HFF, Inc. (NYSE:HF)
Q3 2013 Earnings Call
November 4, 2013 6:00 PM ET
Myra Moren – Director, IR
John Pelusi – Vice Chairman and CEO
Greg Conley – CFO
Nancy Goodson – COO
Mitch Germain – JMP Securities
Brandon Dobell – William Blair & Co.
Good afternoon and welcome to the HFF, Inc. Third 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 now like to turn the call over to your host, Myra Moren, our Director of Investor Relations. Please go ahead.
Thank you, and welcome to HFF, Inc.’s earnings conference call to review the company’s production results and operating performance for the third quarter and first nine months of 2013.
Earlier this afternoon we issued a press release announcing our production and financial results for the third quarter and the first nine months 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. The presentation contains background information on the company’s historical production and financial results as seen on slides 1 through 27, including our results for the third quarter and first nine months of 2013 which are noted on slides 28 through 38, along with select transactions we consummated during the third quarter found on slides 40 through 48.
Due to investor and analyst requests, after our call today we will make available on our website an additional PDF presentation which includes our full capital markets update. However, we will not be covering those slides on today’s call.
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 to 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 third quarter 2013 earnings release dated November 4, 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 United States 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 are refer to certain 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.
Thank you, Myra. As noted on slide 28 through 38, we are very pleased to report that the company had a record third quarter and first nine months in 2013 in several important production and operating performance areas. This especially significant when viewed in the context of our increased operating expenses directly attributable to our ongoing hiring related to our significant strategic growth initiatives that’s started back in 2010 and have continued each year thereafter 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 back in March.
Since January 2010, we have been continuously strategically investing in our business with an emphasis on strengthening the management of the business through the creation and expansion of our leadership team as we have discussed on prior calls. To better manage our future expected strategic growth in 2014 and beyond and as part of our succession planning process, we’ve recently expanded the size of our executive committee by adding four executive managing directors from our deep and experienced senior leadership team on ad-hoc basis to our current four person executive committee.
Beginning in 2014, these ad-hoc committee positions will become permanent voting positions, bringing the total number of voting positions on our executive committee to seven. We will likely be adding additional ad-hoc members to our executive team in 2014 to serve on as needed basis to handle special assignment as well as a form to better educate and train future members of the executive committee as part of our succession planning which has been ongoing since 2010.
As we continue aggressively pursue our strategic growth initiatives through both internal promotions and recruitment in order to better serve our clients and continue to take advantage of market share, we believe strengthening our executive committee will provide additional oversight, resources to better train, mentor, educate, lead and assist all of our existing and future office heads, business line and product specialty team leaders as well as our existing and future transaction professionals to insure we continue to put the best team on the field for every assignment.
To provide some context to our significant growth especially to those who are new to our story and why it is essentially that we continue to invest in our people and leadership resources. It’s important to remember that since January, 2010, we have grown our headcount by more than 66% including a nearly 58% increase in our transaction professional ranks. We believe these investments allow us to continue to sharpen our leadership team’s strong discipline of managing our business, and coupled with our strong balance sheet which we have used to support our strategic growth initiative, we believe we are ideally positioned to successfully build upon our past achievement and outstanding financial results just as we’ve reported since 2010.
As a result of our past investments, we are pleased to report record results in several key and production and operating metrics during the third quarter and first nine months of 2013. During the third quarter and the first nine months of 2013, we believe we again grow our market share relatively to the industry as we will be highlighting during our call. In the past 12 months we grew our headcount which now stands at 12%. We also grew our transaction professional ranks which now stands at 251 by 11% through both promotional and recruitment in 15 of our 21 offices. Both our total headcount and our total number of transaction professional are again new high watermarks for the company.
Our total transaction volumes for the third quarter and first nine months of 2013 were up 50.3% and 27% respectively when compared to the comparable periods in 2012. Our debt and investment sales volume outpaced reported industry statistics for the third quarter and for the first nine months as well which is a further indication we are taking market share. Our transaction volume for the third quarter represents our highest transaction volume recorded relative to any other comparable third quarter since going public. Our commercial loan servicing portfolio also increased to healthy 10% to $32.2 billion.
Our total revenues, operating income, and Adjusted EBITDA for the third quarter of 2013 were up over 29%, 51% and 56%, respectively over the comparable period in 2012 and were all high-watermarks for any third quarter period recorded by the company since going public. Our total revenues, operating income and Adjusted EBITDA for the first nine months of 2013 were up 20%, 19% and 32%, respectively over the comparable period in 2012. Our revenues and Adjusted EBITDA were high-water marks for any first nine month period recorded by the company since going public.
This is a significant achievement in the face of our significant headcount growth associated with our strategic growth initiatives and its impact on our operating expenses and margins and the fact that we believe potentially 5% to 10% of our fourth quarter 2012 were likely pull forward from 2013 in order to take advantage of lower capital gain tax rates in 2012. Despite our continuing investment in our strategic growth initiatives, our cash and cash equivalent also continue to grow to more than $159 million during the first nine months of 2013 which is higher than our cash and cash equivalents position of $152.3 million at September 30, 2012. This too is significant as the 2012 prior year cash position does not reflect the payment of the $56.3 million special dividend we made in late December 2012 which we believe understates our $159 million cash position when taking that into consideration.
