Marcus & Millichap (MMI 0.20%)
Q4 2019 Earnings Call
Feb 20, 2020, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to Marcus & Millichap's fourth-quarter 2019 earnings conference call. [Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Evelyn Infurna of ICR. Ms.
Infurna, you may begin.
Evelyn Infurna -- Managing Director, ICR Inc.
Thank you. Good afternoon, and welcome to Marcus & Millichap's fourth-quarter 2019 earnings conference call. With us today are President and Chief Executive Officer Hessam Nadji and Chief Financial Officer Marty Louie. Before I turn the call over to management, please remember that our 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 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 and 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 company's public filings, including its annual report on Form 10-K filed with the Securities and Exchange Commission on March 1, 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-GAAP financial measures. The company's 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. The webcast link is available on the Investor Relations section of our website, www.marcusmillichap.com, along with a slide presentation you may reference during the prepared remarks.
With that, it is my pleasure to turn the call over to Hessam Nadji.
Hessam Nadji -- Chief Executive Officer
Thank you, Evelyn. On behalf of the entire Marcus & Millichap team, good afternoon, everyone, and thank you for joining our fourth-quarter 2019 earnings call. We finished 2019 on a positive note, achieving 3.3% revenue growth year over year on top of nearly 14% in the fourth quarter of 2018. Strength in our private client brokerage revenue and financing fees were key forces behind the strong finish.
Private client brokerage revenue expanded 6% after growing 15.5% in the prior period, and financing revenue for the quarter was up 13.4%. The fourth quarter benefited from transactions that had been slow to consummate throughout much of the year, as well as our expanded client outreach, marketing campaigns and efforts to replenish inventory. These initiatives were launched in the first quarter of 2019 as the market downshifted. Our brokerage sales volume increased nearly 11% in contrast to a market decline of 7% reported by third-party sources.
Our financing volume rose nearly 20% supported by more refinancing transactions. 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% below our 2018 record as we navigated through market aberration. As a reminder, the urgency to transact throughout 2018, offset by the Federal Reserve's aggressive interest rate increases, was followed by a sharp course reversal in early 2019.
This contributed to sales declines as many investors paused in anticipation of lower interest rates. These dynamics resulted in essentially flat revenue in 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 to new records and subsequently declined by 7.7% and 8.4% in 2019. Our financing division, MMCC, continued to gain momentum with full-year revenue growth of 14.7% and a volume increase of 15%.
Financing fees share of total revenue grew 110 basis points to 8.2% with plenty of room for additional expansion as we increase our internal transaction capture rate. We achieved these results despite a net reduction to the roster as we reorganized MMCC with emphasis on hiring experienced individuals. We welcomed a number of such originators throughout the firm last year. Our broker 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. Despite a competitive employment market, our goal is to grow the sales force by 100 professionals per year and continue to build on our recent success in attracting established professionals and teams. Just over the past six months, we closed the acquisition of Form, a Vancouver-based retail brokerage firm, and acquired major brokers and groups in Boston, Philadelphia, Los Angeles, Nashville and Florida. As a highlight, our Florida acquisition brought the Shelton Granade multifamily team to our IPA division.
Shelton and its partners are among the top institutional multifamily groups in the entire Southeast with a 10-plus-year track record and stellar client relationships. We are very excited to see their synergies with our existing sales force throughout Florida and the rest of IPA across the U.S. and Canada come to fruition. I'm happy to report that our 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 acquisitions and the benefit of strategic investments. Growth initiatives and measures to counteract short-term headwinds take time to produce results 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 lens.
Looking ahead at 2020 and beyond, let me emphasize our strategy for achieving long-term growth and shareholder value with six major components. First, we're constantly enhancing the execution of our organic growth model. At the same time, we're supplementing growth through strategic and accretive acquisitions that fill service and geographic coverage gap and provide revenue diversification opportunities. Growing our financing business and adding more capital markets capabilities 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 brands. Investing in proprietary technology infrastructure and brokerage 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, our earnings were adversely impacted by increased costs related to acquisitions, higher investments in brokerage business development, elevated marketing, proprietary technology development and growing our 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 reduced management compensation in light of the company's financial results. We believe the stage is set for improved performance this year with cautious optimism.
This real estate market is now in an 11th year of expansion. But unlike other cycles, commercial real estate supply demand fundamentals remain in balance. We're seeing steady rent growth and a pullback in new construction. The overall economy is healthy, and capital remains disciplined but plentiful.
Well-priced deals are getting done, and we believe the propensity to transact is incrementally more likely given the bottoming of interest rate reduction. Our biggest challenge is a persistent bid-ask where sellers seek a premium to replace current assets and justify credit risk, while buyers want higher returns at a late-cycle stage. Election year gyrations may skew transaction flow, but the overall market environment is clearly favorable. In a nutshell, the process of advising clients, presenting investment options 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 at large and are doing so every day across the firm. Executing strategic acquisitions remains our top priority for capital deployment as we continue to evaluate synergistic and high-quality opportunities. As we have 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.
