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HFF, Inc. (NYSE:HF)

Q4 2012 Earnings Call

March 06, 2013 18:00 ET

Executives

John H. Pelusi, Jr. - Vice Chairman and CEO

Gregory R. Conley - CFO

Nancy O. Goodson - COO

Myra Moren - Director of IR

Analysts

William Marks - JMP Securities

Brandon Dobell - William Blair

Operator

Good afternoon, and welcome to HFF Inc's Fourth Quarter and Full Year 2012 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, with instructions being given at that time. As a reminder, this conference is being recorded.

I would like to turn the call over to your host Myra Moren, our Director of Investor Relations. Please go ahead.

Myra Moren

Thank you, and welcome to HFF, Inc.'s earnings conference call to review the company's operating performance and production results for the fourth quarter and full year 2012. Earlier this afternoon, we issued a press release announcing our financial results for the fourth quarter and the full year of 2012. This release is available on our Investor Relations website at hfflp.com. This conference call is being webcast live and is being recorded.

Also available on our website is a related PDF presentation containing background information on the Company's historical production and operating results, including our results for the fourth quarter and the full year 2012, as noted on slides 1 through 26, as well as high level macro market information along with select transactions recently closed, as noted on slides 27 through 68. You may use this presentation to follow along with our prepared remarks during the call today.

Due to investor and analyst requests, a second PDF presentation, which also includes our capital markets update, will be posted following our call, but we will not be covering this material during today's call. During today's call, we will only reference select slides related to our performance, our transactional activities, or where we believe in an overall observation as warranted. Those PDFs along with the transcripts of the call will be archived on our website.

Before we start, let me offer the cautionary note that this call contains forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations and statements containing the words may, could, would, should, believe, expect, anticipate, plan, estimate, target, project, intend, and similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors which could cause actual results that differ materially from those contained in any forward-looking statements. For more detailed discussion of these risks and other factors that could cause results to differ, please refer to our fourth quarter and full-year 2012 earnings release dated March 6, 2013, and filed on Form 8-K, and our most recent annual report on Form 10-K, all of which are filed with the SEC and available on their website at sec.gov.

Investors, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements, and are cautioned not to place undue reliance on such forward-looking statements. Except as required by applicable law, including the securities laws of the US and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements after the date of this call. We may make certain statements during today's call which will refer to non-GAAP financial measure, and we have provided a reconciliation of these measures to GAAP figures in our earnings release.

With that in mind, I will introduce our senior management team. Conducting the call today will be John Pelusi, our Chief Executive Officer; Greg Conley, our Chief Financial Officer; and Nancy Goodson, our Chief Operating Officer. I'll now turn the call over to our CEO, John Pelusi.

John H. Pelusi, Jr.

Thank you, Myra. As noted on slide 17 through 26, we are very pleased to report that the company had another very strong quarter and full year, and a record quarter and year in many areas of our business. A number of our 2012 achievements are a direct result of our past strategies and investments dating back the beginning of 2010. As we have reported on past calls, since January 1, 2010, we have been investing in our business and aggressively pursuing our strategic growth initiatives, for both internal growth promotions, and external recruitment.

During this period, we have grown our headcount by nearly 53%, including a 44% increase in our production ranks as noted on slide 26. Due to our leadership team's strong discipline of managing our business, coupled with our strong balance sheet, which we use to support our growth initiatives, we are very pleased to report that we are able to continue to successfully build upon our past achievements during 2012.

As noted on slide 26, during 2012, we were able to execute on a number of our 2012 strategic initiatives that we presented to our board. We grew our headcount by nearly 15% to 574 associates, including a 20% increase on our production ranks to 229 transaction professionals, both of which are new high watermarks for the company. We strategically opened new offices in Denver, Colorado and Orlando, Florida and also continue to add transaction professionals to our existing lines of business, and product specialties through the promotion and recruitment of associates, and the vast majority of our offices during the year.

We added the senior housing team to the firm, and during the fourth quarter of 2012, we also began to organize a group of our existing transaction professionals, with expertise in the healthcare properties area to strategically formalize our national healthcare practice group, to better serve clients who are attempting to take advantage of the strong demographic trends, as well as assist the institutions who are facing significant challenges related to how healthcare will be delivered and funded in the future.

As noted on slides 11, 22 through 25, and slide 66, we believe we again grew our market share, relative to the industry during the fourth quarter, and during the full year 2012. Our record number of 1,358 separate transactions produced full year transaction volume of near 42 billion, which nearly equaled the company's previous high watermark of $43.5 billion in 2007. Excluding one unusually large sales transaction occurred in the third quarter of 2011. Our transaction volumes in the fourth quarter and full year 2012 were both up nearly 41% and 21.4% respectively over the comparable periods in 2011.

Given our strong debt placement activities, which were up 25% year-over-year, during 2012, we were also able to grow our loan servicing portfolio by more than 15% to 31.3 billion, which was also a new high watermark. Nancy will report more detail on our full production results later during the call.

Even in the face of our significant headcount growth and its impact on our fixed expenses, which Greg will touch on later during the call, we generated strong impressive operating results, many of which were new high watermarks for the company, as noted on slides 17 through 26.

During this fourth quarter of 2012, and full year 2012, we generated record revenues, which were up over 28% and nearly 12% respectively from the comparable periods in 2011. Notwithstanding the fact, that potentially 5% to 10% of our fourth quarter revenues may have been attributable to tax driven strategies, related to the legislative increase in capital gains tax rates, which became effective January 1, 2013. We believe our revenues for both the fourth quarter and full year 2012 would still have been high watermarks, even after giving effect these possible tax related transactions.