I will now briefly touch on current conditions across commercial real estate and global capital markets which you could reference on slides 49 to 60.
Due primarily to the ongoing unprecedented quantitative easing by the Federal Reserve, this balance sheet has now grown to approximately $3.8 trillion, as well as continued additional quantitative easing by most other global central banks, it was continue to improvement in the public and private sectors of the U.S. commercial real estate capital markets in the third quarter of 2013.
These improved conditions coupled with the slowly improving economy continue to benefit certain sectors of the U.S. commercial real estate market, especially the Core and Core-plus and certain value-add properties in most of the major markets.
As evidenced by these improvements in the U.S. commercial real estate capital market in the third quarter and first nine months of 2013, both Real Capital Analytics and the MBA reported healthy increases in sales and debt volumes when compared to the same periods in 2012.
Our transaction volumes for both investment sales and debt placements when compared to the same volumes in 2012 were up even more than the national market increases as reported by Real Capital Analytics and the MBA which we again believe provides further support we are gaining market share.
According to Real Capital Analytics, total sales activity for the first nine months of 2013 rose 27% to approximately $239 billion which included the $15 billion sale of Archstone to EQR and AvalonBay as well as several other larger portfolios in the first nine months of 2013 compared to approximately $188 billion for the comparable period in 2012 which did not have similarly large portfolio trade. Excluding these portfolio sales, total sales activity would have increased only 15% for the first nine months compared to the comparable period in 2012.
In comparison, our investment sales transaction volumes was up over 37% for the first nine months of 2013 including the one unusually large portfolio investment sale that Nancy will discuss later on in this call.
The MBA just released its origination index for the third quarter and first nine months of 2013 and reported an increase of 29% and 14% respectively. In comparison our debt originations were up 75% and 27% respectively for the third quarter and first nine months period of 2013.
We believe the CMBS market was a single largest contributor to the industry increase based on data from commercial real estate direct. According to this report CMBS issuance during the first nine months of 2013 was up $57 billion, an increase of approximately 63% compared to approximately $35 billion over the comparable period in 2012. It should be noted there was a significant level of single borrower transactions which totaled $11.3 billion in the first quarter of 2013 alone. However, there is no denying the improvement in the CMBS market so far in 2013 which is nearly $10 billion more than the $48 billion issued in all of 2012. Assuming this trend condition continues this should continue to facilitate transaction in the secondary market with proven economies which we believe will benefit our business.
As noted on slides 40 through 48 based on the transaction we have recently consummated in this highly inefficient and constantly changing private capital market, we see that generally speaking the debt and equity markets continue remained focused on Core and Core-plus properties as well as select value add properties in all major markets and some select secondary markets with proven economies.
We are also continue to see very health flows in the U.S. commercial real estate sector with very healthy cues of capital waiting to put in all parts of capital stock. We also continue to see the migration of equity and debt to some select secondary markets with proven economics, as investors search for yield given how competitive debt and equity pricing has become in major markets. That said major markets are preferred over secondary markets and secondary markets are greatly preferred our tertiary markets.
As reported in past calls we believe there is plenty full debt capital from multiple sources available to borrowers in 2013 and beyond. Based on current activity, we believe there are significant competitions for the best loans especially in the targeted loan size of $10 million to $100 million where borrowers have multiple debt options which are good news for our borrower clients.
All-in coupons remain very attractive, ranging from sub-3.5% to sub 4.5% 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 75% range for similar type assets, sponsors in markets for terms of five to ten years, all-in coupons range from sub-4.5% to sub 5.5%.
As we have been saying on past calls, from a historical perspective, these all-in coupons remained close to the lowest debt coupons 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 into financial markets, we believe all in interest rate will remain within 25 to 50 basis points of current levels absent the global central banks moving to excess liquidity from the global financial system or a significant deterioration in global macro conditions.
We continue to believe that the U.S. commercial real estate risk-adjusted-based spreads relative to other fixed income instruments such as sovereign debt or corporates have provided better and continue to provide superior returns on a risk-adjusted basis, which has fueled the increased lending by life insurance companies, banks, CMBS originators and debt funds
On the equity front, trophy assets, Core, Core-plus and certain value-add properties remain in high demand and the competition remains keen with the major markets being key to a deep pull of aggressive qualified bidders
As investors search for better risk-adjusted returns, some key secondary markets with proven economies continue to see increased interest and good activity for Core and Core-plus properties, as well as select value-add properties. And we believe this trend will continue in 2014 as well. Generally speaking, given the projected population growth for the U.S. and the lack of new construction for most asset classes in most major markets, 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.
That said, improvements in property level fundamentals remain vulnerable to the many potential macroeconomic concerns 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 housing assets due to their strong fundamentals and the debt available through the agencies who lend in all secondary and tertiary markets.