MMI entered 2020 with a brand that is stronger than ever, a sales force of over 2,000 professionals comprising the largest of its kind in the industry, a host of new tools in our technology development pipeline and a proven ability to supplement an effective organic growth model with complementary acquisitions. With that, I will turn the call over to Marty to discuss results in more detail. Marty?
Marty Louie -- Chief Financial Officer
Thanks, Hessam. 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 client transaction business, which saw revenues increase to $142 million.
In addition, revenues from the middle-market business grew 1.4% to $31.3 million, compared to the prior year's fourth-quarter growth of 14%. The middle-market business has been down throughout 2019 after a record year in 2018. Our larger transaction business, which also set records in 2018, remained challenged in the fourth quarter with a year-over-year decline of 6.5% to $35 million. It's important to note that in the fourth quarter of 2018, the larger transaction market segment experienced outsized 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 a 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 IPA division and specialty niches, these larger deals tend to be more variable from quarter to quarter. MMI executed 2,807 transactions in the fourth quarter, a 7.8% improvement from the prior year.
For 2019, the total number of transactions increased approximately 3% to 9,726. 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 $19 million.
This growth was a 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 revenue. This strong result came from higher overall volume and 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 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 2,021 professionals for a net addition of 44 over the 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 headcount by 59 professionals over the last 12 months to 1,925. However, our financing professional headcount shrunk during the year by 15 professionals to 96 as part of our continued efforts to reorganize and fine-tune the financing team with more emphasis on performance standards and hiring experienced professionals. Notwithstanding the reduction in headcount in 2019, MMCC 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 SG&A.
In the fourth quarter of 2019, cost of 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 and 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 our financing team. SG&A increased 12% year over year to $53 million due to higher costs associated with recently executed acquisitions and their related payroll and operating costs, business development and marketing support for our sales force, legal costs, expansion of offices and an increase in certain data and marketing analytics licensing fees.
These increases were partially offset by decreases in stock-based compensation. On a full-year basis, total operating expenses, which include cost of services, SG&A and 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 income was $20.7 million or $0.52 per diluted share, compared to $26.2 million or $0.66 per diluted share last year.
It should be noted that our tax rate for the quarter was 31.3% versus 21.5% for the year-ago period. This was due to a onetime adjustment related to the new tax law that eliminates certain operating expense deductions. In addition, 2018's fourth-quarter low tax rate was due to a large windfall tax benefit that was recorded during the period related to deferred stock units settling in 2018 with no such activity during 2019. For the year, net income was $76.9 million or $1.95 per diluted share, compared to net income of $87.3 million or $2.22 per diluted share in 2018.
Adjusted EBITDA during the quarter was $32.5 million with a margin of 13.7%. For the full year, adjusted EBITDA ended at $115.6 million with a margin of 14.3%. The decrease in margin from a year-ago period was due to slightly lower revenues, costs 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 look to 2020, our top priority for capital deployment will be to scale our acquisitions now that we have built a foundation for sourcing, underwriting and executing deals. Before closing, I'd 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.
While our pipeline has improved and we believe we are gaining market share, overall growth remains somewhat challenging. Second, we anticipate SG&A expense leverage in 2020. The cadence of SG&A 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 year's achievement.
As such, we expect first quarter's SG&A to be approximately 4% to 6% higher than the fourth quarter of 2019. Third, cost of services in the first quarter of 2019 were historically low at 57.1% of revenue. We expect cost of services in the first quarter of 2020 to be in the range of 58% to 58.5%. And lastly, we expect our tax rate to be approximately 27% and 28%.
We'd like to now open up the call for Q&A. Operator?
Questions & Answers:
Operator
[Operator instructions] Our first question comes from Josh Lamers with William Blair. Please proceed with your question.
Josh Lamers -- William Blair and Company -- Analyst
Great. Thanks, guys. Good afternoon, and, yeah, thanks for the margin commentary on the call. That's helpful in framing 2020.
Maybe just to kick things off, curious if you could provide some commentary on the 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?
Hessam Nadji -- Chief Executive Officer
Let me weigh in first, and then Marty can add any comments. 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 there's some very interesting talent out there that we are considering. As a reminder, Martin is fully engaged and 100% focused on his role as CFO and will be until the appropriate person is found and brought onboard and has had some onboarding and transition period with Marty's help. So he's not going to be moving over to his new function until all of that is done in a very sound and detailed fashion.
And he will -- really will be essential to helping us better organize and manage all the projects that the company has taken on related to growth initiatives. That includes a lot of internal projects that we've launched where we could use additional bandwidth from somebody who's very familiar with everybody in the firm, in our history and in all of 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 companies and groups that we acquire are integrating well and being supported well.
Josh Lamers -- William Blair and Company -- Analyst
Sure, sure.
Hessam Nadji -- Chief Executive Officer
Marty, anything to add to that?
Marty Louie -- Chief Financial Officer
Yes, right. My -- first and foremost, my job is really to make sure that this new CFO gets up to speed, and so I'll be spending a lot of time with this person to make sure that it's a very smooth transition as well as transitioning to my new role. So I'm really looking forward to it. Thanks.
