HFF's (HF) CEO Mark Gibson on Q4 2015 Results - Earnings Call Transcript

| About: HFF, Inc. (HF)

HFF, Inc. (NYSE:HF)

Q4 2015 Earnings Conference Call

February 23, 2016 6:00 p.m. ET

Executives

Myra Moren - Director of IR

Mark Gibson - CEO

Greg Conley - CFO

Analysts

Mitch Germain - JMP Securities

Brandon Dobell - William Blair

Brad Burke - Goldman Sachs

Operator

Good evening and welcome to HFF, Incorporated's Fourth Quarter 2015 Conference Call.

[Operator Instructions] As a reminder, this conference call is being recorded.

I would like to turn the call over to your host, Ms. Myra Moren, HFF's Director of Investor Relations. Ms. Moren, please go ahead.

Myra Moren

Welcome to the HFF, Inc.'s earnings conference call to review the Company's operating performance and production results for the fourth quarter of 2015.

Earlier today we issued a press release announcing financial results for the quarter. 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 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 obligations to update or revise any of the forward-looking statements you may hear today. For a more detailed discussion of risks and other factors that could cause results to differ, please refer to our fourth quarter 2015 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 at their website at sec.gov.

We may make certain statements during today's call which we'll refer to a non-GAAP financial measure. And we have provided a reconciliation of these measures to get figures. You can find that in our earnings release.

With that in mind, I will introduce our senior management team. Conducting the call today will be Mark Gibson, HFF's Chief Executive Officer, and Greg Conley, HFF's Chief Financial Officer. I'll now turn the call over to our CEO, Mr. Mark Gibson.

Mark Gibson

Good evening everyone and welcome to HFF's fourth quarter 2015 earnings conference call.

Overall we are pleased with the firm's performance in the fourth quarter of 2015 and the full year. Based on our results, which Greg Conley will review in detail, we believe the commercial real estate industry continues to embrace the Company's capital markets centric business model, its team-oriented approach in executing capital markets transactions, and its unwavering adherence to its core cultural guiding principles.

Revenues in the fourth quarter 2015 grew approximately 18.6% year over year and 17.9% for the year ended December 2015. We continue to invest heavily in our business, evidenced in part by the 12.3% increase in total headcount over the past 12 months, which is consistent with our long-term strategic plan. As noted on previous earnings calls, our headcount growth is a result of both our organic and external recruiting efforts. The firm will balance these two approaches based on the strategic needs and the operating environment. Given the current operating environment, HFF has focused significant resources on organic growth by substantially increasing our collegiate recruiting efforts to build our pool of commercial real estate capital markets analysts.

At present we believe this approach is a better risk-adjusted strategy from both a sustained growth and a cultural perspective, yet does not prevent us from pursuing strategic hires of seasoned transaction professionals. The increase in headcount of 89 net new associates during the past 12 months represents HFF's largest overall hiring increase in a calendar year in the firm's history and includes a substantial increase on our analyst ranks throughout the organization.

HFF and the industry's performance in the fourth quarter, as measured by transaction volumes, experienced healthy increases relative to the third quarter 2015 when general economic uncertainty relating to global growth and widening credit spreads stemming from the corporate bond market increased the cost of debt capital across several asset classes. Given the fourth quarter transaction volume statistics illustrated on Slide 15, the private investor market for U.S. real estate in general appears to have concluded these factors were not suggestive of a significant decline in U.S. economy relative to the purchase of U.S. real estate assets.

However, given the volatility in both the public equity and debt markets in 2016 to date, the question of a significant U.S. economic slowdown has once again emerged. Multiple compression and risk premium expansion being experienced in both the public equity and fixed income markets are signaling a deceleration of the U.S. economy. In contrast, the private commercial real estate market, defined as investors active in non-public commercial real estate assets, have not reacted to the same degree in either the private equity or debt markets.

While the private institutional investment community for commercial real estate is obviously quite aware of public market volatility, very few investors are forecasting the U.S. recession or precipitous decline in U.S. economic activity. Therefore, it would appear the correct pricing of commercial real estate in either of the public or the private market will largely be determined based on the industry fundamentals defined as net operating income or FFO performance over subsequent quarters, which of course will be directly correlated to U.S. economic activity.

Given the aforementioned volatility, we believe it is important to reiterate a few key themes from previous earnings calls relative to the HFF business model.

First, HFF is not in the real estate business but rather the real estate transaction business. HFF does not invest, lend or provide any services other than those of a capital markets intermediary. Therefore, the firm is not directly impacted by price movements of commercial real estate assets relative to investment gains or losses from a HFF sponsored investment fund given its lack of participation in same.