We believe the continued improvements in the U.S. commercial real estate capital and real estate markets are very good tailwinds for our businesses. Asset potential macro concerns which we outlined in our earnings release and have discussed on prior calls, we believe we will see continued improvement in our business over the long-term given the expansion of capital market activity into some select secondary markets with proven economies coupled with the nearly $1.7 trillion of commercial real estate loans maturing between 2013 and 2017.
The transactions noted on slide 40 through 48 provide some insights into the debt and equity prices that occurred during the quarter. We are not going to review any of these transactions today but you should review them following the call, they will be helpful in understanding depth and breadth of some of the complex transaction, our transaction professional have consummated for our clients. We are not going to discuss the possible implications for commercial real estate and rising rate environment based on the movement in the tenure treasury as we covered that topic thoroughly in our second quarter earnings call and the tenure has moved back down into 250 – 2.5% range.
If you are interested in reviewing our prior analysis it is been updated and is in included in this PDF as well as in our capital market PDF update which you can review following this call.
As mentioned during our second quarter call, our discussion on the potential impact from higher interest rate provide interesting color on how we are prospered in past prior period when interest rates were nearly double where they are today, we are not specially focused on it. As we cannot predict the future of interest rates nor can we control the macro events which is why we remained on a long-term strategic plan in the way we manage our business through our very experienced and talented leadership team.
Frankly, today we think it is difficult to predict any business given the numerous factors that come into play such as the overall U.S. economy, function of our elected official within the federal government, the employment, unemployment conditions, the impact from massive injections of liquidity from global central banks and eventually removal of same, the impacts from the sluggish economies in other parts of the world as well as unrest in other parts of the world.
In addition to the unpredictability of when a capital market transaction may close, these are among the other reasons why we elected not to give guidance when we went public, and is why we constantly communicate on earnings call that we do not manage the business on quarterly or annual basis, but rather we manager and run the business for the long haul which to date we believe that’s proven to be very effective based on our performance.
As noted on slide 1 through 27, we believe there are key relationships with owners of institutional commercial real estate assets as well as the debt and equity capital providers, our deep knowledge and understanding of the most effective way to capitalize any given transaction, and our in-depth understanding of the trends in the U.S. commercial real estate and capital markets, provide our clients with the best real estate and capital market knowledge based solution to help them navigate these highly inefficient and constantly changing conditions. We intend to remain singly focused on continuing to form high quality, value -add services for our existing future clients without competing with them.
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. Just as we have done since 2010, we remained prepare to continue to use our strong balance sheet and cash position to weather any challenges that might materialize in the future as well as to continue to systematically and strategically invest in any opportunity to grow our business platforms and product specialties in existing end 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 U.S. that is focused on and does not compete with its clients, not to be the biggest at the expense of being the best or attempt to generate earnings on the margin by competing with client and biting the hand that feed you.
Simply stated, we will not grow for grow sake and we do not want to compete against our clients. Also our business model philosophy of putting the client interest first, our pay for performance and alignment of interest for the client and shareholders has like wide allowed us to track some of the very best transaction professional in the business and has allowed to award our leaders who drive our business which collectively we believe has allowed us to achieve superior results for our shareholders.
An example of one of the several ways we believe we generate superior returns for our shareholders as stated, our stated philosophy of returning capital to shareholders. When we build up sufficient excess capital to deal with the downturn in the business, such as we witness in 2008 and 2009, further provide we have sufficient excess capital to invest in our business in both good times as well as in more difficult times. And when the macro and strategic conditions weren’t same we believe we should return capital to our shareholders just as we did in December, 2012 with the payment of special dividend of approximately $56.3 million.
Subject to overall macro conditions which we have no control over, we remain optimistic about our business prospects for the foreseeable future. In 2007, we consummated $43.5 billion of transaction with just 150 producers. As of September 30, 2013, we had 251 producers with an average tenure of 17.6 years in the business. Even without any future strategic growth of offices, platform services or property specialties. If we can achieve the productivity per producer that we achieved in 2005 through 2007, coupled with our demonstrative disciplined approach to managing the business, both of which were largely to be depended on the 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 volume and financial results well in excess of our result in 2007-2012.
In summary, as we have consistently demonstrates through our past performance, we believe we have the people, culture and experience which when combined with our disciplined approach to managing our business through our deep and experienced leadership team, to continue to strategically grow our business in 2014 and beyond.
We also believe these attributes when coupled with our pay performance compensation system, which aligns our interest to the client and shareholders and our strong balance sheet will allow us to continue to attract the highest quality associates in the industry which will allow us to position the company to continue to gain market share and take full advantage of the sign cant transaction volume we believe will be forthcoming.
We believe our 251 transaction professionals who have an average of 17.6 years in the commercial real estate industry, coupled with our enhanced disciplined management oversight, will enable us to continue to assist our clients navigate these ever challenging and inefficient capital market conditions.
Finally, we believe all the above and specially our people what has allowed us to outperform the market in the past, and we believe will be – 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 in more detail.