During the fourth quarter and full year, we generated record adjusted EBITDA for both reporting periods, with very healthy margins of 28.6%, and 24.6% respectively, which we believe are significant achievements in light of the significant headcount growth, and on certain global macro environment which we were operating in; and it should be noted, that they are both at the upper end of the suggested 20% to 25% target margin range that we have noted on previous calls.

Finally, after giving effect to the payment of the special dividend of approximately $56.3 million at December 2012, we believe we will continue to further strengthen our balance sheet during the reporting period, as evidenced by our strong cash and cash equivalents position of $126.3 million at December 31, 2012.

As noted on slides 1 through 26, via very strong production and financial achievements, are the combined results of our people, our disciplined approach to strategically growing and managing the business through our leadership team, and our pay-for-performance operating model, which we believe closely aligns our interest with our clients and shareholders, as well as our strong balance sheet to support our growth initiatives. We believe our significant, prudent, and continuing investment in our talented associates, combined with the ongoing mentoring of same by our experienced and deep leadership team, will continue to pay long term dividends in the future, just as we believe they have since 2010. As evidenced by our significant growth in our revenues and earnings, which the market has likewise recognized with our ranking as the fifth fastest growing company, and our third place ranking on the profit growth as published by Fortune Magazine in September 2012.

Additionally, we believe they will continue to enable us to better serve our clients, best position the company to take advantage of future strategic opportunities as they arise, and capture additional market share, as well as take advantage of the forecast of transaction volumes, that are likely to arise from the nearly 1.7 trillion of commercial real estate loans that are set to mature between 2013 and '17, as noted on slide 57.

I will now briefly touch on current conditions across the commercial real estate and global capital markets in which we operate, which you can reference following this call, on slides 27 through 36. Due primarily to the ongoing [unprecedented] quantitative easing by the US Federal Reserve, whose balance sheet has now grown to more than $3 trillion, as well as the quantitative easing by other global central banks, who have now collectively injected approximately $10 trillion of excess liquidity into the global banking systems, we continue to see improvements in the public and private sectors of the US commercial real estate and capital markets, especially in the key major markets, and especially for the haves, while the have-nots continue to struggle.

These improved conditions, coupled with an economy that continues to slowly improve, continue to benefit certain sectors of the US commercial real estate markets, especially the core and core plus properties in the major tier 1 markets, as well as value added distressed assets in select markets.

According to real capital analytics, total sales activity rose 24% to approximately $290 billion, compared to $229 billion for 2001, as noted on slides 31 and 32. As noted on slide 31, HFF investment sales activity for 2012 was up nearly 20% when compared to 2011, and was up 69% and 212% respectively, when compared to 2011s increase over 2010, and 2010s increase over 2009. The MBA has not released its 2012 origination data, however, as noted on slide 32, HFF's debt placement volume for 2012 was up 25% over 2011 volume, and was up 74% and 89% respectively, when compared to 2011's increase over 2010 and 2010's increase over 2009.

The continued improvements in the overall commercial real estate markets, and related transactional investment sale and debt markets, are very good for our business, as we believe our business tracks these national trends as noted on slide 66.

Asset macro conditions beyond our control, we believe, we will see continued improvements in our business, given the nearly 1.7 trillion of maturing commercial real estate loans between 2013 and 2007, as estimated by Morgan Stanley, Foresight Analytics and Trepp as noted on slide 57.

As noted on slides 27 through 58, based on the transactions we recently consummated in these highly inefficient and constantly changing private capital markets, we see that, generally speaking the debt and equity markets, continue to remain focused on high quality core, core plus properties, as well as select value add properties, strong sponsorship and properties that have cash flow integrity, with low basis levels relative to market rental rates and reproduction costs. 24/7 core markets such as New York, DC, LA, San Francisco, and Boston, are the most preferred markets.

As we reported in past calls, we continue to see the migration of equity and debt capital to major markets, such as Dallas, Houston, Chicago, Atlanta, Miami, Austin, Denver, Seattle, and Pittsburgh, just to name a few, as investors search for yield given how competitive the debt and equity pricing has become in the core 24/7 markets. That said, major markets are preferred over secondary markets, and secondary markets are greatly preferred over tertiary markets.

Based on our meetings with debt and other high yield capital sources with the MBA in early February 2013, as noted on slides 32 and 34, we believe there will be even more plentiful debt capital from multiple sources available to the market in 2013 and beyond, and therefore, there will be significant competition for the best of the best loans, especially in the targeted loan size range of $10 million to $100 million, where borrowers have multiple debt options, which is good news for our borrower clients.

All-in coupons as noted on slides 34 and 35 remain very attractive, ranging from sub 3% to sub 4% for low leverage transactions on the best of the best assets, sponsors and markets for terms of five to 10 years. For loans with leverage in the 65% to 75% range for similar assets, sponsors and markets for terms of five to 10 years, all-in coupons range from sub 3% to sub 4.5%. As we have been saying on past calls, from a historical perspective, these all-in coupons are among some of the lowest we have seen in over the past 31 years. Please note this pricing is based on current debt quotes and our estimates only as the actual terms, conditions and rates are specific and will vary day to day, market to market, borrower to borrower and deal to deal.

Given the significant liquidity that the global central banks have injected into the global markets, the significant downward movement over the past several years in the 10-year treasury, which is commonly used as an index for pricing in the private commercial real estate debt markets, as well as the significant high grade corporate bond issuance and the preferred equity that has been placed in the public markets at record low all-in coupons, we believe that all-in interest rates will likely remain within 25 to 50 basis points of the current levels, absent global central banks moving the excess liquidity from the global financial system, or a more significant deterioration in the macro global issues we seem to be constantly faced with.

That said, we believe the US commercial real estate risk adjusted spreads relative to other fixed income instruments, such as sovereign debt or corporate, have provided better returns on a risk-adjusted base return, which has fueled the increased lending by the agencies, the life insurance companies, the banks, CMBS originators and debt funds over the past 24 months.