Additionally, some volatility above the norm in U.S. capital markets has generally been beneficial to the firm given HFF's role as a real estate transaction intermediary, because it can result in increased demand for our capital markets knowledge, the advisory services, and execution capabilities. However, it is also important to note that a period of sustained outsized volatility in the U.S. capital markets could result in the development of a divergence in bid and ask prices which could adversely affect U.S. investment sales transaction volumes. In the event a bid/ask gap develops in the investment sales business, a viable alternative for owners will be refinancing in the private debt markets.

Second, HFF has virtually no corporate debt, a relatively low fixed cost structure and minimal working capital needs, allowing the firm significant flexibility in terms of adjusting to any market environment and to take full advantage of potential growth opportunities.

Third, the firm is highly diversified relative to its client base. In 2015, no one client accounted for more than 2.3% of revenue and our top 10 clients combined represented 11.9% of revenue.

As stated on previous earnings call, the commercial real estate industry as an asset class remains in favor [ph] with investors. Additionally, the composition of ownership is becoming increasingly institution, which we believe will positive impact transactional volumes in the future, subject to the health of the U.S. economy.

This is best illustrated by the following points. Effective in the third quarter of 2016, commercial real estate will be recategorized from the broader financial sector and become a standalone category as the 11th global industry classification standard trading vertical, the first distinct trading vertical created since 199. HF believes the emergence of commercial real estate as a core investment holding ensures the industry will continue to benefit from consistent annual allocations of capital and that investing in the asset class is necessary in order to attain a diversified investment portfolio.

Domestic institutional investors who are active in the private commercial real estate market have in the past been consistently under-invested in commercial real estate. As shown on Slide 17, actual investment in the asset class is approximately 100 basis points below target as a percentage of AUM. However, devaluation of the public equity market persists without a corresponding price adjustment in the private commercial real estate market. Allocation models within institutional investors may require rebalancing which could temporarily reduce fund flows in the commercial real estate. In the event rebalancing occurs in scale, the probability of a bid/ask gap forming would be increased.

As evidence of our previous statements and as illustrated on Slide 18, the institutional investor participation in the private commercial real estate market continued a multiyear increase in 2015. Capital managed by institutional investors in real estate, measured by assets held within closed-end and open-ended funds, has increased 77% and 61%, respectively, since 2007, suggesting both increased demand for the asset class and a larger denominator of assets, which should be a positive relative to future transactional volume.

An important source of capital for the U.S. commercial real estate industry is the participation of the retail investor. Given changes currently being implemented by government regulators at this industry, a significant number of no-load or low-load real estate investment funds from private best-in-class real estate operators and investment management firms are emerging or are already investing. HFF believes there is considerable demand from the traditional retail investor universe as few retail investors have exposure to commercial real estate as an asset class.

Given the political and social unrest in many parts of the globe, along with concerns of a global economic slowdown, the flow of foreign capital in the U.S. commercial real estate market has increased, as shown on Slide 20. As reported by RCA, foreign investment in the domestic commercial estate assets totaled approximately $87.9 billion in 2015, more than doubling the 2014 full year total and exceeding the previous record set in 2007 by $40.9 billion.

These statistics were recorded prior to recent and accommodated reforms to FIRPTA, which could be a net positive relative to investing in U.S. commercial real estate by non-U.S. investors. In our opinion, these trends are long-term positives for the U.S. commercial real estate industry and could help to partially offset the impact that the volatility currently being experienced in the public U.S. capital markets.

As reported by RCA and previously mentioned, transaction volumes during the fourth quarter of 2015 totaled $156.9 billion, an increase of 19.5% over 2014 and $533.6 billion during the year ended 2015, a 23.4% increase over 2014, as illustrated on Slide 15. The aforementioned increases in AUM for both the closed-end and open-ended fund markets suggest the market has the potential to sustain current transaction levels absent the significant deceleration in U.S. economic activity.

Of particular note is the transaction volume likely to emerge from the closed-end fund market. As illustrated on Slide 21, the average hold period for 64% of the participants in the closed-end fund market is less than five years in duration. Due to the value-add investment objectives, the underlying compensation structure of these funds have the need to post realized returns for future fundraisers.

Finally, as shown on Slide 23, the $1.06 trillion of maturing commercial real estate loans through 2018 should serve as a catalyst for investment sales or refinancing transactions.

In regard to HFF, our investment sale transaction volumes for the fourth quarter and full year 2015 totaled $12.8 billion, an increase of 33.9% over the same time period in 2014, and $34.1 billion, an increase of 17.5% over the same period in 2014, respectively. When adjusting for two large investment sale transactions, one each closing in 2014 and 2015, the 2015 investment sales growth rate is adjusted to 15.3%. As illustrated on Slide 24, HFF's investment sale transaction volume for the full year 2015 increased 99% from 2007 as compared to a decrease of 7% for the industry.