Thank you, John. I’d like to go through our financial results for the third quarter and first nine months of 2013. This information is also noted on slides 28 through 38 in the PDF materials referenced earlier.
As John previously mentioned, we are very pleased with our third quarter result and the first nine months results for 2013. Revenue for the third quarter was $89.4 million which was up 29.5% or an increase to $20.4 compared to the third quarter of 2012. The quarter revenues of $89.4 million is the second highest reported quarterly revenues in the history of the company with the fourth quarter 2012 being the highest reported quarterly revenue at $97.3 million.
For the first nine month of 2013 revenue totaled $224.6 which is an increase at 19.7% from the same period in 2012. The increase in the quarter and for the full year was driven by the increase in our transaction volumes primarily in our debt placement and investment sales platforms as well as increased servicing revenues due to the growth in our servicing portfolio.
The company had operating income of $18.6 million in the third quarter which was an increase of $6.3 million or 51.2% from the third quarter of 2012. For the first nine months of 2013, operating income was $33.9 million which is an increase of 18.8% or $5.4 million compared to the same period in 2012.
The company had a strong operating margin for the third quarter of 2013 of 20.9% which is an increase from the third quarter of 2012 operating margin of 17.9%. Operating margins were also up sequentially from the first quarter to the third quarter of 2013 where margins increased from a negative 0.2% in the first quarter to 19% in the second quarter to 20.9% in the third quarter primarily as a result of the increase in revenue which went from [$34.2] million in the first quarter to $81 million in the second quarter to $89.4 million in the third quarter of 2013.
The operating margin of 15.1% for the first nine months of 2013 is just shy to 15.2% operating margin for the first nine months of 2012, this slight decline in operating margins for the first nine months period on a 19.7% increase in revenues is attributable to the increase in the company’s operating expenses primarily related to the investments we were making in our business.
Operating margins were also negatively impacted by the $3.8 million increase in our non-cash stock compensation expense primarily related to an increase to the marked-to-market adjustments on liability base stock awards which are required to be revalued at each quarter.
To further demonstrate the impact of margins from our strategic investments, we have experienced in increase in our compensation related cost and expenses associated with in part a 12% increase in headcount of 67 net new associates over the past 12 months as well as all the related to cost necessary to support this growth such as office expansion related occupancy cost and T&E and an increase in operating expenses related to the increase in production activity which also include T&E.
The seasonality of our business also has an impact on quarterly operating margins. Based on our history, the first six months revenue is typically lower than the second six months revenue as a result, the increased operating cost in 2013 have a disproportionate impact on our first quarter and second quarter operating income and adjusted EBITDA margins due to the smaller revenue base in the first two quarters of 2013 as is evidenced by the improving comparative operating margins in the third quarter compared to the first nine month period.
Cost of services as a percentage of revenue up 55.6% in the third quarter of 2013 compared to 58.2% in the third quarter of 2012, for the first nine months of 2013 cost of services as a percentage of revenue is 58.4% compared to 58.6% for the same period in 2012. Cost of services as a percentage of revenue decreased for both the quarter and the first nine months period as we were able to spread the increased fixed cost component of our higher revenue base for both the quarter and the nine months period.
The increase in the fixed cost component of this cost category is primarily related to an increase in salaries and other payroll related expenses associated with the increase in headcounts of 67 new net associates over the past 12 months.
Operating, administrative and other expenses increased approximately $4.4 million in the third quarter of 2013 as compared to the same period in 2012 and increased approximately $9.5 million for the comparative nine months period. The increase in these expenses is primarily attributable to increase in personnel expenses related to an increase in certain incentive-based compensation expenses including our office and firm profit participation plan, and increased non cash stock compensation expense primarily related to the increase of the marked-to-market adjustments on liability-based stock awards which revalued each quarter.
Additional cost increases relate to other discretionary expenses such as T&E and other operating expenses due to the increased production activity which were offset by a decrease in the interest expense on a ware house line of credit. The increase in depreciation and amortization for the quarter and the nine months period is primarily related to the increase in the amortization of the mortgage servicing rights.
Interest and other income net decreased almost a $ 1 million for the third quarter in 2013 compared to the third quarter of 2012 primarily due to decrease in other income on the initial valuation of mortgage servicing rights. Interest and other income net increased $1.6 million for the first nine months of 2013 compared to the same period in 2012 primarily as a result of other income earned as it relate to our multi housing platform including our Freddie Mac program plus Seller/Servicer business.
Income tax expenses for the third quarter and the first nine months of 2013 increased by approximately $2.7 million and $2.9 million as compared to the same periods in 2012. And this is primarily as a result of the increased in pretax book income. Income tax expenses were impacted in the third quarter and for the first nine months of 2013 by re-measurement of the deferred tax assets which decreased income tax expense by approximately $800,000 and $1.2 million for the quarter and nine months period respectively. Adjustment increased to company’s deferred tax assets and its impact on the company’s tax expense was partially offset by a corresponding decrease in other income related to the increase in the liability call payable under the tax receivable agreement which reduced income before income tax is by $700,000 and $1 million in the third quarter and for the first nine months of 2013 respectively.
