HFF's (HF) CEO Mark Gibson on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: HFF, Inc. (HF)

HFF, Inc. (NYSE:HF)

Q2 2014 Earnings Conference Call

July 31, 2014 6:00 PM ET

Executives

Myra Moren – Investor Relations

Mark D. Gibson – Vice Chairman and Chief Executive Officer

Gregory R. Conley – Chief Financial Officer

Analysts

Mitch Germain – JMP Securities

Ken McCarthy – William Blair & Co.

Operator

Good afternoon and welcome to HFF, Inc.'s Second Quarter 2014 Conference Call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and- answer session with instructions being given at that time. As a reminder this conference is being recorded. I would like to turn the call over to your host, Myra Moren, our Director of Investor Relations. Please go ahead.

Myra Moren

Thank you, and welcome to HFF Inc's Earnings Conference Call to review the company's operating performance and production results for the second quarter and first half of 2014.

Earlier this afternoon we issued a press release announcing our financial results for the second quarter and first six months of the year. This release is available on our Investor Relations website at hfflp.com. This conference call is being webcast and is available on the Investor Relations section of our website, along with a slide deck you may reference during our prepared remarks. The conference call is also being recorded.

Please turn to the Slide labeled Disclaimer and the reference to forward-looking statements. This presentation contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our future growth momentum, operations, financial performance and business outlook.

These statements should be considered as estimates only and actual results may ultimately differ from these estimates. Except to the extent required by applicable securities laws, we undertake no obligation to update or revise any of the forward-looking statements that you may hear today.

For a more detailed discussion of risks and other factors that could cause results to differ, please refer to our second quarter 2014 earnings release 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 www.sec.gov.

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 Mark Gibson, our Chief Executive Officer, and Greg Conley, our Chief Financial Officer.

I'll now turn the call over to our CEO, Mark Gibson.

Mark Gibson

Thank you, Myra. Good evening everyone and welcome to the review of HFF’s second quarter results for 2014. We’re very pleased with the firms performance for the quarter and for the six months of 2014, based on our results which Greg will review in detail shortly it would appear the commercial real estate industry continues to embrace the company’s team oriented approach and executing capital markets transactions hereby validating HFF strategic plan which has remained consistent since the IPO and the company’s unwavering adherence to its core cultural guiding principles which I’ll briefly review and are also outlined on Slide 12. Those core guiding principles remain placing our client's interest ahead of our own and maintaining a platform which does not compete with the business interest of our clients embracing a player-coach leadership style whereby the firm's leadership is actively engaged in generating revenue for the firm through originating and executing real estate transactions.

Number three retaining a partnership mentality of employee-owners versus employees which is illustrated by the fact that HFF employees are more than 19% of the outstanding Class A common shares of HFF, before pay for performance compensation structure which greatly aligns the interest of HFF's leadership with the performance of the firm through our profit participation and Omnibus compensation plans.

Stated differently the leadership of HFF obtains the majority of its compensation through net profit participation in commissions not salaries. And finally five an intense focus on maintaining an exceptional team-oriented merit-based partnership mentality culture which aligns the firm with our clients' and shareholders' best business interest.

We believe these guiding principles allow the firm to recruit best in class individuals in the form of recent college graduates and also experienced industry professionals. Since January of 2010, we have grown our total headcount by 306 representing a 81.4% increase. And we have grown our total transaction professionals by 108, representing an increase of 67.9%.

Over the past 12 months we have grown our headcount by more than 12% to a total of 682 associates and our transaction professionals by more than 9% to a total of 267. The growth in our production ranks during the past 12 months was fairly well dispersed as we added transaction professionals through both promotion and outside recruitment in 17 of our offices.

We remain highly focused on maintaining the firm's team-oriented culture by adhering to the aforementioned principles in order to continue to attract and retain best in class individuals to HFF. And additional and significant recruitment tool used by the firm and highly valued by HFF transaction professionals is our CapTrack database.

