HFF's CEO Discusses Q1 2013 Results - Earnings Call Transcript

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 |  About: HFF, Inc. (HF)
by: SA Transcripts

HFF, Inc. (NYSE:HF)

Q1 2013 Earnings Conference Call

May 1, 2013 6:00 p.m. ET

Executives

Myra Moren – Director, IR

John Pelusi – CEO

Greg Conley – CFO

Nancy Goodson – COO

Analysts

Will Marks – JMP Securities

Brandon Dobell – William Blair & Co.

Operator

Good afternoon and welcome to the HFF, Inc. First Quarter 2013 Conference Call.

At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session with instructions being given at that time. As a reminder this conference call is being recorded.

I would like to turn the call over to your host, Myra Moren, 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 first quarter 2013.

Earlier this afternoon we issued a press release announcing our financial results for the first quarter of 2013. 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 first quarter 2013 which are noted on slides 1 through 26, as well as high-level macro market information along with select transactions closed during the first quarter as noted on slides 27 through 66. You may use this presentation to follow along with our prepared remarks.

Due to investor and analyst requests, a second PDF presentation which also includes our capital markets update will be posted following our call, but will not be covering this material during today's call. During today's call we'll only reference select slides related to our performance or where we believe an overall observation is warranted. Both PDFs, along with a transcript 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 statement. For a more detailed discussion of these risks and other factors that could cause results to differ, please refer to our first quarter 2013 earnings release dated May 1, 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 conference call.

We may make certain statements during today's call which will refer to a non-GAAP financial measure, and we have provided a reconciliation of this measure to GAAP figures in our earnings release.

With that in mind, I'll 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 Pelusi

Thank you, Myra.

As noted on slide 17 through 26, we are very pleased to report that the company had a strong first quarter especially when viewed in the context of our increased operating expenses directly attributable to our ongoing and significant strategic growth initiatives coupled with the fact that we believe approximately 5% to 10% of our fourth quarter 2012 production revenues were pulled forward from 2013 to capitalize on the lower capital gain tax rates available in 2012, as we reported in March.

Also as we've reported in past calls, the first quarter of each year is generally our weakest quarter relative to transaction volumes, capital market revenues, operating income and adjusted EBITDA and our respective margins. Since January 2010 we have been continuously investing in our business and aggressively pursuing our strategic growth initiatives through both internal promotions and recruitment. During this period we have grown our headcount by nearly 58%, including a 52% increase in our production ranks, as noted on slide nine.

Due to our strong balance sheet which we have used to support our strategic growth initiatives, coupled with our leadership team's strong discipline of managing our business, we are pleased to report that we continue to successfully build upon our past achievements during the quarter.

During the quarter we grew our total headcount by more than 14% and it now stands at 594 associates. We also grew our production ranks by more than 14% and we now have a total of 241 transaction professionals. Both our total headcount and total number of transaction professionals are both new high watermarks for the company. The growth in our production ranks was again widespread across the firm with the addition of transaction professionals through both promotion and recruitment occurring in 18 of our 21 offices.

We believe we again grew our market share relative to the industry as evidenced by our $7.6 billion in production volumes as well as by the growth in our commercial loan servicing portfolio which reached $31.7 billion, which is also a new high watermark for the company. Nancy will report in more detail on our full production results later during the call.

Even in the face of our significant headcount growth associated with our strategic growth initiatives and its impact on our operating expenses, which Greg will touch on later the call, and the fact that we potentially have 5% to 10% of our fourth quarter 2012 revenues pulled forward from 2013 in order to take advantage of lower capital gain tax rates in 2012, we still generated adjusted EBITDA of $6.9 million during the quarter.

Our balance sheet and cash and cash equivalents remained very strong, with our cash and cash equivalents position reaching $108.2 million at the end of the quarter even after the payment of the $56.3 million special dividend in late December 2012.

I will now briefly touch on current conditions across 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 and unprecedented quantitative easing by the US Federal Reserve, this balance sheet has now grown to -- by approximately $3.4 trillion, as well as continued quantitative easing by other global central banks, we continue to see improvement in both the public and private sectors of the US commercial real estate and capital markets, especially in the key markets and especially for the haves, while the have-nots continue to struggle.