The company’s effective tax rate after eliminating the impact of re-measurement of the deferred tax assets for the first nine months of 2013 is approximately 41%.
The net income attributable to Class A common stockholders increased $0.08 per diluted share from the third quarter 2013 and it increased $0.11 per diluted share for the first nine months of 2013 as compared to the same period in 2012, which represents increases at 29.6% and 16.9% respectively over the 2012 period.
The company’s adjusted EBITDA for the third quarter and the first nine months of 2013 increased $9.3 million or 56.6% and $13.5 million or 31.9% respectively compared to the same periods in 2012. Our adjusted EBITDA margin was very strong at 28.7% for the third quarter of 2013 which is an increase of 490 basis points over the adjusted EBITDA margin for the third quarter of 2012. For the first nine months of 2013, the adjusted EBITDA margin was a very strong 24.8% which is an increase of 230 basis points over the first nine months of 2012.
Our cash balance at September 30, 2013 was $159.3 million compared to the cash balance of $152.3 million at September 30, 2012 and compare to our cash balance of $126.3 million at December 31, 2012. Please note that the cash balance to December 31, 2012 of $126.3 million was after the $56.3 million special dividend payment declared by our Board and made to the stockholders of our Class A common stock on December 20, 2012.
Our cash balance increased $33 million from the yearend 2012 primarily from cash generated from operations. The company’s usual cash is typically related to the limited working capital needs during the year and the payment of taxes as we have virtually no debt to service other than that related to the capital leases and our Freddie Mac business which is offset with the mortgage notes receivable.
During the third quarter and for the first nine months of 2013, the company’s net cash provided operating activities was approximately $23.8 million and $37.7 million respectively. The net use of cash from investing and financing activities for the first nine months of 2013 was approximately $4.7 million.
In summary, the company had a strong operating performance in the third quarter and the first nine months of 2013 when considering that we continue to make strategic investments in our business, consistent with our growth strategy. The company’s strong operating performances is likewise reflected in our strong operating margins in the third quarter and for the first nine months of 2013 despite the increases in our personnel expenses of $4.7 million and $9.5 million respectively. As previously mentioned, these increased expenses are primarily related to the increase in incentive -based compensation expenses including the profit participation plan which are tied directly to our performance and an increase in non-cash stock compensation expenses of approximately $2.4 million and $3.8 million for the quarter and the first nine months of 2013. All other cost increases are relatively in line with the increase revenue year-over-year and in support of the increased business activity as well as in keeping with our long -term strategic objectives.
Finally, our adjusted EBITDA margin continue to be strong at 24.8% for the first nine months of 2013 which is at the top end of 22% to 25% range John stated on past calls. We believe the ability to remain in this target range with the significant investment we’ve made to carry out our strategic growth initiatives provides evidence that we are effectively executing our long range plan and the resulting increase in our operating cost are in line with the growth in revenue we are achieving our business.
We believe the investments we have made and we will continue to make in personnel are commensurate with our longer term strategic growth initiatives to both organic promotion and recruitment which will allow 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?
Thanks, Greg. Before reviewing our production volumes for the third quarter, I wanted to comment briefly on our overall production performance related to the industry in which we compete. We believe we continue to capture market share in the third quarter and in the first nine months of 2013. Our debt transaction volume was up 75% and our investment sales transaction volume was up 27% in the third quarter of 2013 versus the third quarter of 2012 while the MBA reported an industry increase of debt volumes just 29% and our CA reported an increase in sales activity of 26% for the comparable period.
Our debt transaction volume was up 27% and our investment sales transaction volume was up 37% in the first nine months of 2013 versus the first nine months of 2012 while the MBA reported an industry and future debt volume of just 14% and our CA reported an increase in sales activity of just 27% for the comparable period.
Also, as previously reported our total transaction volume for the third quarter was the highest volume reported in any third quarter since the company went public, and our total transaction volume for the first nine months of 2013 represents the second highest first nine months period for transaction volume since the first nine months of 2007 which also was the highest transaction volume year the company has ever recorded.
I would now like to review with you our production volumes by platform services and our loan service business for the third quarter and first nine months of 2013 and compare those results with the same period in 2012 which were also noted on slide 28 through 38 in the PDF presentation. The company’s production volume for the third quarter of 2013 totaled approximately $14.8 billion, a record for any third quarter by the company on 383 separate transactions. This represents an increase in production volumes of approximately $5 billion or 50.3% and an increase of 83 in the number of separate transactions or approximately 27% when compared to third quarter of 2012.
The average transaction size of third quarter of 2013 was $38.7 million, approximately 17.7% higher than the comparable figure of approximately $32.9 million for the third quarter of 2012. There was one unusually large investment sales transaction that closed to the third quarter of 2013. If this transaction were excluded the company’s production volume for third quarter of 2013 which shown increase of 39% from third quarter of 2012 and was reflect in average transaction size 9% higher than the year ago figure.