On the equity front, trophy assets, core plus properties and value-added properties with integrity of cash flow in the top-tier markets remain in high demand and the competition is as keen for many of these assets as we have seen. Like in the debt markets, reputation of the asset, quality of the product, cash flow integrity, basis level relative to market rental rates and reproduction costs are the keys to achieving the highest prices with the top 24/7 cities and the top tier markets being the key to have [deep level] of aggressive qualified bidders.

As investors search for better risk-adjusted rate returns, top markets and some of the key secondary markets continue to see increased interest and good activity for core and core plus properties, as well as some value add properties, depending on the asset class, especially if the product is multifamily housing, grocery-drug-anchored with limited small store GLA, core industrial, and/or other long-term credit lease-oriented properties.

Generally speaking, other than multi-housing sector, which has experienced and continues to experience strong growth in its fundamentals, which has allowed it to significantly outperform most other property types, and certain well located core and core plus properties in major tier-1 markets, commercial real estate fundamentals, while modestly improving in some areas of the country remain vulnerable to any changes in the global capital market macro conditions. Generally speaking, the capital markets for some secondary and tertiary markets, with the exception of multi-housing assets, due to their strong fundamentals and the debt available through the agencies who will lend in secondary and tertiary markets, remain somewhat capital constrained, compared to previous conditions we experienced in 2002 through 2007.

For the most part, other than multi-housing transactions, transactions in tertiary markets and some secondary markets continue remain challenging to consummate.

The volume of quality-distressed properties and nonperforming loans that are located in major markets, with purchase prices well below replacement costs, have slowed considerably compared to 2010 and '11, but they remain in high demand when they come to market. As noted on slides 58 through 61, we believe HFF is very well positioned in the distressed arena with well established lines of business and product specialties in regional offices, in the majority of the markets where much of this remaining distress is concentrated. The most important takeaway here is that if it can fit the target box, there is very competitive capital to facilitate transactions. However, if the transaction cannot fit the target box, that inequity transactions remain difficult to execute, especially in the tertiary and some secondary markets. Simply state, that the private markets continue to be highly inefficient and are changing rapidly, which we believe plays right into our strengths and core competencies, as demonstrated by the superior value-added services and solutions we have achieved for our clients.

The transactions noted in slides 37 through 48, provide some insights into the pricing that occurred in the fourth quarter of 2012. Given the current conditions we just outlined above, which are more relevant than the previous quarter's pricing, I'm not going to review any of these transactions today. But you should review them at your convenience following the call, as they will be helpful in understanding of depth and breadth of some of the complex transactions, our transaction professionals have capably consummated for our clients. Should anyone have any questions on these transactions after the call, we would be happy to address them.

As we have stated in the past calls and as noted on slides 49 through 58, the US economy, and the US commercial real estate markets have been and will continue to be faced with some potentially significant headwinds for the foreseeable future. They are ranging from stubbornly high unemployment levels, continued housing issues, consumer confidence related to jobs, housing and spending, the US federal deficit, sequestration, as well as significant budget issues, along with similar budget issues faced by our state and local governments related to their own budget and [pension] issues, as they face 2013 and beyond with hard choices, and without stimulus money. The removal by the Fed at some point of more than $2 trillion of excess liquidity reserves from QE1, QE2, the unwinding of Operation Twist, and QE3.

Potentially higher interest rates, although just when you think interest rates have bottomed out, they only go lower, which in and of itself is becoming a problem for a number of financial institutions and how they fund themselves, as well as the nearly $1.7 trillion of commercial real estate debt that is coming due between 2013 and '17.

There are also global issues such as the Eurozone's continued inability to resolve its sovereign debt problems and the interrelated tier-1 capital issues in the majority of the European banks; the continued tensions in the Middle East as well as North Korea; the future reversal of quantitative -- of easing of all the global central banks, especially the US Federal Reserve, whose balance sheet has increased by more than $2 trillion since 2008, each of which individually have the potential to impact commercial real estate fundamentals, capital market flows and transaction volumes in the US.

Irrespective, we have no control over any of these significant macro issues, all of which we have been dealing with since 2008, and regardless as noted on slide 59 through 68, we believe we are very well positioned to continue to grow our market share and whether any and all of these challenges, if they materialize, due to our demonstrated approach to managing our business, our experienced transactional professionals, our pay-for-performance compensation model, our very strong balance sheet, as well as our continuing competitive position in the market, just as we've consistently demonstrate of our strong performance since January 1, 2010 as noted earlier.

As we stated on past calls, and as noted on slides 57 through 62, we continue to view the nearly 1.7 trillion of maturing debt in the mainly distressed overhang in the market as favorable macro conditions for our business, through 2017. Regardless of the direction of the economy, these properties will either need to be sold and/or refinanced. As noted on slides 59 through 61, we believe we have strategically located offices in all of the core 24/7 markets, and nearly all the other major markets, where debt and equity capital are currently seeking opportunities, as well as some of the most experienced transaction professionals in the industry, and therefore, we believe we are very well positioned to harvest these very significant and proven reserves of potential transactions.

As noted on slides 60 through 62, we remain focused on continuing to strategically build out our platform suite of services, as well as our property and product type specialties in our existing offices, as well as opening new offices in major markets where we do not currently have a presence, such as we have over the past several years, all assuming, we can continue to retain and attract the highest quality individuals, who ascribe to our culture, business practices and work ethic, as we believe that we have demonstrated based on a proven, historical track record.

We believe we have the capital to execute these strategies due to our strong balance sheet and cash position as noted on slide 67. Furthermore, as noted on slides 4 through 16, we believe we have the people, the culture and experience when combined with our disciplined approach to managing the business and a pay-for-performance compensation model that appropriately aligns our interests with our clients and shareholders, that provides the framework for us to successfully and profitably execute these strategies.