CapTrack is an internal proprietary system containing information on over 20,000 consumers and providers of capital whose data including a complete overview on investors, investment objectives pricing underwriting criteria is continuously updated by HFF transaction professionals via meetings, phone calls transactional activity et cetera.

CapTrack provides our production for us real time pricing, underwriting metrics and current market information on specific debt and equity transactions on the billions of dollars of assets we’re continually pricing in the market. The system shared throughout the HFF platform allows the HFF transaction professionals to educate the firms clients on the best capital marketed strategy for given asset portfolio or company. We strongly believe the results generated by HFF for the second quarter and first half of 2014 and since the firm went public are directly attributable to the incredibly talented group of individuals which comprise the HFF team.

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

Gregory R. Conley

Thank you, Mark. I'd like to review our financial results for the second quarter of 2014. This information is also noted on Slide 17 through 28 in the PDF materials referenced earlier. Slide 17, provides highlights of our second quarter 2014 performance. As Mark stated, we’re very pleased with the firm’s performance for the quarter and for the first six months of 2014.

During the second quarter we continued to see improvement in our top line results as revenue increased 17% and transaction volume increased 13.1%, which is led by 28% increase in investment sales transaction volume and our servicing portfolio grew by over $3.1 billion or 9.5%.

We continue to maintain solid operating margins as well as the strong cash balance. In addition we continue to maintain a high diversified and fully integrated capital market services platform as it relates to both users and providers of capital. As it relates to our revenue base in the first half of 2014 our client represented more than 4% of our capital market services revenue in the combined fees of our top ten clients represented 12.2% of our capital market services revenue.

Adjusted EBITDA margin is declined by approximately 410 basis points for the quarter primarily due to a decrease and our interest in other income related to our Freddie Mac seller servicer business.

Turning to Slide 18 and 19, revenue for the second quarter of 2014 was $94.8 million an increase of 17% or $13.8 million. For the first six months of 2014 revenue was a $170.8 million which represents a year-over-year increase of $35.6 million or 26.3% the increase in revenue for the quarter and for the first six months is driven by the increase in our transaction volumes primarily in our investment sales platform as well as an increase in the servicing revenues from the growth in our servicing portfolio.

Operating income increased $2.6 million in the second quarter or 16.8% compared to the same period last year for the first six months of 2014, operating income increased 42.7% or $6.5 million to $21.8 million representing an increase of $6.5 million.

The increase in operating income for both the quarter and the six month period is primarily attributable to the increase in revenue which was partially offset by increases in compensation related and other operating expenses. The operating margin for the second quarter was 19% in consistent with the operating margin in the second quarter of 2013.

Operating margins for the first six months of 2014 increased to 150 basis points to 12.8% as compared to the same period in 2013. The operating margins for both the quarter and the six month periods were impacted by the quarter-to-quarter uneven recognition of the non-cash stock-based compensation expense primarily related to the mark-to-market adjustments on the liability-based awards in 2013 and the first quarter of 2014.

Operating margins would have increased 1.3% and 3% for the quarter and six month period in 2014 respectively after adjusting operating income for stock based compensation, further reflecting the improving operating leverage in our business. It is important to also note that given the typical seasonality in our business or the first six months of each year’s generally weaker relative to revenue than in the second half of the year.

Increased operating cost have a dispropionate impact in our operating income and adjusted EBITDA margins due to the smaller revenue base in the first six months of the year. Cost of services as a percentage of revenue decreased 1.2% to 56.3% in the second quarter of 2014 and decreased 2% to 58.2% for the first six months of 2014 compared to the same periods in 2013.

These decreases for the quarter and six month period are primarily attributable to the fixed cost components being spread over the higher revenue base and as evidenced in our cost increases relative to growth and personal is commensurate with our revenue increases.