Debt Placement production volume was approximately $8.5 billion in the third quarter of 2013 representing an increase of 74.6% from third quarter of 2012 volume of approximately $4.9 billion. Investment Sales production volume was approximately $5.8 billion in the third quarter of 2013, representing an increase of 27.2% from third quarter of 2012 volume of approximately $4.5 billion.
Structured Finance production volume was approximately $301.7 million in the third quarter of 2013, an increase of 5% from the third quarter of 2012 volume of approximately $287 million. Loan Sales production volume was approximately $255.9 million for the third quarter of 2013, an increase of 50% from the third quarter of 2012 volume of $170.6 million.
At the end of the third 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 $1.6 billion compared to approximately $2.4 billion at the end of the third quarter of 2012, representing a decrease of approximately 36.5%.
The principal balance of the HFF’s Loan Servicing portfolio increased $2.8 billion or 9.5% to more than $32.2 billion at the end of the third quarter.
The company’s production volumes for the nine months ended September 30, 2013 totaled approximately $34.7 billion on 1005 transactions which is the second highest volume recorded by the company for any first nine months period second only to 2007 which remains our high watermark for full production volume. This represents the 27% increase in production volume and a 13.8% increase in the number of transactions when compared to the production volumes of approximately $27.3 billion on 883 transactions for the first nine months of 2012.
The average transaction size for the first nine months ending September 30, 2013 was approximately $34.5 million or 11.6% higher than the average transaction size of approximately $30.9 million for the comparable period in 2012. Again it should be noted that there was one unusually large investment sales transaction during the first nine months of 2013. If we would adjust the 2013 production volumes to exclude this unusually large investment sales transaction, the company’s adjusted 2013 production volume for the first nine months would have increased by approximately 23% as compared to the 2012 production volumes of $27.3 billion and the company’s adjusted average transaction size for the first nine months of 2013 would have increased by 8% as compared to the 2012 transaction size of $30.9 million.
As for our headcounts, HFF total headcount reached a new high watermark as a public company was 626 associates as of September 30, 2013, which is a 12% net increase from the September 30, 2012 employment level of 559. The increase in our headcount is attributable to the addition of transaction professionals and associates 15 of our 21 offices. The total number of transaction professional increased 11.1% to 251 as of September 30, 2013 compared to 226 at September 30, 2012 with an average tenure of 17.6 years in commercial real estate industry, we believe our transaction professionals are uniquely positioned to help our clients navigate the challenging and inefficient capital market.
I’ll now turn the call back over to John for his concluding remarks.
Thank you, Nancy. As we stated on past calls, 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 more than 1000 separate transactions representing nearly $34.7 billion in transaction volumes consummated year-to-date. 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.
(Operator Instructions). And our first question will come from the line of Whitney Stevenson with JMP Securities. Please proceed.
Mitch Germain – JMP Securities
Hey, John, it’s me Mitch with Whitney, how are you?
Hi, Mitch, great, how about you?
Mitch Germain – JMP Securities
Obviously, we have seen interest rates stabilize a bit here but we saw some volatility at the start of the quarter. I am curious; did you see any change in posture from sellers may be wanting to get ahead of potential rises or rising cap rates or declines in asset pricing?
It usually, Mitch, takes a while for somebody to make a decision relative to putting something on the market or to finance it. So I don’t think that – we saw somebody do something that they want to planning to do I think clearly the market is very flush with cash I think all asset, stocks, bonds, it’s really the matter commodities I think are all flushed with cash and I think people are looking to take advantage of either financing and or selling a property, so I don’t think we could say somebody had a specific interest in moving forward something that they want otherwise thinking about doing anyway. So I think you saw that in the end of 2012 to take advantage of capital gain tax rates more so than more seeing right now.
Mitch Germain – JMP Securities
Got you and I know mentioned secondary markets or tertiary market, static condition what you are seeing some yield focused investors. Is that a phenomenon that still some are playing outdoor, has the activity levels in those markets slowed a bit?
I would say it differently than you just said. I think that the secondary markets have proven economies that have job growth are seeing the migration of capital to go on to those markets especially for Core and Core-plus assets as well as value add assets. I don’t think just as I said earlier, I don’t think that markets that don’t have proven economies or have declining job growth that are secondary market. We still think capital is not really looking at those markets irrespective of what the yield is. So if you have a market that has an economy that’s growing, it’s going to attract capital.
Mitch Germain – JMP Securities
Got you and two more for me. First, page 54 in your slide presentation, I think you go over the different debt providers and some of the pricing terms, I don’t know if it is a new slide, I didn’t see at last quarter but I am curious has – we have seen the loan officer survey suggest further easing in lending standard so has there have been any change in may be LTV or terms here over the course of last three or six months that you want to reference.
I would say, Mitch, first of all this slide been in all of our – and you are new to our story that now that Wills not around but this has been in every one of our decks in the past. So you could actually on a quarter-to-quarter go back and look at that. I would say that with the run up and interest rate, we saw an increase and both spreads and in absolute coupons from the CMBS vendors.