These improved conditions coupled with the slowly improving economy continues to benefit certain sectors of the US commercial real estate market, especially the Core and Core-plus properties in the major Tier 1 markets, including some secondary markets and certain value-add and distressed assets in select major markets as well.

According to Real Capital Analytics, total sales activity for the first quarter 2013 rose 35% to approximately $73 billion. However, this included the $15 billion sale of Archstone to EQR and AvalonBay compared to approximately $54 billion for the comparable period in 2012 as noted on slides 31 and 32. Excluding that sale, total sales activity would have increased only 7%.

The MBA just released its first quarter 2013 origination index which showed a 9% gain in origination activity compared to the first quarter of 2012. And we believe CMBS issuance during the quarter was the significant driver of this increase. CMBS issuance reached $30.3 billion through mid-April versus only $7.9 billion during the same period in 2012, which is nearly a 240% increase. However, $11.3 billion was large single borrower CMBS transactions which represented over 37% of the overall year-to-date CMBS issuance in 2013.

As noted on slides 27 through 46, based on the transactions we have 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 and Core-plus properties as well as select value-add properties, strong sponsorship in properties that have cash flow integrity with low basis levels relative to market rental rates and reproduction costs in all of the major markets.

24/7 Core markets such as New York, D.C., L.A., San Francisco and Boston are the most preferred markets. However, as we have 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, Boston, Denver, Seattle and Pittsburgh, just to mention a few, as investors search for yield given how competitive debt and equity pricing has become in the Core 24/7 markets.

We are also starting to see some migration of capital looking at select Core, Core-plus and value-add transactions in select top secondary markets. That said, major markets are preferred over secondary markets and secondary markets are greatly preferred over tertiary ones.

Based on our meetings with debt and other high-yield capital sources of the MBA in early February 2013, as noted on slide 32 through 35, we believe there will be even more plentiful debt capital from multiple sources available to the market in 2013 and beyond. Therefore, we believe there will be significant competition for 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 clients.

All-in coupons remain very attractive, ranging from sub-3% to sub-4% for low leverage transactions on the best-of-the-best assets, sponsors in markets for terms of five to ten years or longer. For loans with leverage in the 65% to 75% range for similar assets, sponsors in markets for terms of five to ten 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 amongst some of the lowest we have seen in the past 30 years. Please note this pricing is based on current debt quotes and are estimates only.

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

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

On the equity front, trophy assets, Core, Core-plus properties and value-add properties with integrative cash flow in the top tier markets remain in high demand and the competition remains very keen, with the top 24/7 cities and the top tier markets being the key to a deep pull of aggressive qualified bidders.

As investors search for better risk-adjusted returns, top major markets and some key secondary markets continue to see increased interest and good activity for Core and Core-plus properties, as well as select value-add properties. Generally speaking, we expect to see modest improvement in property global fundamentals for most property types in the majority of the major markets with more stagnant conditions in the secondary and tertiary markets.

However, improvements in property level fundamentals remain vulnerable to the many potential macroeconomic headwinds that we have discussed in the past. Generally speaking, the capital markets for some secondary, most tertiary markets remain somewhat capital-constrained compared to the previous conditions we experienced in 2002 through 2007. With the exception of multi-family assets due to their strong fundamentals and the debt available through the agencies to lend in secondary and tertiary markets.

For the most part, other than multi-housing transactions, transactions in tertiary markets continue to remain more difficult to consummate. The volume of distressed properties or non-performing loans has slowed considerably compared to 2010 and '11. However, when they come to market, they are in high demand. As noted on slides 57 and 58, we believe we are 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 most of this remaining debt -- distressed debt is concentrated.

The most important takeaway here is if we can fit the target box, there's very competitive capital to facilitate transactions. However, if the transaction could not fit the target box, debt and equity transactions remain difficult to execute, especially in tertiary and some secondary markets. Simply stated, the private markets continue to be highly inefficient and are changing rapidly, which we believe plays directly to our strengths and core competencies as demonstrated by the superior value-added services and solutions we have achieved for our client. We believe the continued improvements in the overall commercial real estate market and the related transactional investment sale in debt markets are good tailwinds for our business.

Absent potential macro headwinds which we have discussed on prior calls, we believe we will see continued improvement in our business given the expansion of capital market activity into some select secondary markets coupled with the nearly $1.7 trillion of maturing commercial real estate loans between 2013 and 2017, as noted on slide 55.