Operating administrative and other expenses increased by approximately $4.6 million in the second quarter of 2014 and $10.7 million for the six month period of 2014 compared to the same periods in 2013. The increase in these expenses for both the quarter and six month period is primarily attributable to an increase in personal expenses of $2.7 million and $7.9 million respectively, which is related to increased incentive based compensation expenses including our office and firm profit participation plan expenses and an increase of $1.3 million and $3.5 million in stock compensation expense for the second quarter and six month period respectively.

Additional cost increases relate to certain other discretionary expenses such as travel and entertainment and are due to our higher transactional activity an increase in personnel. Interest and other income net decrease $3.2 million in the second quarter 2014 and $4.5 million for the first six months of 2014, as compared to the same period in 2013. These decreases are primarily due to a $3.7 million and $5.2 million decrease for the quarter and six month period respectively and securitization compensation and income from the sale of a portion of the related servicing rights on Freddie Mac loan securitizations related to our Freddie Mac Program Plus Seller Servicer business.

Income tax expense for the second quarter and first six months of 2014 increased by approximately $200,002 million primarily as a result of the increase in pre-tax book income. The company's effective tax rate for the first six months of 2014 is approximately 41%.

The earnings per share on a fully diluted basis decreased $0.02 for the second quarter and increase $0.02 for the six month period of 2014. The company's adjusted EBITDA for the second quarter of 2014 was flat at $23.1 million compared to the second quarter of 2013. For the six month period adjusted EBITDA increased $5 million.

Adjusted EBITDA margins decreased for the second quarter and six month period by 410 basis points and a 170 basis points respectively primarily as a result of the decrease in another income related to our Freddie Mac Program Plus Seller Servicer business. If the securitization related income was flat versus the same period last year for the quarter and six month period adjusted EBITDA margins would have been essentially flat for the quarter and up 1.3% for the six month period 2014.

I’d now like to make some additional comments regarding the decrease and another income for the quarter and six month period of 2014. As I previously stated the decrease in interest and another income was impacted by decrease of $3.7 million and $5.2 million for the quarter and six month periods respectively and securitization compensation and income from the sale of a portion of the related servicing rights on Freddie Mac loan securitizations.

As you know the GSE’s required reduction lending in 2013 significantly impacted the company’s loan originations with Freddie Mac in the second half of 2013 and in the beginning of 2014. Due to the nature of securitization transactions by Freddie Mac, there’s a lag effect between the time when the company originates a loan and sales at the Freddie Mac and again when Freddie Mac securitizes the loan. When the loans are securitized, we have the opportunity to earn income from securitization and from the sale of a portion of the related servicing rights on this securitized loan.

Due to the significant originations with Freddie Mac throughout 2012, and particularly in the second half of 2012 the company continue to report significant increase in its securitization related income in the first and second quarters of 2013, which was largely related to loans originated in 2012. Due to decline in Freddie Mac originations in 2013, we reported a decline in securitizations related income in the second half of 2013, and in the first six months of 2014.

The total securitization related income reported in the other income category for the full year of 2013 was $9.7 million with approximately 70% or $6.7 million reported in the first half of 2013, which compares to the $1.5 million of securitization related income reported in the first six months of 2014, which gets to the year-over-year difference of $5.2 million. The reduction of Freddie Mac loan originations also had a negative impact in MSR income reported by the company in 2013. However, the impact from this non-cash GAAP income is removed when determining adjusted EBITDA.

Slides 20 to 22 related to my next comments regarding balance sheet and liquidity related items. We continue to maintain a strong balance sheet as the company’s cash balance at June 30 was $133.2 million compared to a cash balance of $201.3 million at the end of the year December 31, 2013 representing a decrease of $61.1 million. The significant portion of the decrease in cash related to $68.2 million special dividend payment declared by our board and distributed to stockholders of our Class A common stock on February 6, 2014.

During the first six months of 2014, the company generated $6.6 million from operating activity after payment of compensation items including our performance based awards related to 2013 and accrued for balance sheet of December 2013. The company’s use of cash is typically related to the limited working capital needs during the year in the payment of taxes.

