not a defining.
Contributor, but it was one of several.
And in terms of the pipeline all I can say.
Is that we're seeing gradual.
Increases in our in our pipeline and the fact that.
But there is an internal component to rebuilding the pipeline and inventory when you have a record exceptionally.
High level of activity in the fourth quarter of 2018 that had two layers to it one is the fact that you sell more of your inventory than projected and two is that our sales force is so busy closing transactions and taking our clients, they're spending less time developing new business. So it takes us a couple of quarters, usually to begin to recover from that and then compounding. It is the headwinds that we discussed that's why it's more gradual than we'd like.
Okay.
And last one for me great to see the form acquisition as just as we think about layering that into our model.
Any detail you can provide on number of producers that that acquisition would include.
Forum has a great team of four senior partners and we're all team of 11 professionals, which include support staff and additional producers.
They are top notch, we're excited about having them on board and their business philosophies, so well aligned with ours. We really think this is going to be a case of one plus one equals.
Four or more some of our other investments have begun to to illustrate it remember that it takes time for any new group coming in to a larger organization to infiltrate there is system integration steps and for any brokerage group remember the the continual includes.
Contacting clients getting new listings marketing those listings and closing so its typically about a six month or so.
The transition process before there is there is the.
Momentum of transaction closings and revenue production all the companies that we bought our various stage of this integration I remember that.
Our prior acquisitions were mostly done in the third and fourth quarter of 2018 in the first quarter of 2019. So we're just in that ramp up process and and what form we hope to accelerate that as much as possible, but there is that natural integration and infiltration process.
Great. Thank you.
Thank you Steve.
We have reached the end of the question answer session and I will now turn the call back over to Hessam Nadji for closing remarks.
Thank you operator, and thank you everyone for joining our second quarter 2019 call again, our apologies for any technical issues that you may have experienced.
And.
We look forward to seeing you on the road and then having you on our next quarterly call. Thank you very much.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.