Turning to our debt business line, volumes for the fourth quarter in year ended 2015 totaled $11.4 billion, a decrease of 6.1% over the same time period in 2014 and $38.2 billion, an increase of 18.8% over the same time period in 2014, respectively. As illustrated in Slide 25, HFF debt placement volume for the full year 2015 increased 63% from 2007 as compared to a decrease of 3% for the industry.

In summary, we believe there's ample availability of capital in both debt and equity markets to sustain current real estate transaction volumes absent a precipitous decline in U.S. economic activity. Commercial real estate in effect houses the U.S. economy and therefore its health is directly correlated to U.S. job growth.

With that, let me turn the call over to Greg.

Greg Conley

Thank you, Mark. The information I will discuss today is also set forth on slides 31 through 42.

Beginning on Slide 31, during the fourth quarter, our revenue was up 18.6% year over year to a record $169 million. Total transaction volumes grew 11.8%, led by an increase in investment sales transaction volumes of 33.9% year over year. We continue to produce strong operating margins, demonstrate our ability to generate cash from operations, and maintain healthy levels of cash. In addition, we continue to maintain a highly diversified and fully integrated capital market services platform as it relates to both consumers and providers of capital.

Turning to Slide 32 and 33, revenue for the full year 2015 was $502 million, which represents a year-over-year increase of 17.9% or $76.1 million. The revenue growth for the year was driven by a 17.3% increase in transaction volumes, with debt volume up 18.8% and investment sales volume up 17.5% year over year.

Operating income was $47 million in the fourth quarter of 2015, compared to $37.2 million in the same period last year. For the full year of 2015, operating income increased 27.1% to $107.8 million. Increase in operating income for the full year was primarily attributable to the growth in revenues partially offset by increases in compensation-related and other operating expenses. The operating income for the full year of 2015 benefited from reductions of $2.1 million and non-cash stock compensation expense and contractual performance based incentives for recruited transaction professionals.

Operating margin for the fourth quarter of 2015 was 27.8%, compared to the operating margin of 26.1% for the fourth quarter of 2014. The margin expansion was primarily due to the increased revenues, partially offset by increases in compensation related costs and other operating expenses. Operating margin for the full year of 2015 expanded by 160 basis points to 21.5% as compared to 19.9% for the same period in 2014, due to the growth in revenues and improved operating leverage. The improved operating leverage achieved by the Company was in part attributable to the productivity gains realized from the 82.4% increase in transaction professionals added since the beginning of 2010.

The Company's adjusted EBITDA for the fourth quarter of 2015 was $56.8 million, an increase of $13.3 million or 30.5% when compared to adjusted EBITDA in the fourth quarter of 2014. For the full year of 2015, adjusted EBITDA of $141.3 million grew by $31.2 million or 28.3% year over year. The increase in adjusted EBITDA for the quarter and the full year was driven by the growth in operating income as well as an increase in securitization and other agency-related income.

Adjusted EBITDA margins for the fourth quarter expanded 300 basis points to 33.6% year over year, while the adjusted EBITDA margins for the full year ended December 31, 2015 increased by approximately 220 basis points to 28.1%.

Cost of services as a percentage of revenue was 55.9% for the full year of 2015, compared to 56.9% in the same period of 2014. This 100-basis-point improvement is primarily attributable to the fixed cost component being spread over the higher revenue base and is evidence that our cost increases relative to growth in personnel is commensurate with our revenue increases.

Operating, administrative and other expenses were up approximately $13.5 million or 14.8% in the full year of 2015 when compared to the same period in 2014. This increase was primarily due to additional compensation related expenses and other operating expenses due to higher transactional activity and the growth in headcount. This is offset by the $2.1 million reduction in non-cash stock compensation expense and the contractual performance based incentives for recruited transaction professionals.

Also as shown on Slide 32 and 33, interest and other income increased $1.4 million in the fourth quarter, which is primarily related to an increase of approximately $2.3 million in securitization and other agency related income, offset by a decrease in the valuation of mortgage servicing rights of approximately $900,000.

For the full year of 2015, interest and other income increased $14.1 million due to an increase of $6 million from the valuation of mortgage servicing rights and an increase of approximately $8.1 million, primarily related to the securitization and other agency-related income.

We have seen significant improvement in our Freddie Mac originations beginning in the second half of 2014 and continuing through the fourth quarter of 2015. The Company's Freddie Mac originations for the full year of 2015 were approximately $4.8 billion, which is an increase of $2.8 billion or approximately 140% above the originations in the same period in 2014.