Transactions noted in slide 37 through 46 provides some insights into the debt and equity pricing that occurred during the quarter. Given the current conditions we just outlined 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 the depth and breadth of some of the complex transactions our transaction professionals have consummated for our client. Should anyone have any questions on these transactions, we will be happy to address them following the call.

In summary, we are very well-positioned, as noted on slide 57 through 66, to continue to grow our market share and/or weather any challenges as they materialize, due to our demonstrated disciplined approach of managing in the business, our experienced transaction professionals, our pay-for-performance compensation model, our very strong balance sheet, as well as our continually improving competitive position in the market, just as we have consistently demonstrated via strong performance since January 2010.

As we have stated on past calls, we continue to believe that transaction activity will pick up even further over the next five years as a result of two contributing factors. First, in addition to any distressed debt overhang in the market, the nearly $1.7 trillion of debt maturing between 2013 and 2017, as noted on slide 55, will need to be refinanced or sold, which may also require financing as well. Regardless of the direction of the economy, these properties will either be sold and/or refinanced.

Second, we believe existing owners of well-performing Core, Core-plus properties and select value-add properties in the major markets and some select secondary markets will also attempt to take advantage of the demonstrated capital market demand for these properties due to the scarcity of the product on the market.

The above coupled with the significant debt and equity capital sources seeking an investment home in these types of assets we believe will create a conducive environment for transaction volumes to increase in the future. As noted on slide 57 through 59, we believe we are very well-positioned to harvest these very significant and proven reserves of potential transactions given our deep pool of experienced transaction professionals who are strategically positioned in all the Core 24/7 markets and nearly all of the other major markets where debt and equity capital are currently seeking opportunities. Also we believe these conditions play right into our core competencies and demonstrate transaction experience and expertise and are macro tailwinds for our business.

As noted on slide 58 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 open new offices in major markets where we currently do not have a presence, just as we have over the past several years, assuming we can continue to retain and attract the highest quality individuals, subscribe to our culture, business practices and work ethic. We believe we have the capital to execute these strategies due to our strong balance sheet and cash position as noted on slide 65.

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 the pay-for-performance compensation model that appropriately lines our interest with our clients and shareholders, which collectively provides the framework for us to successfully and profitably execute these strategies.

As noted on slide 61 through 63, during 2007 we consummated $43.5 billion of transactions with just 150 producers. As of March 31, 2013, we had 241 producers with an average tenure of 17.5 years in the business. Even without any further strategic growth of offices or platform and/or property specialists, if we can achieve the productivity per producer we achieved in 2005 through 2007, coupled with our demonstrated disciplined approach to managing the business, both of which will largely be dependent on market conditions and related transaction flows as well as our ability to capture [the 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.

As noted on slide seven through nine, we believe our key relationships will be owners of institutional commercial real estate assets and the debt and equity capital providers, our deep knowledge and understanding of the most effective way to capitalize any given transaction, 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 their transactions.

Through our proprietary database contract, current private debt and equity capital market knowledge is communicated daily to all of our sessions and then on to the clients. We believe this proprietary information allows us to [grab] the most current pricing and deal structures being quoted today and 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 market.

We intend to remain singly focused on continuing to provide -- perform high-quality value-add services for our existing and future clients without competing with our clients. We remain fully focused on finding the best real estate and capital market solutions for each client's respective needs to assist them in navigating these highly inefficient and constantly changing conditions. Our collective focus remains fixated on [healthy] business that has to happen, which we believe can be transacted in the market with high-quality clients and capital sources.

Due to our strong balance sheet and cash position, we are prepared to continue to invest strategically to take advantage of all opportunities, to grow our business platforms in existing and new markets, but only when the culture, philosophy and work ethic match up. As we have repeatedly said since going public, our goal is to 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've consistently demonstrated since January 1, 2010 and as noted on slides 1 through 16, we believe our disciplined approach to managing the business through our deep and experienced leadership team, our pay-for-performance compensation system which aligns our interest with our clients and shareholders and our strong balance sheet all have been and will continue to be key in positioning the company to continue to gain market share and take full advantage of the significant transaction volume we believe will need to be refinance-sold or refinanced between 2013 and 2017.