The company is virtually no corporate level debt to service other than that related to our Freddie Mac business, which is offset with the mortgage notes receivable. I would like to point out that our balance sheet on Slide 20, we had $190.4 million of outstanding borrowings for 16 loans under our warehouse credit facility to support our Freddie Mac multifamily business and we also had a corresponding asset recorded in the same amount for the related mortgage notes receivable from Freddie Mac. We have experienced a slight increase in the sale of originated loans to Freddie Mac of approximately 21% from the second half of 2013 to the first half of 2014.

I would like to make a few comments regarding our production volume and operational measurements noted on Slide 24 to 27. As noted on Slide 24 and 25, our production volume increased $1.6 billion or 13.1% for the second quarter of 2014 and $4.7 billion or 23.6% for the first six months of 2014. The total number of transactions increased by 74 and 140 for the second quarter and first six months of 2014 as compared to the same periods in the prior year.

The increase in transaction volumes for both the quarter and six month period was primarily attributable to the increased investment sales transaction volume. Again, as I mentioned earlier the company’s loan servicing portfolio increased 9.5% or $3.1 million compared to the balance of June 30, 2013.

Slide 26, provides a historical summary of our headcount and also shows the second quarter year-to-date comparison to the same periods in 2013. As Mark mentioned total headcount a number of producers as of June 30, 2014 is up 12.4% and 9.4% respectively over the past 12 months. We have increased the total number of producers by 108 or 67.9% since 2009.

Slide 27 provides a summary of certain production and operational measures. One key note here is that the revenue per producer is up approximately 16.1% for the first six months of 2014 and is up 18.6% for the trailing 12 months.

In summary, the company had a very strong start to 2014 and a solid operating performance for the second quarter of 2014, particularly when considering that we continue to make strategic investments in our business consistent with our growth strategy. We continue to believe that we have been very efficient and strategic as it relates to our management of expenses and any incremental increased should at minimal impact to our bottom line results on a full year-over-year competitive basis provided the market continues to expand, when we continue to experienced revenue growth consistent with the investments made in our business.

I’ll now turn the call back over to Mark for his comments on the industry. Mark?

Mark D. Gibson

Thank you, Greg. I’ll now make a few comments regarding the overall market for commercial real estate. In general, there has not been any significant change from our commentary in the first quarter. The commercial real estate industry has an asset class for making favor with most institutional and increasingly with high net growth investors.

As I shown on Slide 30 and 31 allocations have been increased for 2014 and beyond, which would suggest that will be more than ample equity capital available to the industry. At present the industry is approximately 100 basis points under invested relative to current allocations. Additional illustrations of the above include the significant increase in AUM and both the closed-end and open-ended fund markets as depicted on Slides 32 and 34.

And the fact that the majority of open-ended core funds in the U.S. has substantial queues of inbound capital to be invested. Regarding investment sales transaction volumes one can view the volumes has published by RCA on Slide 37, for the first six months of 2014, as noted the industries transaction volume in the first six months of 2014 totaled $184 billion or 23% increase over the first six months of 2013.

In contrast HFF investment sales volume rose by 43% in the same timeframe. The industry’s transaction volume for the year ended June 2014 totaled $395 billion and 19% increase over the same time period in 2013 in contrast HFF trailing 12 month investment sales volume totaled $29 billion representing an approximate 67% increase over the same time in 2013. From a macro perspective one can view the industries investment sales volume is down 37% from peak volumes in those 7 or essentially flat from 2005. The contrast HFF is up 52% since 2007 and 241% since 2005.

Given the increase in AUM previously mentioned, the fact the closed-end fund market is structured from a compensatory perspective to trade assets approximately 64% of investors in closed-end funds having average totaled of less than five years are shown on Slide 33 and $1.4 trillion of loan maturities occurring in the next three years are shown on Slide 36.

HFF, we use there is a reasonable foundation to support current volumes. Many investors are concerned about rising interest rates in the commitment impact on values or transaction volumes and rightly so. HFF is encouraged by the fact the majority of investors have acknowledged same and it’s communicated to all constituencies, the various outcomes which might occur in a rapidly rising interest rate environment and the impact on returns.