As noted on slides 63 through 65, during 2007 we consummated $43.5 billion of transactions with just 150 transaction professionals. As of December 31, 2012, we had 229 transaction professionals, with an average tenure of 17.4 years in the business.

Even without any future strategic growth of offices or platform and/or potential property specialists, if we can achieve the productivity per transaction professional we achieved in 2005 through '07, coupled with our demonstrated disciplined approach to managing our business, both of which largely will be dependent on market conditions and related transaction flows, as well as our ability to capture same. We believe we have the potential to materially increase our transaction volumes and our financial results well in excess of our 2012 and 2007 results.

In summary, we continue to believe transaction activity will pick up even further over the next five years, as a result of two contributing factors. First, the nearly $1.7 trillion of debt maturing between 2013 and '17 as noted on slide 57, coupled with existing owners of well-performing core, core plus and select value-add properties will create a conducive environment for transactions to increase as these owners attempt to take advantage of the demonstrated demand for this type of product, due to the scarcity of that product on the market.

Second, the number of assets that have not still been fully resolved and the length of time these assets have been on each institution's balance sheet, will make it more difficult for all lenders to continue to leave these loans on their balance sheet. We believe both of these situations play right into HFF's core competencies and demonstrated transactional experience and expertise. Therefore we intend to remain singularly focused on continuing to perform high quality value-added services for our existing and future clients, without competing with any of our clients. We remain fully focused on finding the best real estate and capital market solution for each client's respective needs, to assist them in navigating these challenging and highly inefficient and constantly changing conditions.

Our collective focus remains fixated on have to business that has to happen, which we believe can be transacted in the market with high quality clients and capital sources. As noted on slide 7 through 9, we believe that our key relationships with owners of institutional commercial real estate assets and the debt and equity capital providers, coupled with our deep knowledge and understanding of the most effective way to capitalize any given transaction, as well as our in-depth understanding of the trends in the US commercial real estate and capital markets, provide our clients with the best opportunity to consummate a transaction, provided their expectations are realistic with market conditions.

Through our proprietary database, CapTrack, current private debt and equity capital market knowledge is communicated daily to all of our associates and then on to our clients. We believe this proprietary information allows us to provide the most current pricing, deal structures being quoted today, which allows us to structure transactions or give advice to allow our clients to make the first right choice, to avoid a failed execution later. This is especially relevant in today's highly inefficient and constantly changing private capital markets.

Due to our strong balance sheet and cash position, we are likewise prepared to continue to invest strategically to take advantage of all opportunities to grow the business and/or our platforms in existing and new markets, as we believe we have consistently demonstrated in the past, but only when the culture, the philosophy and work ethics match up.

As we have repeatedly stated since going public, our goal is to the be the best one-stop shop commercial real estate intermediary in the US, that is focused on and does not compete with its clients, not to be the biggest at the expense of being the best. As we have consistently demonstrated since January 1, 2010, and as noted on slides one through 16, we believe our disciplined approach to managing our business through our experienced leadership team, our pay-for-performance compensation system, and our alignment of interest with our clients and shareholders has been and will be in the future, key in positioning the company to continue to take full advantage of the significant transaction we believe will be need to be refinanced, sold and/or refinance between 2013 and 2017.

We believe our 229 transaction professionals, who have an average of 17.4 years in the commercial real estate industry, coupled with our enhanced disciplined management oversight will continue to enable us to assist our clients navigate these ever changing inefficient market conditions.

Finally, we believe all of the above, especially our people, are what has allowed us to outperform the market in the past and will allow us to outperform the market in the future.

I would now like to turn the call over to Greg Conley, who will report on our financial and operational results, and I will now ask Greg to discuss these results in more detail.

Gregory R. Conley

Thank you, John. I'd like to go through our financial results for the fourth quarter and full year 2012. This information is also noted on slide 17 through 26 in the PDF materials referenced earlier.

Revenue for the fourth quarter of 2012 was a record $97.3 million compared to $75.9 million in the fourth quarter of 2011, an increase of $21.4 million or 28.1%. For the full year 2012, revenue was also a record $285 million, compared to the $254.7 million for the full year 2011. This represents a year-over-year increase of $30.3 million, or 11.9%. The increase in the quarter and for the full year is driven by the increase in our transaction volumes, primarily in our debt and investment sales platforms, as well as increased servicing revenues from the growth in our servicing portfolio.

The company had strong operating margins for the fourth quarter and the full year 2012 of 22.2% and 17.6% respectively. These margins are down slightly from the fourth quarter and full year 2011, where the operating margins were 24.2% and 21% respectively.

This decline in operating margins for both the quarter and the full year period is attributable to the increase in the company's operating expenses, primarily related to the investments we are making in our business. For example, we have experienced an increase in our compensation related cost and expenses associated with, in part, a 15.3% increase in headcount of 76 net new associates over the past 12 months, as well as all of the related costs necessary to support this growth, such as offices, expansion related occupancy cost.

We also experienced an increase in certain incentive based compensation expenses in 2012, compared to 2011, including an increase in compensation expense, directly tied to the performance based metrics achieved, by certain transaction professionals recruited in 2009 and '10, and an increase in operating expenses related to the increase in production activities such as T&E.

Cost of services decreased slightly to 55.4% of revenue in the fourth quarter of 2012, compared to 55.6% in the fourth quarter of 2011, as we were able to spread the increase in fixed cost component over the 28.1% higher revenue base in the fourth quarter of 2012, compared to the fourth quarter of 2011.