Now the rates have come back in meaning the tenure treasury and with the amount of money that’s out there we’ve seen both the spreads and absolute coupons come in. I think that you have seen in the CMBS market, continued willingness to look at 75% or 80% LTV [ph] business with financing either inside that quote or outside that quote, I think the life companies have continued to remain very disciplined in their approach as well as banks were doing on book and on balance sheet lending. They want to stay pretty much in that 65% to 70% LTV range, they’ll compete on prices as opposed to proceeds with the exception of multi-family which compete against the agencies they’ll move up and now do a 75% plus LTV loan but we continue to see an abundance of capital in the debt market as well as the equity markets.
Mitch Germain – JMP Securities
Great, and I guess you previously mentioned a lagging effect of about two to three years in hiring new producers. So I guess I’m just kind of curious in terms of looking at the hiring that you’ve made how EBITDA do you believe could or maybe revenues could be unlocked as these producers become a little more active in sourcing deals.
Well I think again if you go back and look at that production hiring that we’ve had, I believe that we got a 92 net new producers since 2010. And I think if you go back and I don’t have the numbers right in front of me perhaps Greg or Nancy do. But I think in 2010, we had 12 plus or minus new producers. So it takes three to five years for those producers to become stabilize, and so those producers we believe in 2013 and 2014 are going to hit their stride relative to what we think are normal stabilized producer might generally.
If you look at 2011 and 2012 again they are newer and so they’re not going to be anywhere near us as productive so the people that we hired in 2011 are going to be more productive in 2014 and 2015, the people that we hired in 2012 are going to be more productive in 2015 and 2016. But if you just assume that all of the transaction professionals that we hired these net 92 people are all here say five years from today just assume that we’re all standard at zero, and assume that all of the existing producers that we have stay here and remain as equally productive if you just assume that those 92 people become stabilized, and hit what our current average producer makes then you could just interpolate that say okay there’s not many net new revenues here if you take 20% to 25% profit margin you could interpolate backwards as to what that might mean and EBITDA. I mean here is – there is a whole lot of more assumptions are going for that where is the economy, what’s going on in the macro world so on and so forth. But I mean that’s a way to look at it.
Mitch Germain – JMP Securities
Great, thank you very much. Great quarter.
Thank you Mitch. Thank you, Whitney.
And our next question will come from the line of Brandon Dobell with William Blair. Please proceed.
Brandon Dobell – William Blair & Co.
Any issues that you’ve seen with Fannie & Freddie and all the FHFA stuff in multi housing another score cards due out soon do you expect that to be an issue here guys looking out for next couple three quarters even how that business works with originations than MSRs?
I think Brandon that’s very good question and as you know the regulators came out several years ago and said that your agencies Freddie and Fannie need to reduce your portfolios by 10% per year, and they’ve been in fact doing that. And as we’ve reported on previous calls, we don’t really; we’re totally agnostic as to who does our multi family business. So we take every multi-family loan that we’re blessed by clients to go out procure debt financing, we take it to the life insurance companies, the banks, the CMBS originators, the debt funds. We don’t care who comes up with the best deal, we only care that client has the best deal.
So each and every one of our multi-family deals has taken to the market and relative whether it goes to Freddie or Fannie, we really don’t care. So from our perspective as we’ve done repeatedly we take the MSR income, we take all the Freddie Mac income and trading profits we have from the Fannie Mae business, we take it all below the line. We try to be as transparent as we can be so you could actually see what happen there. It is not up in our gross revenues, it’s down below there, so it would obviously if that business starts to go the other way, our net interest income from our warehouse lines will start to get down. The MSR incomes that we record which we believe are the most conservative way to look at the MSR income and Greg could speak more clearly to than I can. We go out of our way to make sure that, that is very transparent and so we’ve been competing I think if you and Myra are you on a call still?
You have the MBA statistics that show where Freddie and Fannie were relative to the debt volume handy? If you don’t, I remember it somewhere of the top of my head and if you could find it that would be great, but their business was of about 35% to 40% and our debt business was up Brandon so I think our debt business was up in the multi-family space. So again it points to – that is not the only thing that we do in our multi family business like some of the other competitors that we compete against.
Brandon Dobell – William Blair & Co.
Fair enough, okay, and she is digging around there quick couple one for Greg. Does the addition of the four people to I guess kind of permanent voting status, does that change anything from incentive compensation stock based compensation? Anything that we’re going to see in the P&L from non-movers, is that just more of a structural thing than is there any accounting impact that those changes?
First of all Brandon this is John Pelusi. I’ll take that, those people first of all it’s an ad-hoc going forward, these people are all part of leadership team and so relative to equity based stock compensation as you know we have from profit participation, so those people are all part of that as well, so we’re helping and assuming that we do better and that our stock based compensation were up because our metrics go up.
Brandon Dobell – William Blair & Co.
Fair enough, okay and then I know with the kind of marked-to-market and all the stock based comp anything else that we or anything in the fourth quarter we should expect beyond the usual marked-to-market stuff that happens with the stock based compensation. Is there anything that’s going to be yearend true up or anything that may catch us unaware, it’s not linked to surplus?