The Company's effective tax rate for the full year of 2015 was approximately 41%. Earnings per share on a fully diluted basis increased 23.9% from $0.71 to $0.88 for the fourth quarter of 2015, and increased 35.4% from $1.61 to $2.18 for the full year of 2015.

Slide 35 through 37 related to the balance sheet and liquidity. Our cash balance net of client advances at December 31, 2015 was $225.1 million, compared to $206.7 million at December 31, 2014. For the full year of 2015, the Company generated $94.3 million in cash from operating activities, excluding a $16.6 million decrease in client advances. The Company's use of cash is typically related to the limited working capital needs during the year and the payment of taxes.

The Company has virtually no corporate level debt to service other than that related to our Freddie Mac business, which is offset with the mortgage notes receivable. As shown on Slide 36, our balance sheet as of December 31, 2015 included $318.6 million of outstanding borrowings on 22 loans under our warehouse credit facilities to support our Freddie Mac multi-family business, and we also had a corresponding asset recorded for the related mortgage notes receivable. To date, all of these loans have been purchased by Freddie Mac.

Subsequent to the yearend, on February 19, the Company paid a special cash dividend of $1.80 per share. The aggregate dividend payment totaled $68.4 million, and since December 2012, the Company has returned capital to our shareholders in the form of four special cash dividends totaling $260.7 million.

I would like to make a few comments regarding our production volume and operational measurements, which can be found on slides 38 to 41. As noted on Slide 38 to 39, on a year-over-year basis, our production volume grew 11.8% or approximately $2.7 billion for the fourth quarter of 2015, and increased 17.3% or $11.2 billion for the full year of 2015. The Company's loan servicing portfolio grew by $9.3 billion or 27.3% when compared to the portfolio size at the end of 2014.

Slide 40 provides the historical summary of our headcount and also shows the fourth quarter comparisons at the same period in 2014. Total headcount and transaction professionals as of December 31, 2015 were up 12.3% and 4.7%, respectively, year over year.

Slide 41 provides a summary of select production and operational measures. The revenue per transaction professional is up approximately 10.5% for the full year of 2015 to $1.743 million from $1.577 million for the same period in 2014, which highlights our productivity gains.

In summary, we are very pleased with the Company's operating and financial performance for the fourth quarter and full year of 2015 as we have achieved improved operating margins while continuing to make strategic investments in our business consistent with our growth strategy. We continue to be very disciplined, efficient and strategic as it relates to the management of our expenses. 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 expand and we continue to experience revenue growth consistent with the investments made in our business. We remain diligent in our efforts to monitor operating expenses and continue to maintain a relatively low fixed cost structure as approximately 66% of our operating expenses are variable.

I would now like to turn the call back over to Mark. Mark?

Mark Gibson

Thank you, Greg. As we look into 2016, we think it's important to convey the firm's strategic plan remains unchanged from previous years in terms of continuing to build out the Company's platform to ensure the HFF offices domiciled in major markets in the U.S. have a full complement of our existing business lines and property vertical specialties.

Further, our future growth will continue to be premised on our core guiding principles which we believe significantly differentiate HFF in the real estate industry. These core guiding principles are briefly described as follows.

First is our client-centric business model which avoids business lines or product services that directly compete with the business interests of our clients, such as investment management, landlord and tenant representation, and/or property asset management practices. Our transaction professionals appreciate this lack of conflict of interest with their clientele. Additionally, the firm's sole focus on the capital markets business eliminates any internal competition with other business lines for resources to both conduct and grow their business.

Second is our player-coach leadership style whereby the firm's leadership and mentors are transaction professionals through being engaged in generating revenue for the firm by actively originating and executing real estate transactions. Our transaction professionals prefer to be led, mentored through transactional deal flow versus managed in a corporate context.

Third is our pay-for-performance compensation structure, which aligns the interests of HFF's leadership with the performance of the firm through our proper participation at omnibus compensation plans. To further illustrate this point, as you know from our previous filings, effective January 1, 2015, we amended our office and firm profit participation plans, as well as the executive bonus plan, to allocate a higher percentage of the annual awards through equity, which will vest over a subsequent three-year period.

Fourth is maintaining an owner mentality versus an employee mentality, which is illustrated by the fact that HFF employees own approximately 13% of the outstanding Class A common shares of HFF. Highlighting the importance of our adherence to an owner mentality is the firm's granting of 750,000 shares in January of 2014 and an additional 250,000 shares in February 2015 and February 2016 to our leadership team and transaction professionals based on value-add metrics which vest over five years.