Cost of services as a percentage of total revenue increased to 57.5% for the full year 2012, from 56.5% for the full year 2011. The increase in the cost of services as a percentage of revenue is attributable to an increase in compensation expense of $2.9 million, directly tied to the performance based metrics achieved by these certain transaction professionals we recruited in 2009 and 2010. This expense increased cost of service as a percentage of revenue by approximately 1%.

Operating, administrative and other expenses increased from approximately 18.3% of revenue in the fourth quarter of 2011, to 20.9% of revenue in the fourth quarter of 2012. Likewise, operating, administrative and other expenses increased from approximately 20.7% of revenue for the full year 2011, to 22.9% of revenue for the full year of 2012. The increase in these expenses as a percentage of revenue for both the quarter and the full year, are primarily attributable to an increase in certain incentive based compensation expenses, including our office and firm profit participation plan expenses, office expansion related occupancy costs, and certain other discretionary expenses such as travel and entertainment, due to the increased production activity.

While we continue to aggressively manage the demand base of our discretionary expenses, these expense categories increase primarily due to the increased business activity. These discretionary expenses are primarily related to travel and entertainment, supplies, research and printing, as well as our other fixed expenses, including occupancy, professional fees, insurance and other operating expenses.

For the full year 2012, these discretionary expense categories, which include all expense categories, except for cost of services personnel and the interest on our warehouse line, increased approximately $5.9 million, as compared to those expenses reported for the same period in 2011. These increases are primarily the result of the increase in year-over-year business activity, as represented by an 11.9% or a $30.3 million increase in year-over-year revenue, as well as the costs necessary to support the net growth of 76 new associates, and increased costs related to office expansion.

The increase in depreciation and amortization expense for the full year 2012, compared to the same period in 2011 of approximately $1.1 million, is primarily related to the increase in the amortization of mortgage servicing rights.

Interest and other income net increased $3.8 million for the fourth quarter 2012, compared to the fourth quarter 2011, and $5.1 million for the full year 2012, compared to the full year 2011. Approximately $1.5 million and $3.3 million of this increase for the year-over-year quarter and full year respectively was related to the non-cash initial reporting of mortgage servicing rights. The remaining increase of $2.3 million and $1.8 million for the year-over-year quarter and full year respectively, was primarily the result of the other income earned, as it relates to our multi-housing platform, including our Freddie Mac Program Plus Seller Servicer business.

Income tax expenses were impacted for the fourth quarter and for the full year 2012 by the reversal of the remaining valuation allowance on our deferred tax assets of $19.5 million in the fourth quarter of 2012, and the total valuation allowance reversal of $21.9 million for the full year of 2012. The impact of reversal of the valuation allowance, and the effect of the changes in the tax rates used to measure the deferred tax assets on income tax expense for the years ended December 31, 2012 and 2011, was a decrease of $20.7 million and $4.6 million respectively. The adjustments increased the company's deferred tax asset, and its impact of the company's tax expense, was partially offset by a corresponding decrease in other income, related to the increase in the liability payable under the tax receivable agreement, which reduced income before income taxes by $17.4 million and $3.9 million during the years ended December 31, 2012, and 2011 respectively.

The company's effective tax rate for the full year 2012, after eliminating the impact from the valuation allowance reversal, and the remeasurement of the deferred tax asset, is approximately 41%.

The net income attributable to Class A common stockholders for the fourth quarter 2012 was $19.6 million or $0.52 per diluted share as compared to net income of approximately $12.7 million or $0.35 per diluted share for the fourth quarter of 2011. This represents an increase of $0.17 per diluted share, or 48.6%. The effect of the adjustments for the reversal of the deferred tax asset valuation allowance, and the related impact in the payable under the tax receivable agreement, resulted in an overall net increase to net income of approximately $2.8 million or $0.08 per share on a fully diluted basis for the quarter ended December 31, 2012.

The net income attributable to class A common stockholders for the full year 2012 was $43.9 million or $1.18 per diluted share as compared to approximately $40 million or $1.11 per diluted share for the same period in 2011. This represents an increase of $0.07 per diluted share or 6.3%. The effect of the adjustments for the reversal of the deferred tax asset valuation allowance, and the changes in the tax rates used to measure the deferred tax assets, and the related impact on the payable under the tax receivable agreement, resulted in an overall net increase to net income of approximately $3.3 million or $0.09 per share on a fully diluted basis for the year ended December 31, 2012, and an overall net increase to net income of approximately $700,000 or an estimated $0.02 per share on a fully diluted basis, for the year ended December 31, 2011.

Adjusted EBITDA is the only non-GAAP measure that the company is currently using, and we believe it is one of the most useful tools to assist in evaluating the company's operating performance. The company's adjusted EBITDA margins were very strong for the fourth quarter and full year of 2012 at 28.6% and 24.6% respectively. These margins are down slightly from the fourth quarter and full year 2011, where the adjusted EBITDA margins were 29.2% and 27.1% respectively.

As I stated earlier, the decline in adjusted EBITDA margins for both the quarter and the full year period, is primarily attributable to the [merit] changes in operating income, and interest and other income.

Our liquidity remained strong as our cash balance at December 31, 2012 was $126.3 million, following the payment of a special dividend of $56.3 million on December 20, 2012. Our cash balance at December 31, 2011 was $141.8 million. Our cash balance increased approximately $40.9 million, or an increase of 28.8%, before considering the payment of the $56.3 million special dividend.

The company's use of cash continues to be typically limited to the limited working capital needs during the year, and the payment of taxes. The company has limited capital expenditures and virtually no debt to service other than that related to our Freddie Mac business, which is offset with the mortgage notes receivable and a small amount of capital leases.

During the full year 2012, the company's net cash provided by operating activities was approximately $45 million. The net use of cash from investing and financing activities, net of the special dividend was approximately $4.2 million, which was primarily related to investments in property, equipment and leasehold improvements related to office expansion, and the final tax distribution payment, made to the non-controlling interest limited partner of the operating partnerships.