I’m going to let Greg answer that.
Well, I mean obviously when you get to the end of the year you have estimates that you’re making throughout the year , you get your balance sheet to include the appropriate accruals relative to things that are related to the profit participation plan, so depending on how the fourth quarter shapes up those accruals will get adjusted accordingly. And as you know, last year in the fourth quarter was a pretty significant quarter for the company, we had $97.3 million in revenue and as John mentioned the top comp against that relative to what happened with the pull forward issues at the end of last year. So I think you saw some of that last year when we had such big quarter, you obviously probably a little bit higher accruals in that quarter last year. So that’s the only thing that could happen is just the adjustments relative to accruals that are related to estimates.
Brandon Dobell – William Blair & Co.
Okay fair enough and back to the business for a second, anyway to think about I guess it’s how successful you guys are time and investment sales transaction to a debt transaction so your – the opportunity to advise in a brokering of a sale or I guess the purchase buy more appropriately and then had any opportunity also arrange for financing for that. Is there a way to think about at higher rate, the correlations unlike that and do you anticipate that moving up or down as go under 2014?
Well, first of all Brandon again it’s a very question I think we obviously would love to be able to tie – else to getting debt we don’t do that. What we try to do is when we take on an investment sales and part of the pitch to get a client to hire us, is that we say that we’re going to have a dedicated investment sales team and a dedicated debt team, and we’re going to at the same time while we’re taking the property out of the market also ping the market in all parts of the market so life companies, the banks, CMBS , debt originators of its multi-family, it’s also the agencies to basically help drive pricing. We believe that those people that develop in those efficient capital stock are going to be able to pay the most for our property.
And so by billing that and educating market and perspective buyers and separating the contenders from the pretenders we believe that drives value, it also does another thing as you get into the final and best pricing with the seller. You can prove up what you believe the capital stock is for any perspective borrower. So if somebody is sitting there saying, well, I could get 20 year financing at 3%, we know based on transactions that we’re currently pricing in the market that, that’s not real, and we can educate a client.
Client may still want to go chase the dollars but they won’t come back to us and say we didn’t tell you about that. I would say that it varies quarter-to-quarter and I would say that I think anywhere from 25% to 50% is what our hit rate is. And a lot of it depends on whether you’re selling a property that already has debt on it; if it already has debt on it obviously you’re not going to be able to put new debt on it unless you re-finance it, paid with the fees and send on pre-payment penalty. But it is something that we think differentiates ourselves from others, in that we assign specific debt teams and investment sales team to attack each and every transaction for an owner.
Brandon Dobell – William Blair & Co.
Okay and then last one from me. As the market continues to improve I would imagine the opportunity that some of your newer producers, once they have been promoted up. Perhaps go to other firms that are looking to build all this is particular city, I would imagine that the pressure on those people may increase a little bit. If you guys see the year-to-date period lost any more other people that the firm promoted up from new associates to producers, or have you seen any higher churn as people look to take other opportunities away from you guys?
I’m going to let Nancy answer that question relative to the churn, relative to whether they’re new, existing or older experienced producers, I don’t think the activity relative to our competitive peer set trying to get and hire our people away from us is any different. It’s always been extreme, it’s always been competitive. We continually have our competitors camping on our people, which we take as a compliment. Because we think we have the very best transaction professionals in the marketplace. At the same time, Brandon, we also believe that we have the very best platform in the marketplace. We don’t have gatekeepers, we don’t have geographic boundaries.
We have an open architecture, which provides the most up-to-date current information on what’s going on in the capital markets to share throughout our systems. So that when people look at other opportunities they also look at the platform. And I think that’s why the majority of our people stay here. Have we lost people in the past? Yes. Are we going to lose people in the future? Yes. It’s up to us to make sure that we are recruiting the very best people both from an analytical prospective who then turn into producers. And also from outside, recruit the very best from the outside and bring them in here. And then those people that drive the business make sure that we reward them. And I think those things are what allow us to continue to compete and achieve the results that we’ve achieved so far. But I’m going to let Nancy answer this specific question relative to churn if it’s up or down.
I think the churn is actually a little bit down, and frankly the reason for the people as I am looking over the list of the people who have left over the last year. It’s probably less than half of them are going to competitors, we have people that leave the brokerage business to go work for a principle and that sort of thing.
So it’s not just an assumption that everybody that leaves goes to a competing firm. It’s kind of mixed up as far as who’s doing what when they leave and again the percentage of people that have left is probably less than – the worst churn we have is obviously when the market was really terrible.
Brandon Dobell – William Blair & Co.
Yes, okay great appreciate it. Thanks for the help.
Thanks, Brandon. Operator, is there any other calls or questions from callers?
At this time, I show that we have no further questions in the queue. I would like to turn the call back to John Pelusi for closing comments.
Thank you. We appreciate you joining us today and hope that you can join us again in a few months for our fourth quarter 2013 call. Thank you.
Thank you for your participation in today’s conference, this concludes your presentation, you may all disconnect good day everyone.
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