Our fifth guiding principle is risk mitigation. The Company has virtually no corporate level debt to service, and we'll continue to maintain significant cash balances to fund our working capital needs, our future growth, and to mitigate downside risks as occurred in 2008 and 2009. Once we have met these needs and have sufficient capital reserve to not only survive but thrive in a down market, the Company, led by the Board of Directors, always looks at all options regarding the highest and best use of its capital. Over the recent past this has been illustrated by returning capital to shareholders on four previous occasions, in 2012, 2014, 2015, and recently in February 2016 in the form of special dividends totaling $260.7 million or $6.95 per share.

The sixth guiding principle is the maintenance of our partnership mentality whereby the governing body of HFF, its executive committee, is elected by the firm's leadership team, which is comprised of 57 individuals who run the firm's 22 offices, its business lines and its property-type verticals. This approach to governance reinforces our team partnership culture and significantly differentiates the firm from the industry at large.

Finally, our seventh core guiding principle is the maintenance of the firm's value-add philosophy which permeates every aspect of the HFF culture. All leadership positions, compensation awards and executive appointments are based on long-held value-add principles which were developed internally and are communicated to all employees.

HFF's ability to differentiate and build out its platform and consolidating industry, as well as to continue expansion into the real estate industry at large remains a primary focus of management. We believe these guiding principles allow the firm to recruit and retain best-in-class industry professionals.

Evidencing [ph] this statement and as illustrated on Slide 40, since the beginning of 2010, the Company has increased its headcount by 434, representing a 115.4% increase, and we have grown our total transaction professionals by 131, representing an increase of 82.4%. We have accomplished this profitably and at a sustainable, measured pace. HFF remains committed to protecting its culture via an unwavering adherence to its deliberative hiring practices.

Operator, I'd like to now turn the call over to questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Your first question comes from the line of Mr. Mitch Germain of JMP Securities. Please proceed.

Mitch Germain - JMP Securities

Good evening and congrats on the quarter.

Mark Gibson

Thanks, Mitch.

Mitch Germain - JMP Securities

Curious, your thoughts, Mark, CMBS market. Obviously pricing up materially year to date, we've got $110 billion of debt maturing. I mean, what is your outlook there in terms of the ability for that debt to find a home within that market or liquidity to return within that market?

Mark Gibson

Are you specifically referring to CMBS, Mitch?

Mitch Germain - JMP Securities

Yes, please.

Mark Gibson

Okay. Well, as you know, the CMBS market, given increased regulations and various other measurements of risk retention, et cetera, they are worked through those points and it is being affected by, in general, corporate bond spreads across every asset class. So it's really more of a question I think in the fixed income business in general versus just specifically looking at real estate or CMBS.

However, addressing your question relative to the maturation of loans over the next three years, as we referenced in our script, I think it is important to note for everyone to realize that the liquidity in terms of deposit base for the U.S. banks is significant. And if you look specifically to the insurance company industry, you would find that the vast majority of insurance companies across the U.S. are looking to measurably increase mortgage production throughout 2016.

So in terms of the availability of debt capital, when you look at the banks, when you look at the insurance companies, when you look at the agencies, of course with Fannie and Freddie, there seems to be ample liquidity available to handle the debt needs of the market in 2016. CMBS on a relative basis to where it was many years ago, in 2006 and 2007, is quite moderated. So I think there's ample liquidity to handle what we see coming from other sources than just CMBS. And I would state, while CMBS is a very important funding source for the commercial real estate industry, in many situations and as a necessary ingredient, we think, to a healthy market, I think it will find its pricing through the year in 2016 and will still be a viable source of capital.

Mitch Germain - JMP Securities

Great. And I know last quarter you were -- you had suggested advising some of your clients just to kind of slow things down a bit in the face of some market volatility. Curious about what type of discussions you're having with some of your customers today.

Mark Gibson

Well, so, Mitch, referencing our commentary in the third quarter when we saw debt spreads widening significantly in August, September, our advice was really to determine whether this is a long-term trend or a short-term phenomenon. As you're aware, the spreads came in fairly measurably throughout October, November, sort of widening again in December.

So at this moment, I think the market in general, and we don't have a crystal ball going forward, is doing exactly that again it is trying to determine pricing and if this a trend line that's going to happen or is this as it was in August, September, a moment of expansion that is going to see some contraction in the future relative to risk premiums, in a more moderate pace going forward.

I think the market would be in that price discovery phase, would be the way I would describe it, Mitch.

Mitch Germain - JMP Securities

Okay, that's very helpful. I appreciate that commentary.

And then the buyer pool, is it just as robust and strong, you know, as we saw maybe beginning of 2015, or has this thinned out a bit?

Mark Gibson

I think the interest level in commercial real estate remains very high. And we have a question of price. And as we mentioned in our script, I think the market in general is trying to figure out a balance between what the public market is suggesting, what the private market is suggesting, Mitch. But in terms of the view of real estate as an asset class and a needed diversifier for a well-balanced portfolio, that has not changed.