Interestingly historical volumes seem to indicate that volume of transactions is more dependent on availability of capital rather than cost of capital. This statement is best illustrated by noting peak sales volumes were obtained in 2007 with the tenure treasury about 4% and the rapid deterioration of transaction volume for 2009 were capital was largely unavailable despite falling interest rates.

And regard to pricing it is largely believed the cap rate compression or multiple expansion as run as course and therefore most investors are keenly focused on fundamentals such as leasing velocity rent and occupancy increases. There are peer to be steady improvement of same across the various property types as shown on Slide 47.

In terms of geographic market preference as previously reported, we expect the long-term trend of migrating of the risk curve as we call it at this point in the cycle to continue as investors seek total return for portion of their commercial real estate investment portfolios and markets outside of traditional gateway cities.

Additionally, investors are increasingly focus on corporate relocation trends long-term employment population shares in the velocity of trades in a given market meaningful liquidity of a market and intermitting allocations to a given geography. As we’ve been noted in several articles and studies of late to continued inflows of foreign capital in the U.S. real estate market primarily in gateway, markets as height in the need of many investors deserved for alternative markets.

In terms of the supply of new product affecting price HFF believes the supply of product in general remain reasonable given the transparency of information, which now exists versus past cycles.

In essence virtually every institutional lender and equity investors keenly aware of the actual price that’s underway in the pipeline of potential new product as well. Therefore there is a risk of oversupply and a given property type or geography that your action from the capital markets is very quick to react relative to history.

Additionally, the reason rise in construction costs as also slow the pace of new construction given compression and return on cost metrics. Finally, in regard to debt capital availability corporate America remains modestly leverage with significant cash holdings, which combined with the banking industries, ample liquidity and need for earning assets on booked makes for increased demand for low estate loans both construction and longer-term durations from the banking industry.

The CMBS market is quite sound with increasing participants in BP’s market as well as increased demand for virtually all tranches of the various rating levels. Finally, the insurance industry’s demand for mortgages both in fifth and floating rate instruments is robust and unlikely to change in the near future given the fixed income alternatives.

In summary, I’ve stated the offset HFF believes there is ample availability of capital in both the debt and equity markets to sustain a reasonable foundation for real estate transaction volumes and perhaps there is more, perhaps more importantly is confronting by the transparency of discussions regarding obvious potential risk and the [indiscernible] underwriting assignment.

However, as is our custom HFF is always mindful to both domestic and global macroeconomic events, which could dramatically and negatively impact both the volume and pricing levels of real estate. Commercial real estate in effect houses the U.S. economy and therefore itself is directly correlated U.S. economic health primarily defined as U.S. job growth.

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

Question-and-Answer Session

Operator

All right. (Operator Instructions) And it looks like your first question comes from the line of Mitch Germain from JMP Securities. Please proceed.

Unidentified Analyst

Hey, Mark its Peter on for Mitch, how are you guys?

Mark Gibson

Hi, Peter.

Unidentified Analyst

Good. I think you have seen any changes in the lending standards over the last few years and give any comments on that?

Mark Gibson

Define lending standards Peter or underwriting metrics or thing or…

Unidentified Analyst

Yes, underwriting metrics.

Mark Gibson

Yes, I would say yes, we have seen changing underwriting metrics in terms of debt yields and various other metrics I wondered it is typically used. However, I would state that we remain very comfortable with the discipline that remains in the market both from a construction lending perspective as well as a long-term mortgage lending perspective relative to past cycles in the industry.

So, why they have changed, we think it was necessary to change because they were considerably two respective. And we think now we’re in a balanced market from HFF perspective.

Unidentified Analyst

Got it. And what other markets you guys targeting for new offices?