Josh Lamers -- William Blair and Company -- Analyst
Sure, yes. Maybe turning to MMCC, 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 and sequential decline in 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 a combination of that and bringing in more tenured experienced professionals and whether we should expect some of this productivity gain to continue into the new year and beyond.
Hessam Nadji -- Chief Executive Officer
Sure, Josh. Let me take the first part of your question. On the top-line hiring side of the equation, both for MMCC and the brokerage operation, we've had great success and continue to have success attracting new 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 have always been very high.
And in a slower market environment, it's not unusual for us to expedite some of those departures. And so we are very confident that we'll be able to continue to hire and continue to improve the quality of both our investment brokerage team as well as the finance team. On the productivity front, certainly the refi increase had an effect on the productivity without a doubt, and we would expect productivity to continue to grow and improve gradually. I don't -- wouldn't expect the kind of spike that we saw in the fourth quarter to be replicatable every quarter, but the general trend line of productivity for MMCC should be on the rise.
Josh Lamers -- William Blair and Company -- Analyst
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 so I'm just wondering how you're approaching that asset class or whether you're prioritizing it given the broader rent control 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 and the opportunity there.
So yes, and if you could just sum that up.
Hessam Nadji -- Chief Executive Officer
Sure, you bet. The advantage of who we are and where we are in our evolution of the 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 twice about the ability to grow share, deploying 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, and we are the leader in it. We plan to stay the leader in it, if anything increase our margin of leadership in it.
The rent control topic has been a serious one and clearly 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 in Oregon. Some of those laws have passed, and sales velocity has dropped substantially in some of those markets. But the market will recalibrate.
It is recalibrating as we speak. There's no doubt that there are some short-term pains, but there is nothing from the market that makes us 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 types. So we have this tremendous advantage of having growth opportunity across the board.
Josh Lamers -- William Blair and Company -- Analyst
Right. Thanks for your time commentary.
Hessam Nadji -- Chief Executive Officer
Thanks, Josh.
Operator
[Operator instructions] Our next question comes from Brendan Finn with Wells Fargo. Please proceed with your question.
Brendan Finn -- Wells Fargo Securities -- Analyst
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 of acquisitions and maybe geography as well?
Hessam Nadji -- Chief Executive Officer
Sure, Brendan. The strategy has been to focus on those areas geographically and by service capability where we have a 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, integration and early performance have all been very encouraging and very positive. So we are very excited about continuing this strategy of acquiring complementary firms that really bring very little overlap and bring a whole new value internally to our existing sales force that can collaborate with new colleagues that cover different property types or cover financing where we have no financing and then, of course, expand our geographic coverage as well and, of course, the service delivery to our clients.
So that's what's 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 active dialogue is a little bit more heavily tilted toward financing firms, but there are other conversations happening with investment brokerage groups that may be a little bit further behind just in their development, but there's definitely some opportunities on both sides. And we don't see any change to the strategy.
If anything, we have brought on some resources and added some infrastructure in order to be able to scale this process and not only do it more effectively and do more deals but also mitigate that risk with careful underwriting and very detailed understanding of these firms before they're acquired. Let me just also emphasize that this acquisition strategy is really a supplement to our organic growth model. We are not, in any way, shape or form, taken the foot off the gas on executing our core business in an organic fashion better and better all the time. That's where our training enhancements, our technology enhancements, improving our internal communications and best practices, a lot of 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.
Brendan Finn -- Wells Fargo Securities -- Analyst
Got you. That's helpful. And then the larger transaction segment is kind of notoriously volatile. So I guess after a down year in 2019 relative to 2018, are you guys expecting more strength in that kind of market segment in 2020?
Hessam Nadji -- Chief Executive Officer
Yes. I would look at that business 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 of how much of our business is now coming from these larger transactions over the long term, it's steadily grown. So it has ups and downs in a given year because of some market conditions. And remember, most of the clients we service even in larger transactions are private clients.
A lot of them are 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 IPA 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 expand it. 2020, it will be very hard to forecast because that segment tends to be more volatile. It wouldn't be responsible for me to give you a forecast. But if you think about the fact that we grew somewhere between 28% to 38% in those two segments in 2018 and the declines were around 7% to 8% in 2019, over the two-year period, that business segment continues to show very healthy growth.
Brendan Finn -- Wells Fargo Securities -- Analyst
That's helpful. Thanks, guys.
Operator
We have reached the end of the question-and-answer session. At this time, I would like to turn the call back over to Hessam Nadji for closing comments.
Hessam Nadji -- Chief Executive Officer
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.
Operator
[Operator signoff]
Duration: 35 minutes
Call participants:
Evelyn Infurna -- Managing Director, ICR Inc.
Hessam Nadji -- Chief Executive Officer
Marty Louie -- Chief Financial Officer
Josh Lamers -- William Blair and Company -- Analyst
Brendan Finn -- Wells Fargo Securities -- Analyst