Mitch Germain - JMP Securities

Great. Well, fantastic quarter, year, and I love the momentum you guys got so far this year. So, thanks a lot.

Operator

Thank you for your question. Your next question comes from the line of Mr. Brandon Dobell of William Blair. Please proceed.

Brandon Dobell - William Blair

Thanks. Evening, gentlemen.

Greg Conley

Hey, Brandon.

Mark Gibson

Hey, Brandon.

Brandon Dobell - William Blair

A couple of I guess internal focused questions. First, any sense of how many analysts you guys have now as opposed to a year ago, or maybe how we should think about that pool of people growing in 2016?

Mark Gibson

Yeah. Brandon, it's a great question. We don't disclose that publicly. But as we stated in our script, we are very focused on significantly increasing organic hires, primarily due to the fact that we've reached certain scale and we believe that, where the market is today and we believe from a cultural perspective and our growth needs to build out our platform, it is a better risk-adjusted return to the firm at this point to really focus a tremendous amount of our resources and our efforts on the organic recruiting and training.

Brandon Dobell - William Blair

Okay. And to take that one step further, as you look at -- we see the headcount metric that you guys post every quarter in the slide deck, I'm presuming that the people you're hiring out of colleges in the analyst programs are going to show up as non-producer headcount, which would kind of explain why that line has grown or that pool has grown notably faster than the producer headcount the past couple of quarters?

Mark Gibson

That would be accurate.

Brandon Dobell - William Blair

Okay. And then shifting about the other -- I guess if they want to divide the people into three buckets, right, you've got the analysts, you've got the producers, and then there's, let's call it, the other, I know there's not a whole lot of corporate headquarter personnel growth, but how do we think about, I guess, other support, administrative professionals, you know, how has that trended, or really just the headcount growth being [inaudible] by the analyst pool only.

Mark Gibson

You know, Brandon, it's a great question. We just don't disclose the detail of that.

But I think what you should focus on is really total headcount growth. And just in the way that we are structured, because you mentioned I guess what you would call corporate growth, I think, the majority of what we're doing from a headcount perspective is production related, as you would expect in a real estate transaction business.

Brandon Dobell - William Blair

Yeah. Okay. And then let me take Mitch's question in a bit of a different direction. It sounds like the price discovery is the right way to think about the near-term dynamics in the market. Is there a point at which you start to worry about spreads impacting other buyer behavior or seller willingness? And maybe you could take that into one more direction too. Do you think spreads have a disproportionate impact on international capital versus domestic capital?

Mark Gibson

Are you talking about spreads in debt?

Brandon Dobell - William Blair

Correct, yeah. Just going back to referencing, I guess it's Slide 26 or 27, you know, using that as a proxy for, I guess, a little bit of risk, review on risk, you know, spreads start to get really wide, they pull out quickly, I would imagine that slows things down pretty measurably.

Mark Gibson

I see where you're coming from, Brandon. Let me say this. And we have stated this on previous earnings calls.

Relative to, we'll call it 2005, 2006, 2007, or whatever you want to compare the timeframe to, this market as you see from the slide on 26 is quite different in every metric that you or any other analyst could offer in a comparative look. And so when we look at debt relative to where we are today versus where we were then, we are significantly lower-levered, and the underwriting metrics being utilized by every lender across the space has been measured in our view.

I would say the same thing for the equity investors across the board as well. There is no more naivety in the marketplace, it is a fully informed market, people fully understand the risk. And therefore, people have, generally speaking, said, fine, I'm fine with these underwriting metrics, I'll accept lower returns.

On that point, while levered returns are important for certain segments of the market, people are mostly driven by unlevered returns. So when you're looking at unlevered IRRs in the private market, people had been very focused on that much more so than they have in the past. And as you will note, across the board, leveraged levels are quite lower.

Now it will impact certain segments of buyers and maybe opportunistic buy side and others, but for the vast majority of the market, the unlevered metric is really important, particularly in the foreign or overseas investors front. I don't know if that answers where you're coming from.

Brandon Dobell - William Blair

Yes. Yeah, it's helpful. Okay. And maybe it's a point of -- maybe it's semantics or I'm not sure what, but during your prepared remarks, Mark, you mentioned sustaining the level of transaction activity as opposed to the market growing. And maybe I'm reading too much into your comments, but I just want to make sure I understand how you think about kind of total transaction dollar volume looking out 2016, 2017 as opposed to where it's been 2014, 2015, and is that, you know, sustaining really is just kind of keeping at this high level or if you think there's a continuation of growth in the amount of capital being allocated here?