We believe our 241 transaction professionals who have average tenure of 17.5 years in the commercial real estate industry coupled with our enhanced disciplined management oversight will enable us to assist our clients navigate these ever-changing and inefficient capital 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 what 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 now ask Greg to discuss these results in more detail.

Greg Conley

Thank you, John. I'd like to go through our financial results for the first quarter 2013. This information is also noted on slides 17 through 26 in the PDF materials referenced earlier.

Revenue for the first quarter was $54.2 million compared to $51.9 million in the first quarter of 2012, representing an increase of $2.3 million or 4.5%. With transaction volumes down approximately $200 million or 2.9% in the first quarter of 2013 compared to the first quarter of 2012, the increase in revenue for the quarter was driven by an overall increase in average basis points earned on the transactions due to the mix of business. Nancy will speak in more detail to our production data points.

The company had an operating loss of $100,000 compared to first quarter 2012 operating income of $2.8 million or 5.3% operating margin. This decline in operating income is attributable to the increase in the company's operating expenses primarily related to the investments we are making in our business consistent with our strategic growth initiatives which we have been aggressively pursuing since January 2010.

For example, we have experienced an increase in our compensation-related costs and expenses associated with in part a 14.2% increase in our headcount of 74 net new associates over the past 12 months, as well as all the related costs necessary to support this growth such as office expansion related occupancy costs.

As John previously mentioned, we typically have seasonality in our business where by the first quarter of each year is generally our weakest quarter relative to revenue and financial performance. As a result, the increased operating costs had a disproportionate impact on our first quarter operating income and adjusted EBITDA margins due to the smaller first quarter revenue base. We have seen the same pattern in most of the prior years since our initial public offering in 2007.

Cost of services increased $2.5 million in the first quarter of 2013 or 7.6% as compared to the first quarter of 2012. These increases are attributable to first the increase in commissions and incentive compensation directly related to the increased revenue. Secondly, an increase in a portion of the fixed cost component which is primarily related to an increase in salaries and other payable related expenses associated with the increase in headcount of 74 associates. And thirdly, an increase in compensation expense of $400,000 directly tied to performance-based metrics achieved by certain transaction professionals recruited in 2010.

Cost of services as a percentage of revenue increased to 64.3% of revenue in the first quarter of 2013 compared to 62.4% in the first quarter of 2012. The increase in the cost of services as a percentage of revenue is attributable to the increase in the fixed cost component and the increase in compensation expense of $400,000 directly tied to the performance of the transaction professionals recruited in 2010, which increased cost of services as a percentage of revenue by approximately 1%.

Operating, administrative and other expenses increased approximately $2.7 million from $15.2 million or 29.4% of revenue in the first quarter of 2012 to $17.9 million or 33% of revenue in the first quarter of 2013. The increase in these expenses are primarily attributable to a $1.9 million increase in personnel expenses related to an increase in certain incentive-based compensation expenses including our office and firm profit participation plan expenses and increased stock compensation expense of approximately $900,000 primarily related to an increase of the marked-to-market adjustments on the liability-based stock awards revalued each quarter.

Additional cost increases relate to an increase in office expansion related occupancy costs and certain other discretionary expenses such as travel and entertainment and other operating expenses due to the increased production activity. The increase in depreciation and amortization expense of approximately $100,000 for the first quarter of 2013 compared to the same period in 2012 is primarily related to the increase in the amortization of the mortgage servicing rights, offset by a slight decrease in other depreciation expense.

Interest and other income net increased $1.4 million for the first quarter of 2013 compared to the first quarter of 2012 primarily as a result of other income earned in connection with our Freddie Mac program plus Seller/Servicer business.

Income tax expenses for the first quarter of 2013 decreased by approximately $400,000 to $1.7 million as compared to $2.2 million for the first quarter of 2012, primarily as a result of the decrease in pretax book income. The company's effective tax rate for the first quarter of 2013 is approximately 43%.

The net income attributable to Class A common stockholders for the first quarter 2013 was $2.3 million or $0.06 per diluted share as compared to net income of approximately $3.3 million or $0.09 per diluted share for the first quarter of 2012. This represents a decrease in net income of approximately $1 million or $0.03 per diluted share.

The company's adjusted EBITDA for the first quarter of 2013 was $6.9 million or 12.7% of revenue, which represents a decrease of $400,000 or 5.7% as compared to adjusted EBITDA of $7.3 million or 14% of revenue for the first quarter of 2012. The decline in adjusted EBITDA margin is primarily attributable to the decrease in operating income.