We had $261.3 million of outstanding borrowings for 14 loans under our warehouse credit facilities, to support our Freddie Mac multifamily business, and we also had a corresponding asset recorded in the same amount for the relative mortgage notes receivable from Freddie Mac. All 14 of these loans have been purchased by Freddie Mac.

Overall, the company had a strong operating performance in 2012, as we continue to make strategic investments in our business, to support the continued headcount growth, which was a net increase of 76 new associates over the past 12 months, and increased costs related to office expansion.

As John previously stated, the additions we have made and will continue to make in personnel, are commensurate with our longer term strategic growth initiatives, to both organic promotions and recruitment to best position the company, to take advantage of the forecasted transaction volumes, resulting from the significant volume of maturing commercial real estate loans, between 2013 and 2017, as well as to continue to better serve our clients and capture additional market share.

We are particularly pleased with our adjusted EBITDA margins of 28.6%, and 24.6% respectively for the fourth quarter and full year 2012, which are at the high end of our previously stated expected range in adjusted EBITDA margins of 20% to 25%, particularly during periods where we continue to invest in our business, as we did during 2012.

We continue to believe that we have been very efficient and strategic, as it relates to our management of expenses, and any incremental increase should have minimal impact to our bottom line results on a year-over-year comparative basis, provided the market continues to recover, and we continue to experience revenue growth, consistent with the investments made in our business.

Now, I will turn the call over to Nancy to discuss our production volume and loan servicing business. Nancy?

Nancy O. Goodson

Thanks Greg. As noted on slides 21 through 24, I will review our production volume by platform services, and our loan servicing business for 2012, and compare these results with 2011. The company's production volume for the full year 2012 totaled approximately $41.9 billion on 1358 transactions, compared to full year 2011's production volume of approximately $35.6 billion on 1101 transactions, representing an increase of approximately 17.6% in volume and 23.3% in the number of transactions. The average transaction size for the full year 2012, was approximately $30.8 million, which was 4.7% below the average of $32.3 million in 2011.

Of note is one unusually large loan sale transaction that closed during 2011. If this transaction were excluded, the company's production volume for 2012 would show an increase of 21.4% compared to 2011, and would reflect in average transaction size, just 1.6% below the figure a year ago.

Debt placement production volume was approximately $23.4 billion in 2012, representing a 25.1% increase over 2011 volume of approximately $18.7 billion. Investment sales production volume was approximately $15.1 billion in 2012, representing a 19.6% increase over 2011 volume of $12.6 billion. Structured finance production volume was approximately $2.5 billion in 2012, representing an increase of 27.2% over 2011 volume of approximately $2 billion. Loan sales production volume was approximately $919 million for 2012, representing a 60.7% decrease over 2011 volume of $2.3 billion. When excluding but one unusually large loan sale that closed in 2011, the company's full year 2012 loan sales volume reflects a 24.6% decline from the prior year.

The amount of active private equity discretionary fund transaction, on which HFF's securities has been engaged and they recognize additional future revenue with approximately $2 billion at the end of 2012, compared to approximately $1.9 billion at the end of 2011, representing an increase of 10.1%. The principle balance of HFF loan servicing portfolio increased approximately 15% to $31.3 billion at the end of 2012, from approximately $27.2 billion at the end of 2011.

On our headcount, as noted on slide number 26, HFF's total employment reached a high watermark as a public company, with 574 associates as of December 31, 2012, which is a 15.3% net increase from the December 31, 2011 employment of 498. The increase in headcount is attributable to the opening of new offices in Orlando, Florida, and Denver, Colorado, as well as the production teams recruited over the past year in our Denver, Dallas, and Portland offices. Numerous individuals, new hires, as well as the promotion of a number of analysts to transaction professional status.

The total number of producers increased 20% to 229 as of December 31, 2012, compared to 191 at December 31, 2011, with an average tenure of 17.4 years in the commercial real estate industry, we believe our transaction professionals are uniquely positioned to help our clients navigate these challenging and inefficient capital markets.

I will now turn the call back over to John, for his concluding remarks.

John H. Pelusi, Jr.

Thank you, Nancy. Our successes are directly tied to our clients, and therefore, we would like to thank each of our clients who contributed to show -- who continue to show their confidence in our ability to create and execute viable solutions for them, as evidenced by the 1,358 separate transactions, representing nearly $42 billion in transaction volume consummated during 2012. Just as important, these results are testament to our associates as well, and therefore, we would also like to thank each of them for providing superior value-added services to our clients.

Operator, I would now like to turn the call over to questions from our callers.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the lines of Will Marks, representing JMP Securities. Please proceed.

William Marks - JMP Securities

Thank you and good afternoon, actually evening. Hi John, Myra, Nancy and Greg. I want to start actually with Greg on -- looking at this year, 2013 on seasonality. In 2012, there were some intricately difficult comps compared to 2011, on the revenue side. Is there anything with it that really stands out, obviously in the fourth quarter, you did have one issue on the bottom line, [but not sure] on the revenue side or in the EBITDA side. Does anything stand out in 2012, is it a difficult or easy comp?

Gregory R. Conley

Well, I mean, obviously I think the fourth quarter was pretty significant quarter for the company, it was a record, and almost $100 million in revenue, and as John stated, we believe it was a potential, some pull-forward revenue that might have occurred in the fourth quarter in that 5% to 10% range. So, I think that that is one thing that stands out why we mentioned it, it is because that -- we get it in the fourth quarter, next year it could be a tougher comp for the company, if that indeed holds true.

John H. Pelusi, Jr.

But I would like to say Will, this is John Pelusi, that even despite that, we believe we would have had still a record for the fourth quarter and for the full year. But, we specifically pointed that out because, we believe that to be the case.