Mark Gibson

Well, I think the facts are out there, Brandon, without an opinion. If you just look at the denominator of institutional assets in our commentary regarding closed-end and open-ended funds, you have a much larger denominator of assets in the business versus 2007. And we've given you those barely significant percentage increases, particularly relative to transactional volumes.

So the math, forget opinions, would tend to suggest that there is ample inventory, let's say, institutionally to sustain a healthy market.

Now, clearly, there are all kinds of variables that could affect that. And most of them would be near-term or short-term oriented, but if we have, as we stated in our script, a precipitous economic decline and a bid/ask gap would develop as a result, then that could be a headwind for transactional volumes until that is corrected.

So you do have these risks that are out there, but I think if you take a step back and look at the data, in terms of real estate as an asset class, as a percentage of the largest owners of capitals portfolios across the world, not just domestic but across the world, there's much more -- there are many more assets in the denominator today than there were -- we'll go back to the, again, 2005, 2006, 2007 timeframes.

Brandon Dobell - William Blair

Right. Okay. And final one for me. Are you guys doing as a firm anything, I don't know, specific or particular or different, in advance of real estate kind of having its own title, its own home as a sector, as a classification? You know, is there -- not that [inaudible] marketing this as some big opportunity, but it is going to create, you know, question, it's going to create different capital flows, it's going to create different allocations. Should you guys do anything with your clients or potential clients in advance of this reclassification or classification happening?

Mark Gibson

No. But we are educating the market on it. And I think really for us, Brandon, it would just simply be a statement that we have, for quite some time, in many years, in the state plan, the corporate plan, in the sovereign market, that real estate has really developed into this, you know, we call it a valid but it could be just a meaningful diversifier within a well-balanced portfolio, so, a very valid asset class. And I think the public market recognizing that with its own kicks is a very good trend line in terms of what people are expecting in the future.

So I just -- I don't view it as anything that we are marketing or suggesting from a strategic standpoint, other than acknowledging that the asset class is very well-respected across both the private and the public markets.

Brandon Dobell - William Blair

Got it. Okay, appreciate it. Thanks.

Mark Gibson

Yup.

Operator

Thank you for your question. Your next question comes from the line of Mr. Brad Burke of Goldman Sachs. Please proceed.

Brad Burke - Goldman Sachs

Thank you. Good evening guys. I was hoping that you could elaborate on that decision to pay out another special dividend this year in light of what we're seeing in the public equity markets and whether you considered just maintaining the extra liquidity considering some potential volatility coming up?

Mark Gibson

Brad, I appreciate the question. So as we have stated many times on these calls, we have criteria in this regard. The first is to make certain that we have ample working capital to run the business. The second is to ensure that we have ample capital to fund our strategic plan for the coming year. And the third is to have enough capital reserved to not only survive a 2008-2009 downturn for our business, but to actually thrive and grow in it.

And once that that has been established from a reserve standpoint, we then put the decision to the Board of Directors of HFF, which considers all alternatives for cash. And again for February of 2016, looking at the broad picture, they opted to declare a special dividend.

Brad Burke - Goldman Sachs

Okay. But I guess implicit in that is, as you're looking at the business right now, you think that even post paying the special, you can survive grow, thrive in a 2008-2009 style recession?

Mark Gibson

Well, again, I would just tell you that we reserved capital. It is our unwavering adherence to those three principles that we, Brad, do feel that we have adequately reserved for those events before we would consider anything with excess cash.

Brad Burke - Goldman Sachs

Okay. I appreciate the refresher.

And then just my quarterly question on Texas, just hoping you'd give us an update on how that's holding up. Any comparison versus the U.S. average is appreciated. And then any comparison of Houston versus the remainder of Texas would be helpful as well.

Mark Gibson

Well, I would have been disappointed if you didn't bring it up. So as I have stated and we have stated over the last, I believe now, five quarters that we've been asking the question, I can once again state that our offices in Texas and our transactions in Texas are up again both in a -- for a full year perspective 2015 over 2014 across the board, both in volume and in fees.

I can also state, Brandon, to your question, that when you broaden it out to Texas, that the SIC code economic distribution of Dallas is quite different from the economic SIC distribution of Houston. And so they're really very different cities from an economic makeup perspective and, you know, I would just encourage people to take a hard look at the two, and I would throw in Austin and San Antonio as well, they're quite different.

However, on the point of Texas and Houston and specifically, I think it's a good point to highlight a comment that I made in the script, and that is one of volatility. You have seen Houston, given its energy exposure, experienced some volatility. And I mentioned in our report that some volatility in the market, given the fact that we are really a real estate transaction business, is not necessarily negative for our business and in general is somewhat positive. And I think given what I stated about volumes in our business, in answering your question about Texas, I think that's a pretty good example on a relative basis of highlighting Texas from an energy perspective and some of the volatility it may be experiencing relative to the HFF business.