Our cash balance at March 31, 2013 was $108.2 million compared to the cash balance of $126.3 million at December 31, 2012, representing a decrease of $18.1 million. The cash balance at December 31, 2012 is after the payment of the $56.3 million special dividend which was made on December 20, 2012.

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

During the first quarter of 2013, the company's net cash used in operating activities was approximately $16.6 million. The net use of cash during the quarter was primarily driven by the decrease in working capital due to the payment of certain performance-based awards related to 2012 and accrued for in the balance sheet at December 31, 2012 as the company generated $2.3 million in net income for the first quarter of 2013.

This decrease in working capital related to certain performance-based accruals is further illustrated on the balance sheet as the balance and the liability line item titled accrued compensation accounts payable payable to affiliate and other current liabilities decreased $21.9 million from December 31, 2012 to March 31, 2013. The net use of cash from our investing and financing activities is approximately $1.5 million.

In summary, the company had a strong operating performance in the first quarter of 2013 when considering that we continue to make strategic investments in our business to support the continued headcount growth which is a net increase of 74 new associates over the past 12 months and increased costs related to office expansion. In addition to the costs related to headcount growth, our operating income and operating margins in the first quarter of 2013 were further impacted by an increase in cost of services related to an increase in compensation expense of $400,000 directly tied to the performance-based metrics achieved by certain transaction professionals recruited in 2010 and an increase in personnel expenses of $1.9 million which was primarily related to an increase in incentive-based compensation expenses including our performance-based profit participation plans and an increase in stock compensation expense of approximately $900,000 primarily related to the marked-to-market adjustments on the existing restricted stock awards which are revalued each quarter and resulting from the increase in the company's stock price from $14.90 per share on 12/31/2012 to $19.93 per share on March 31, 2013.

Other cost increases are relatively in line with the increased revenue year over year and in support of the increased business activity as well as in keeping with our long-term strategic objectives.

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 through 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 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 full 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'll turn the call over to Nancy Goodson to discuss our production volume and loan servicing business. Nancy?

Nancy Goodson

Thanks, Greg.

As noted on slides 21 through 24, I'd like to review with you our production volume by platform services and our loan service business for the first quarter of 2013 and compare these results with the comparable quarter in 2012. The company's production volume for the first quarter totaling approximately $7.6 billion on 277 separate transactions represents a decrease in production volumes of approximately $0.2 billion or 2.9% and an increase of 28 in the number of separate transactions or approximately 11.2% when compared to the first quarter 2012 production of approximately $7.8 billion on 249 transactions.

The average transaction size for the first quarter of 2013 was $27.4 million, approximately 12.7% lower than the comparable figure of approximately $31.4 million for the first quarter of 2012. The increase in revenue on decreased production volume was driven in part by the change in mix of deals closed in the first quarter of 2013 compared to the same period of 2012. This is evidenced by the decrease in transaction size. Historically, smaller deals will typically generate higher fees in terms of basis points on volumes and larger deals.

The composition and mix of our production volume as the deal size fluctuates every quarter which may impact the average deal size and the average basis points earned. Debt placement production volume was approximate $4.5 billion in the first quarter, representing a decrease of 3.9% from first quarter 2012 volume of approximately $4.7 billion. Investment sales production volume was approximately $2.7 billion in the first quarter of 2013, representing a decrease of 2% from first quarter of 2012 volume of approximately $2.8 billion.

Structured finance volume was approximately $284.7 million in the first quarter of 2013, an increase of 77.9% over the first quarter of 2012 volume of approximately $160.1 million. Loan sales production volume was approximately $27 million for the first quarter, a decrease of 80.2% from the first quarter of 2012 volume of $136.2 million.

At the end of the first quarter of 2013, the amount of active private equity discretionary fund transactions on which HFF Securities has been engaged and may result in additional future revenue was approximately $2 billion compared to approximately $1.7 billion at the end of the first quarter 2012, representing an increase of approximately $0.3 billion or 23.1%. The principal balance of HFF loan servicing portfolio increased $3.6 billion or approximately 12.6% to more than $31.7 billion, a new high watermark at the end of the first quarter of 2013 from $28.2 billion at the end of the first quarter of 2012.