Gregory R. Conley

Peter, it’s a great question we look at markets the following metrics, we look at levels of commercial real estate inventory, we look at the employment basis from a diversification standpoint like SIC code. We look at the population of that market and the long-term trends of both the employment. So, we look at corporate inflows and outflows into a given reason. And finally, we look at the velocity of trades in those markets relative to comparable size markets. So for instance if market is outpacing comparable size MSA from a liquidity perspective it grabs our attention.

So, we’re focused on two and perhaps three additional markets and of course as you know from prior calls, Peter, it is totally dependent upon as finding the right person, which is quite an effort. So, while we have identified the markets and we would like to have a presence there given our analysis are same that really is depended upon finding the right personal for HFF to do so.

Unidentified Analyst

Right, Greg, thanks guys. I think Mitch has one more.

Mitch Germain – JMP Securities

Hi, guys, how are you. Mark, I’m curious you guys referenced $1.4 billion of debt that‘s expiring over the next couple of years how elevated it is? I’m curious in your mind is there in equity funding GAAP that’s required given kind of where the LTVs are in some of those loans?

Mark D. Gibson

It’s a great question Mitch and thanks for bring it up just a slight correction $1.4 trillion versus billion, but I would say.

Mitch Germain – JMP Securities

I’m sorry for that.

Mark D. Gibson

That’s okay we all knew what it was. I would say no and we have been very consistent on that number one, peak roller or peak maturities actually happened a couple of year to go we have extensions that have continue to push some of these out and that was a matter of that was very significant and prevalent in the real estate industry two or three years ago in raising capital. Particularly equity capital that there would be the significant flood of distrust assets of a result of funding gap existing from a maturities standpoint.

We didn’t take it was the case then and we don’t think it is the case now, number one, due to the liquidity available to the commercial real estate market and we think correctly. So and number two, if one really gets into the banking sector and goes through the various market-to-market requirements contained in same. We don’t see gaps in terms of where our current LTVs might be versus how an equity investor or debt investor will currently underwrite it. So the answer is – and the continue on commentary on that is therefore we don’t see one point for maturing loans affecting price just like it hasn’t in the last two to three years.

Operator

All right. And our next question comes from the line of Ken McCArthy from William Blair. Please proceed.

Ken McCarthy – William Blair & Co.

Good afternoon guys, thanks for taking my question. Craig maybe for you to start it off. I appreciate the detail on the negative impact from the GSE securitization on the other income line for you guys and I understand the lag effect those appears going a little bit more detail on more specifically the timing with that lag in other words, the hair cut that the GSEs were mandated on last year. How does that impact the income that you guys receive on those loans being sold into the back half of this year like when can that become more of a normalized looking at the year-over-year comparisons.

Gregory R. Conley

Well first off let me just stated, as you know, relative to this lag effect. Once we sell of that loan to Freddie Mac, the timing of when it gets securitized which then results in the timing of when we record that income is totally out of our control. So it’s something that occurs and we reported when it occurs, but we can't give you specifics to how that lag effect will fallout. However, what I could tell you is, as you know, we started seeing a decrease in loan originations throughout 2013 and we saw that in the first half of 2013 and second half.

However, we continued to see an increase and our securitization compensation in the first half of 2013, because of everything we had done in originations at the second half of 2012. We had a record year with Freddie Mac in 2012. So that impact we started seeing as far as it relates to our income statement when the decrease occurred in 2013 we started seeing that effect in the second half of 2013. So as I mentioned earlier, in 2013 of a total of $9.7 million reported for a securitization related income and that other income line $6.7 million was recorded in the first half of the year meaning there is only $3 million recorded in the second half of the year.

And if you look back in our – what we reported in Q3 and Q4 last year you started to seeing that decrease. So having said that as you know the GSE’s continue to hopefully have originations or lending at the same levels this year as I do last year. We are obviously hopeful and continuing to see some improvement with Freddie Mac this year. However, in the first half of this year as you know, we reported a decrease relative to the first half of last year of $3.2 million. So going forward and the comparison in the second half of 2014 related to the second half of 2013 is going to be a lot less of our hurdle then it was in the first half of the year. What happens going forward is all of dictated based upon what we end up doing relative to originations with Freddie Mac.