Brad Burke - Goldman Sachs

I appreciate the update. And then I guess either you or Greg, just how we should think about the direction of Fannie and Freddie mortgage originations, whether there are going to be any changes that you are seeing, and exemptions in 2016, whether that potentially have a material impact to the total volume.

Greg Conley

Well, as far as, you know, what we're seeing, obviously the agencies have all identified what their tasks are going to be, very similar to last year. As far as how far they're going to with exceptions, we'll have to wait and see. I mean we're expecting things to be very similar to what they were last year. And obviously you know we had a pretty solid year with Freddie Mac last year with our origination volumes are up almost 140%.

So we're looking forward to 2016, at least from the standpoint of available capital from the agencies to be very similar. And recent MBA data is also indicating that, at least capital -- or at least debt financings on multifamily properties are going to be up slightly from last year as well.

So I think all things being equal, I think the Freddie Mac and Fannie Mae, the agency businesses are going to be at least pretty strong going into 2016 and very similar to last year. So there's really not much more to add to that.

Brad Burke - Goldman Sachs

Okay, that's helpful. And while I have you, the EBITDA margins are the highest that we've seen in quite a while, and I realize that there was strong revenue growth and some operating leverage associated with that. But is there anything else that we should chunk here in the quarter that we ought to think about that was driving such strong margin growth year over year?

Greg Conley

Well, on the quarter, the fourth quarter is always kind of a wildcard because it's, you know, represents 30 -- could represent 30% to 35% of the total revenue for the year. So, clearly when you have a lot of the fixed costs and some of the accruals you make quarterly, you know, they get -- there's a little offside [ph] impact that happens in the fourth quarter from that.

But when you look overall for the year, the biggest impactful item probably this year, in addition to the significant increase we had in revenue was what's going on in other income, and that's from the agency business, with our originations on Freddie Mac being up 140%, and has an impact on the other income line.

Now, having said that, while the other income line is up as it compares to 2014, this contribution to adjusted EBITDA is very similar to what it's been in prior years, 2013 and 2012. It was about 15% overall this year, its contribution to adjusted EBITDA. And it was anywhere from 13% to 18% back in the years 2013 and 2012.

Our downside was last year 2014, and that was from the effect, and we talked about this all throughout 2014, that was due to the fact that there was a reduction in the caps that the agencies made at the end of -- in the middle of 2013, it affected us through 2013 and through the beginning of 2014, and that has a lag effect which impacted our other income line. So that, I guess, you could consider lumpy when you compare it to last year, but as overall, as it relates to other periods where you can say it's a little bit more normal, it's in line with its contribution to adjusted EBITDA as it has been in the past.

Brad Burke - Goldman Sachs

Okay. I appreciate the color. Thank you guys.

Operator

Thank you for your question. Your next question comes from the line of Mr. Germain of JMP Securities. Please proceed.

Mitch Germain - JMP Securities

Hey, Mark. We've seen a pretty steady rise in individual transactions. If I look at kind of outlook into 2016, I mean obviously you talked about the difference in public versus private real estate. I mean, is there a view that the entity portfolio trades could see in excess of amount of growth this year?

Mark Gibson

That's an interesting question, Mitch. I would answer it this way. I think any time that you see a disconnect between public market valuations and private market valuations, in terms of public market being lower than what private market may deem to be fair market value of assets, then you tend to see an increase, as we have seen over the last several months, an increase in what I would call the, we'll call it the entity or the public to private or whatever you may assign the label to, Mitch.

So I think if that persists, I do believe that you will see it. Again, a lot of this is going to be predicated upon the strength of the U.S. economy and what we see in terms of fundamentals, which I really think is going to be the question that we are going to be focusing on in the future, because I, at least HFF's perspective is that will be the determinant in terms of settling the issue on relative price of capital and relative price of assets. So, fundamentals continue to push forward across the board in terms of FFO and NOI growth. It will begin to be a clearer picture, I think, over time, in terms of demand.

So, generally speaking, when you have this sort of division over valuation in the public and the private, you do tend to see that fairly significantly increase.

Mitch Germain - JMP Securities

Thank you.

Operator

Thank you for your question. We will now hear from Mr. Gibson for any additional and/or closing remarks.

Mark Gibson

We appreciate you joining us today and hope that you can join us again for our first quarter 2016 call. Thank you.

Operator

Ladies and gentlemen, thank you so much for your patience and your participation in today's presentation. You may now disconnect, and everyone have a great day.

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