As per our headcount, as noted on slide 26, HFF's total employment reached the high watermark as a public company with 594 associates as of March 31, 2013, which is a 14.2% net increase from March 31, 2012 employment level of 520. The increase in headcount is attributable to the opening of new offices in Orlando, Florida as well as the addition of transaction professionals and associates in 18 of our 21 offices.

The total number of producers increased 30% to 241 as of March 31 compared to 211 at March 31, 2012. With an average tenure of 17.5 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 market.

I'll now turn the call back over to John for his concluding remarks.

John Pelusi

Thank you, Nancy.

Our successes are directly tied to our clients and therefore we would like to thank each of our clients who continue to show their confidence in our ability to create and execute viable solutions for them as evidenced by the 277 separate transactions representing $7.6 billion in transaction volumes consummated during the quarter. Just as important, these results are testament to our associates as well, and therefore we'd like to also 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 any of our callers.

Question-and-Answer Session

Operator

[Operator Instructions].

Your first question comes from Mark Wills for JMP Securities. Please proceed.

Will Marks – JMP Securities

Hi, it's Will Marks, as you probably figured out. Good evening.

All right. So a few questions. One just some housekeeping item. I guess, Greg, you mentioned the tax rate. Could you say what you'd expect for the full year?

Greg Conley

For the full year we've been kind of averaging about 41% over time. First quarter tends to be a little bit higher because of the methodology we utilize in estimating taxes, annualizing first quarter results. And some of the permanent differences are a little bit higher in the first quarter than other periods of the year. So that 43% rate is probably on the slightly high side. So we've been averaging about 41% on an annual basis over the last number of years. So I would say that on an annualized basis it will be a little bit less than the 43%.

Will Marks – JMP Securities

Okay, thanks. And all right, so now a big picture question. In terms of the deal size number, is there any comment in terms of, you know, would you expect it to continue at that size? I know it can move around a lot quarter to quarter and I'm trying not to read into it too much, but any thoughts there?

John Pelusi

Well, I wouldn't read into it at all. As we mentioned repeatedly, we don’t manage the business quarter to quarter, we don't control when transactions close. And, you know, our pipeline at every -- any given moment has large transactions in it and it has smaller transactions in it, and it all depends on when they close. So I would not read anything into that at all.

Will Marks – JMP Securities

Okay. Thank you. You know, we knew that there was some pull forward in the fourth quarter, that there was going to be that, so you could argue that makes for a tough first quarter. Are there any other quarters that we should be aware of, I guess, second, third, and fourth this year will be a difficult comp I would think, but second and third, is there anything that you'd want to mention?

John Pelusi

You know, well, we don't give guidance, and again as we stated before, you know, we -- for us to give a guidance would be very difficult. We do not control when deals are sold or when they're financed. And again for us to comment on any given quarter is something that we don't do. And I think the best way to look at the company, as we stated on prior calls, is to look at it on a trailing four-quarter basis, because there are just so many nuances of deals that happen and when they close that, you know, for us to make any kind of comments relative to that is difficult at best. And again, we don't give guidance.

Will Marks – JMP Securities

Sure. Okay, fair enough.

A couple of other things. John, you talked about, you know, the non-core tertiary markets really not seeing that much business in Core and now every Core market is. But your focus is the bigger markets, so I would think this is a benefit for you as things spread to maybe secondary markets where you're also positioned [instantly] to more business, but not having a focus in tertiary markets is a good thing, is that correct?

John Pelusi

That's correct, Will. And I think if you listen very intently to what we said, we specifically noted on this call that we are definitely seeing capital migrate into some select secondary markets, which is we believe a good tailwind for our business overall. We believe there is plentiful capital in the market, probably more so than at any other time that we've seen. That capital, however, is very focused. It wants to be in the major markets, it wants to be in select secondary markets. It wants to be in Core, Core-plus, it wants to be in value-add, and some distressed and the major markets.

And when you put that product out there, it is very competitively bid both on the equity or structured finance area, mezzanine, preferred equity, or on the debt side. We continue to see very aggressive pricing across the board.

So, you know, from the standpoint of property level fundamentals, we've seen and continue to see in the major markets, we see some improvement in real estate property fundamentals. We continue to see capital going into the major markets, the 24/7 markets, the major property markets, as well as select secondary markets. So we're encouraged by that. And I think again if you listen to what we said this quarter versus last quarter, you'll note the differences there.