Gregory R. Conley

Just secondarily, well you know, we have had this kind of general metric if you will, looking at the seasonality, and we have said in the past that 40% of the revenue of the company occurs in the first half of the year, and 60% as a total revenue for the year in the second half, and it might tweak up or down, 3% or 4% either way and in fact, that continued to hold true this year, and we expect that that will continue to hold true in the future, unless there is some macroeconomic events or some of the other things that happen, that cause hiccups in transaction volumes.

William Marks - JMP Securities

Okay. That's helpful. Thank you. Wanted to ask about slide -- specific slide 57, which is that 1.7 million debt maturity, as that maturity looking ahead [in task]. I notice that 2013, I had (inaudible) and I just checked that 2013 had been a down year versus '12 and now, instead of -- as of last quarter it was 349 and now it's 376 in 2013. So it jumped 30 million or so and how and -- whereas 2012 didn't change. Can you just explain that and obviously things do change overtime, but could 2014 grow to be bigger than 2013? I guess obviously yes, but can you talk about that a little bit?

John H. Pelusi, Jr.

I think well first of all, this isn't our data, it's Morgan Stanley's, Foresight Analytics and Trepp, so it's hard for me to comment on it. My suspicion is that there could have been something that was going to expire at the end of 2011 or '12. There could have been something that should have expired in 2011, but didn't, somebody just rolled it over an existing lender, couldn't get done, but the new lender (inaudible), it just got rolled over. Same thing could have happened in '12. So when all those data comes through, that's my suspicion; because clearly, there are properties that still cannot be refinanced at current levels, probably especially in the CMBS markets, where the B-note holders do not want to take a loss, and the longer they hold on with a highly accommodative Federal Reserve policy, that just keeps a lid on rates. The longer you delay, and the better the economy gets, you start to (inaudible) loss position, or have losses in this grade.

So that's my suspicion. We didn't produce this stat, we just reported and we see the same thing that you do, but that's my suspicion.

William Marks - JMP Securities

Thanks. Then the only other question that it is [worth], it's just for the benefit of us all, can you, in very simple terms or brief terms, just describe your profit sharing? Because I know you are a lot different from most other firms, and that your commissions may be low in some cases, but you have this nice added benefit of profit-sharing, which other firms don't have?

John H. Pelusi, Jr.

We really have two levels of profit participation. Well, the first is the office profit participation which has been with us, even before we went public. So if you run an office and do a line of business for us, and your group achieves a 14.5% profit margin, from the very first dollar of NOI, you receive up to 15% of that amount as a profit participation, that you in that line of business, and/or office head can keep and/or distribute to the people within your group. So again, you got to hit a 14.5% profit margin. Once you do that, it's 15% from the first dollar of NOI. So if an office hits $2 million of that number, its 14.5%, there is $300,000 available for profit participation, which if the Board agrees to pay out some portion of it in equity, part of it is paid out in stock, and part of it is paid out in cash, and is paid out over a two year period.

In addition to that, starting in 2011, the Board approved a firm profit participation plan, which is allocated amongst the leadership team, which today I think consists of more than 50 people. So the firm, after paying all the expenses including the office profit participation, achieves a 17.5% profit margin. The incremental dollars above 17.5% are then put into a pool, 15% of those incremental dollars are put into a pool to be shared by the leadership team for services rendered that are above and beyond any other compensation that they might have gotten from cash commissions, office profit participation, and/or any other payments that are made during the year.

That waterfalls all the way up to, assuming you had a 27.5% of profit margin incremental dollars, it waterfalls all the way up to 25%. That piece is likewise, if the board approves, it is paid out in some combination of stock and cash over a two year period.

William Marks - JMP Securities

Okay. I appreciate you clarifying that for me, and everyone. That's it. I have asked too many questions when (inaudible) results are just good. Thank you very much.

John H. Pelusi, Jr.

Thank you, Will.

Operator

Your next question comes from the line of Brandon Dobell, representing William Blair. Please proceed.

Brandon Dobell - William Blair

Hi. Good evening everybody.

John H. Pelusi, Jr.

Hey Brandon.

Brandon Dobell - William Blair

Couple of things on, I guess the human capital side of the equation for a second, as we think about this year, and the production people you added, how did that kind of finish out in terms of internal promotions versus lateral or I guess external hires, and whether that are you seeing any kind of change in velocity from people outside your firm, I guess, interested in joining the platform, and how does that feel compared to what it looked like six or 12 months ago in terms of interest level?

John H. Pelusi, Jr.

Nancy, do you want to answer the first part of that?

Nancy O. Goodson

Sure. The number of promotions is more than the recruits, frankly, it usually happens at the beginning of the year, just because that's kind of when -- the time of the year when we are reviewing and deciding if people are going into production, and so you see the biggest increase in number of producers at the beginning of the year, based on the promotions and then the ones that are hired from the outside, just come in whenever they find somebody and get a bid here. But overall, we have more promoted producers than we have recruited producers.

Brandon Dobell - William Blair

Okay. Then comes, how it feels from -- interest from people outside your firm are going to join the platform?

John H. Pelusi, Jr.

I don't think Brandon that's any different than it has been over the last several years. I mean, we continue to be interested in people there, the highest quality, best reputation in the market, and our clients are satisfied with them. It just takes a long time when you go through that process, because we put awful lot of eyes on people, when it's a next turn on recruit, especially if it has had a significant part of our line of business, and/or product specialty that is national in scope. So we spend an awful lot of time on that, it's not an easy process to go through, both for the company or that person because of the number of interviews and the number of people that we want to put in front of that person and vice versa.