Ken McCarthy – William Blair & Co.

Sure, okay. That’s helpful. So that will be less bad going forward I guess the best to put it. And then another one for you.

Gregory R. Conley

Thank you.

Ken McCarthy – William Blair & Co.

Another one for you Greg, in the operating and administrative and other expense line where there any one time expenses that showed up this quarter and then I guess near-term do you expect any kind of one time as stuff on the heels of the opening up of the Charlotte office then kind of the New York broker platform that you guys brought on recently.

Gregory R. Conley

We don’t have any one time type stuff in there. As you know when we bring on the brokers they typically get assimilated into an exiting office with Charlotte I mean there will obviously be taking on expenses going forward of opening a new office but it will be baked into the numbers going forward as we report us. The only thing I will say in the operating and administrative and other expenses is this stock based compensation expense item that I highlighted.

And I highlighted because it’s we do adjusted EBITDA for that amount because it’s non-cash and as you know there was a significant amount of unevenness in the past years relative to that number. Because we did have an equity award back in 2010, that was the liability based award requiring us to mark those awards to market each quarter and as you know we’re fluctuating stock prices that causes that expense number to fluctuate quarter-to-quarter. So when you look at this year in 2014, the first quarter of this year still had a impact relative to that liability-based awards that we mark-to-market. Going forward those are fully invested as of March 1. So going forward, we will no longer have those awards that we have to mark-to-market. So you’ll see a little more of a smoothing effect relative to stock-based compensation going forward.

Ken McCarthy – William Blair & Co.

Got it, okay thanks Greg. Then final one from me maybe this is for your Mark. Circling back to kind of the $1.4 trillion debt that’s out there a really attractive market, but I guess looking kind of our TTM basis or at least the last couple of quarters it’s maybe came in little bit lighter than some have been originally thinking. So yes, maybe if you could kind of reconcile that versus the $1.4 trillion market that you see out there? Thanks.

Mark D. Gibson

Can you give me – repeat the question I’m not sure I have…

Ken McCarthy – William Blair & Co.

Yes, I mean just relative to kind of what we’ve been expecting through the last couple of quarter or at least from the last year basis, I think that debt placement on the production side has come in little bit later than what we would have thought especially relative to that’s still attractive multiyear $1.4 trillion run rate for debt that needs to be work through. So, I just hoping if you could kind of reconcile the difference there, if we’re completely half basis and kind of the debt how is it still going as planned in your book?

Mark D. Gibson

Okay, well the MBA released our second quarter numbers getting into your point collectively it’s down roughly 1%.

Ken McCarthy – William Blair & Co.

Okay.

Mark D. Gibson

The easiest answer here if you look at our published numbers you can see volume a little up when you compared to six months over six months, but notably transactional volume is significantly up or the number transactions I should say correct.

Ken McCarthy – William Blair & Co.

Yes.

Mark D. Gibson

So, I would not the easiest way to say this without giving guidance, which we don’t. The easiest way to say this would be – I wouldn’t look at this as a quarter-by-quarter basis. Because I don’t see any change from a trend line in terms of availability of debt through the market pretty robustly from all providers across the sector. And if you look at the transactional volume as reported by RCA in the various other metrics either AUM and the funds or other components, I just wouldn’t read its difficult to asses on a quarter-by-quarter basis is the way I will stated.

Ken McCarthy – William Blair & Co.

Sure, okay. Thanks guys.

Operator

Ladies and gentlemen this will conclude the question-and-answer portion of today’s conference. Now I like to turn the call over Mark Gibson for closing remarks.

Mark D. Gibson

Thank you, operator. Everyone, we appreciate you joining us today and hope that you can join us again for our third quarter 2014 call. Thank you very much.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you all for your participation. And you may all now disconnect. Have a wonderful day.

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