Will Marks – JMP Securities

Okay. No, that's helpful. Thank you.

The pull forward into the fourth quarter, was that all -- should we -- you know, I read in the press release, I heard what you said, it's all investment sales for the most part rather than debt placement, right?

John Pelusi

Well, you know, if we financed the deal that was sold, there would be some of that in there as well. So, not all investment sales are 100% all cash transactions.

Will Marks – JMP Securities

Right, okay.

John Pelusi

[It cannot be that].

Will Marks – JMP Securities

Okay. Let's see. And yeah, I guess that's all for me now.

John Pelusi

Thanks, Will.

Will Marks – JMP Securities

Get back on queue. Thank you.

Operator

Your next question comes from Brandon Dobell from William Blair. Please proceed.

Brandon Dobell – William Blair & Co.

Thanks.

John Pelusi

Hi, Brandon, how are you?

Brandon Dobell – William Blair & Co.

Not so bad. How are you doing?

John Pelusi

Great.

Brandon Dobell – William Blair & Co.

Good. One quick housekeeping one, should we expect stock-based compensation in the balance of the year to look about like it did last year, Greg?

Greg Conley

You know, as you can imagine with these marked-to-market adjustments, it fluctuates quarter to quarter. And by the end of the year it kind of balances out. And I think we are a little over $3 million in total for stock-based compensation last year.

It will be up slightly this year because we made some additional awards with our 2012 profit participation plans. So we have an unrecognized stock comp expense for those unvested awards of about $4 million and it's about a year left to go on those. So you can expect for that piece to have a slight increase. So I'd say we'd be up a little bit from the $3.4 million number that we had last year, provided that the marked-to-market adjustments doesn’t have any significant impact that's different than last year.

Brandon Dobell – William Blair & Co.

Okay. That makes sense.

John, any changes the last couple of quarters, you know, notwithstanding the noise around yearend but around the time it's taken for deals to move through the process, I guess kind of a time to close or kind of, you know, pipeline outlook for how long things are taking to get done?

John Pelusi

Yeah, I would say, Brandon, that continues to get better, you know, every quarter.

Brandon Dobell – William Blair & Co.

Okay.

John Pelusi

So if you go from back to 2009, '10 and every quarter, as the markets continue to heal, as more capital comes into the system, things tend to move along. And as, for example, CMBS, as we've mentioned on the call, was up, you know, pretty dramatically, what you're also seeing there is people don’t want to hold that on their balance sheet very long. So you're seeing more and more deals come to market. They're generally, you know, $1 billion to $1.5 billion --

Brandon Dobell – William Blair & Co.

Right.

John Pelusi

-- single borrower or single asset transactions which is, again as we noted on the call, was up, you know, pretty dramatically early this year.

Brandon Dobell – William Blair & Co.

Okay. And then in terms of the types of customers that you see that are looking to acquire properties or being providers of debt, anything that we can changes and what those -- what that list of customers may look like? Do you see new players, new entrants, you know, shifting around in your business? And if so, does that entail any changes for the mix of types of transactions or how we think about commission rates for you guys?

John Pelusi

It's a two-part question. I'll try to deal with them in two pieces. One is we are constantly seeing new entrants into the market both on the debt and the investment sales side. And I think that is clearly a function of the significant liquidity injected by the global central banks including our Federal Reserve which has now dumped, you know, more than $2 trillion since 2008 into the financial markets.

Brandon Dobell – William Blair & Co.

Yup.

John Pelusi

So on a risk-adjusted based return, you know, real estate, even if you go back 20, 30 years, you would see that it has outperformed other asset classes, so, stocks, bonds, other fixed income instruments. So you have that going for you. You also have these additional dollars being put into the system and people are searching for yield. I don’t know if you saw the Apple announcement yesterday, but they did a $17 billion fixed income deal, and it was the lowest pricing I think for three and five years. I think three years was 0.45%, I think the five-year was 1%.

So if you are pension funds, endowments, public or private, and you sat there and said, you need to get to 7% to 8% yields, it's pretty difficult to achieve those kind of numbers when you're -- if you're going to go focus on, you know, high-grades corporates or sovereigns like the US which I think our Treasury market closed down at 163 today for 10 years.