Brandon Dobell - William Blair

John, one of your comments, it was just (inaudible) remarks of the amount of debt capital available and what that made you to the spreads or rates. How do you think about that dynamic, relative to either sustainability of fees, or direction of fees? Does it matter for you guys, does it impact the fees that you get from your clients? I know its individually negotiated, but if there is a lot of capital out there, do you find yourself kind of trying to pretend your position with your clients more than you had to before?

John H. Pelusi, Jr.

I think Brandon, the biggest thing that we see, despite the fact that there is an abundance of capital, and as I mentioned on the call, we just came back from the MBA in early February, and as noted on our slides, it's very indicative that there is a lot of capital out there, but it's very specific. Now, unlike say 2002 to 2007, when you had a deal that was kind of just a little bit off the market, little bit out of the comfort zone, somebody who could sit down and have a conversation with them and say, look, here is how we could help you underwrite this, how we can help you mitigate this, you can probably get to 25, just 50 basis point premium to do this, and you can have that dialog. Today, that dialog is either yes or no, it's pretty binary.

As we have stated repeatedly over the last four or five calls, every month that goes by, there is new markets that open up, there is different kinds of property that people wanted to. We see different kinds of capital coming from different sources. Some sources that were just playing in the zero to 75% loan-to-value have created their own buckets, because they don't like being in the CMBS market, and are plying from say 70% up to 85% in the capital stack.

So the markets are just so inefficient that I think clients have a very difficult time of knowing, who is in the market, who is not in the market, who has the most competitive money, especially in the CMBS market, at any point in time. Typically, as you get out towards a period where CMBS originator is going to do a securitization, you get down to the last two or three weeks. They become very aggressive on deals, because they know, they can get it into that pool, it's not going to sit on their balance sheet for any period of time, and they are willing to do some things that they might not do, when they are first starting out on a -- originating a new pool for securitization.

I think also what happens is that public markets are so frothy and so competitive as noted in some of the presentation slides that we will put on in our capital markets review section, that the risk adjusted base returns for real estate, commercial real estate have been and continue to be far superior to what they can get in the public market, so you are starting to see even additional allocations come this way. When they come this way, people become even more aggressive.

So I'd say the biggest risk you run in at, as we did in 2007, when we had a record year, was some clients may tend or tried to go direct, and if they go direct and that is less business for us to do. But I think that, for every one of those people that go, given how highly inefficient the markets are, there is other people who are coming to us, both on the debt investment sales, structured component, our equity placement business, that is more than enough offset that and back forward, if in fact it incurs.

Brandon Dobell - William Blair

Okay. Then final one for me, on the servicing portfolio, (inaudible) I am not sure there is any slides in your deck about what the portfolio is made up of, from kind of a property type. But any color on where the growth gas come from, especially in '12, a nice finish to the year there, and what the outlook for fees, repayment risk might be for your portfolio, looking out the next couple of years?

John H. Pelusi, Jr.

I would say -- and I will let Nancy answer some of it, I would say that -- Nance, would you just answer the first part of it, and I can talk about the back end of it?

Nancy O. Goodson

Sure. The portfolio is pretty spread across a lot of -- all the property types, that the growth that we have seen in the last two years is driven more by multifamily than anything. That has certainly -- the majority of what the new growth has been.

Brandon Dobell - William Blair

Okay. That makes sense.

John H. Pelusi, Jr.

And I would say, Brandon, relative to that point, last year is probably the first year nationally that multifamily outperformed office in terms of overall transactions, and again, not surprising from the fundamental perspective, because of the housing situation, and the population growth frankly in the US, it's not surprising that that would be the case. And so, relative to repayment risk, I think our portfolio and I would like Nancy to comment on this, if I give you a misstatement, but I believe we have very few delinquencies in our portfolio, and we probably mirror the averages that the life insurance companies have, relative to delinquencies, I believe, but significantly less than 1% of the portfolio. I'd rather have Nancy tell you exactly what it is, if she knows.

Nancy O. Goodson

I don't know off the top of my head, but it is clearly -- it's less than half a percent of our outstanding principle balance.

John H. Pelusi, Jr.

Which includes life insurance companies, CMBS, banks, debt funds, may include something that we didn't even originate. Somebody has just asked us to service something. So it is pretty pristine portfolio.

Brandon Dobell - William Blair

Okay. Perfect. Appreciate the color, thanks.

John H. Pelusi, Jr.

Thank you, Ben.

Operator

At this time, we have a follow-up question from Will Marks, representing JMP Securities. Please proceed.

William Marks - JMP Securities

Thanks. Greg, on the income statement, the operating, administrative and underlying obviously jumped and you talked about this $20 million in the fourth quarter, and had been running at about an average of 15 for each of the previous three quarters. I think you gave detail on the growth a little bit, but was there anything to suggest that that's not a run rate going forward, and I guess there is some seasonality, although there wasn't in the first three quarters in this year, so I will let you address that. Thank you.

Gregory R. Conley

Well, the biggest chunk in the fourth quarter, because relative to the performance based type accruals that we make, and with the significant performance we have in the fourth quarter, is the big reason for the jump in that expense category. So when you get the 10-K, you will see the line items itemized for that operating, administrative and other, but one line item to look at is personnel, and that's where we are going to see a big portion of that jump.

Then another small piece of that -- in there is where the equity compensation expense exists, and as you know, we have said these on past calls, a portion of that expense on the equity comp relates to our mark-to-market liability based awards, and there is an increase there in the fourth quarter as well, because of the -- of some of those accruals.

William Marks - JMP Securities

Okay. That's helpful. Thank you.

Operator

At this time, there are no additional questions in the queue. I would like to turn the call back over to Mr. John Pelusi, for closing remarks.

John H. Pelusi, Jr.

We would like to thank everyone for joining us today, and we hope that you can join us again in a few months, for our first quarter 2013 call. Thank you and have a good evening.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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