Brandon Dobell – William Blair & Co.

Yeah.

John Pelusi

So it's not surprising to us to see pension funds, endowments, sovereign wealth funds, all of the advisers coming into the market and they've continued to come into the market as we've reported in 2010, I'd say secondly.

And the debt markets are seeing more and more people coming to the CMBS market, new originators, as banks are searching for ways to generate yield. You know, leaving your money on deposit with the Federal Reserve and earning 0.25 basis points is not going to sit well with those shareholders. So you're seeing banks which we reported on prior calls making balance sheet loans and increasing as the activity increases and their balance sheets start to get full of loans that they want to hold on their balance sheet, maybe they're willing to do some deals and that might not sit well on their balance sheet for 10 years but it fits better for three or five years but the client wants a 10-year execution, they're going to put that on to the CMBS side. So we're seeing more entrants there.

We're seeing the life companies fully flushed with capital, as we reported on the last call and this call. We believe the life companies are probably going to be $55 billion or more in 2013. And they are under-allocated, underweighted relative to commercial real estate. And again they're big buyers of the corporate fixed income. But again if you're sitting there buying Apple debt at, for three years, at 0.45%, five years at, you know, 1%, and 10-year deals that basically, you know, 25 to 30 basis points over the 10-year treasury, doing a commercial real estate loan at 3.5% or 4% looks pretty attractive. And so again we think there's plenty of that capital available.

And then you have a lot of people who are, you know, trying to do a [barbell] approach. So let's say that the fixed income markets, basically 80%, and it's going to hang in that, you know, senior position, you're seeing a lot of capital being formed both by the life insurance companies, the banks. A lot of the endowments and pension funds have also put money into some debt funds to do mezzanine and private -- or excuse me, preferred equity, but they're trying to get 7% kind of yields. And then as they put a little leverage on there, you know, they're up into the 8%, 9% range.

And again same thing, you're seeing a lot of activity on the equity side trying to get into the markets. Because if you could buy a property at a 5% or 6% cap rate and finance it at 3% to 3.5%, you're going to generate levered returns in the 8.5% range which helps with the overall yields that people are getting. So again, you know, we see a lot of very robust activity both in the equity and debt markets today.

Brandon?

Brandon Dobell – William Blair & Co.

Sorry about that. Yeah, the producers you guys had in the quarter, internal versus external, and then have you guys added anybody in April so far?

John Pelusi

Nancy, you could answer that question.

Nancy Goodson

The ones that had been added are about 50% internal promotions and 50% recruited. As far as the month of April, I believe we have added one or two that I can recall.

Brandon Dobell – William Blair & Co.

Okay. Okay. And then the year-on-year increase in non-producer headcount's then somewhere around, you know, kind of 40 or so per quarter, is that the right way to think about it? Looking out for the next several quarters, that number of people? Or is there a point at which the, you know, kind of the number of non-producers you add relative to producers, will that relationship start to break down or not remain as correlated?

John Pelusi

Well, I think, Brandon, if you look at us over time, it's generally 1.1 to kind of 1.3 associates for every producer that we have. So I think that -- and again that can fluctuate quarter to quarter because it depends on, you know, we could be a little light in terms of staffing on March 31, on April 1 we hired five, six more people or vice versa. We hire five or six more people but the producers didn't start until the following month.

So again I think the best way to look at our business is over, you know, a trailing four kind of quarter period.

Brandon Dobell – William Blair & Co.

Okay.

John Pelusi

You know, our business with the transactions which we don't control and the people that we bring on quarter to quarter is too hard for us to sit here and give you -- that's why we don't give guidance.

Brandon Dobell – William Blair & Co.

Yeah.

John Pelusi

It's just too hard for us to, you know, provide that kind of color and commentary. And we hire based on best athletes and highest integrity, best reputation, work ethic, culture. And if they're not there, we're not going to hire them.

Brandon Dobell – William Blair & Co.

Yeah. Okay. Thanks, appreciate it.

Operator

[Operator Instructions].

John Pelusi

Operator, I don’t think there's any more calls that we can see. So we appreciate all of you joining us today and hope that you can join us again in a few months for our second quarter 2013 call. Thank you very much.

That concludes our report, operator.

Operator

Ladies and gentlemen, that concludes today's conference. You may now disconnect.

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