Myra Moren – Director IR
John Pelusi – CEO
Greg Conley – CFO
Nancy Goodson – COO
Sloan Bohlen – Goldman Sachs
Good day ladies and gentlemen and welcome to the fourth quarter 2007 HFF, Incorporated earnings conference call. (Operator instructions). I would now like to turn the presentation over to your host for today’s call, Miss Myra Moren, Director of Investor Relations, please proceed.
Thank you and welcome to the HFF Inc’s earnings conference to review the companies fourth quarter and full year 2007 results. Last night we issued a press release announcing our financial results for the fourth quarter and full year 2007. This release is available on our investor relations website at www.HFFLP.com. This conference call is being webcast live and is being recorded. An archive of the webcast and a transcript of the call will be available on our website; also available on our website is a related presentation which you may use to follow along with our prepared remarks. A PDF of the presentation has been made available on our website.
Before we start let met offer the cautionary notice that this call contains forward looking statements within in the meaning of the federal securities laws. Statements about our release 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 statements. For more detailed discussion of these risks and other factors that could cause results to differ, please refer to our fourth quarter and full year 2007 earnings release dated March 10, 2007 and filed on form 8K and our most recent annual report on form 10k, all of which are filed with the securities and exchange commission and available at the SEC website at www.sec.gov.
Investors, potential investors and other readers are urged to consider these factors carefully in evaluating the forward looking statement and are cautioned not to place undo 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 will refer to certain non GAAP financial measures and we have provided reconciliations of these measures to GAAP figures in our earnings release which is available on our website. With that in mind, I will introduce our senior management team. Conducting the call today will be John Pelusi, Chief Executive Officer, Greg Conley, Chief Financial Officer, and Nancy Goodson, Chief Operating Officer.
Please be advised that during the later portion of this call, we will be referring to the related presentation materials which were made available on our website prior to this call. I will now turn the call over to our CEO, John Pelusi.
Thank you Myra and good morning everyone. We have a very full agenda for today’s call, especially in light of the continued global and domestic re-pricing of debt and equity risk, the credit and liquidity issues in the global and domestic capital markets including the commercial real estate debt capital markets as well as the lack of investor confidence and fear in the fixed debt markets. This call will likely be longer than we would like however, during these challenging times, we want to make sure that we cover our financial and operational results as the state of the capital markets thoroughly.
As Myra mentioned earlier this call will be recorded in the event that you are not able to be with us for the entire call. First for the benefit of any new investors or existing one, I’ll provide a brief description of HFF and what we do for new investors as we did in our third quarter earnings call because I think it’s essential for the investment community to fully understand what we do especially in these challenging times. Next I will turn the call over to Greg Conley and Nancy Goodson to provide a review of our fourth quarter and full 2007 financial and operational results, following Greg and Nancy’s report I will conclude the presentation with an update of what we are seeing in the capital markets as well as the commercial real estate markets and the steps we are taking to compete in the long term.
Following these presentations we then open the call for questions and answers. At this time I’d like to refer you to pages 3 through 5 of the presentation materials referred to by Myra. We are transaction based commercial real estate intermediary with 18 offices in the US and providing a one stop shop integrated capital market services platform for owners of commercial real estate as well as a national regional platform for institutional commercial real estate capital providers to source product for the debt and equity products.
Our transaction professionals offer debt placement solutions, investment sales expertise, structured finance options, private equity alternatives, investment banking transaction solutions, note sale and note sale advisory services as well as commercial loan servicing for both the users and provider of capital. We do not own property, make loans, make debt or equity positions, offer purchased derivatives, manage, lease or otherwise compete with the principle activities of our clients. Finally we want to make it very clear that we have not been nor are we currently involved in the residential for sale home market or in the sub-prime residential markets or in any financial products related to sub prime, all A, or jumbo mortgages as we have gotten some investor calls inquiring as to our involved in these business activities.
Before getting into our results and capital markets presentation, I would like to express our appreciation to our client who have continued to show their confidence in our ability to perform value added services for their commercial real estate capital markets need, especially in these challenging times. I would also like to thank each of our associates, who have consistently demonstrated their ability to quickly adapt to this challenging environment by sharing their collective knowledge from each transaction with their fellow associates, provide superior value added service to our clients. At this time I would like to turn the call over to Greg and Nancy who will report on our financial and operational results in the face of very challenging domestic and global capital market credit and liquidity conditions and the lack of investor confidence in the fixed income debt sector all of which we believe stated back in late February 2007 as we reported on each of our previous earnings calls in 2007. I will now ask Greg Conley to discuss our fourth quarter and full year 2007 financial results in more detail.
Thank you John and good morning everyone. I’d like to go through our fourth quarter and full year 2007 results. First I’d like to highlight that these financial results presented in the earnings press release reflect the consolidated financial position and results of operations of Holiday GP, HFF Partnerships Holding LLC, the operating partnership in HFF, Inc for all periods presented. The minority interest line item included in the financial statements relates to the ownership interests of HFF Holdings in the operating partnerships following the offering which approximates 55%. HFF, Inc’s consolidated operating results and balance sheets for all periods presented give effect to the reorganization transactions made in connection with our initial public offering. Revenue for the fourth quarter of 2007 was $52.3 million which represented a decrease of $20.9 million or 28.5% from the fourth quarter last year.
As John mentioned earlier, this decrease is due to the continued global and domestic re-pricing of debt and equity risk, the credit and liquidity issues and all of the global and domestic debt markets as well as the lack of investor confidence and fear in all of the fixed income debt markets. For the full year, revenue was $255.7 million as compared to $229.7 million for the full year of 2006. On a year over year basis, this represents an increase of $26 million or 11.3%. Operating income was $7.3 million for the fourth quarter of 2007. This represented a decrease of $11.8 million when compared with the same period for 2006. For the full year of 2007, operating income was $48 million as compared to $54.3 million for the full year of 2006, representing a year over year decrease of $6.3 million or 11.6%.
This decrease in operating income is attributable to increased operating expenses incurred to support the ongoing cost and expenses related to the growth in our capital market services platforms, support of our public company structure following the companies initial public offering on January 30th, 2007 and certain other cost increases spread among our other expense categories associated with operating the business.
As we mentioned in the past, as you know the largest portion of our expenses is cost of services. A majority of the cost in this category are the commissions paid to transaction professionals and the salary and discretionary bonuses paid to analysts who support transaction professionals in executing transactions. As we have discussed numerous times in prior calls, the significant portion of this cost category is variable. There is however fluctuations in this category quarter to quarter depending on reported revenue amounts, the timing of certain payroll and other benefit costs as well as fluctuations that occur from time to time and the fixed call portion of this cost category. As such a longer term comparison such as on a year over year basis of this cost category is most representative measure and is evidenced in part when comparing the full year 2007 results to the results for the full year of 2006.
Cost of services as a percentage of sales increased slightly from 56.9% in 2006 to 57.9% in 2007. Again, this slight increase is attributable in part to the increase in the fixed cost component of this category which I primarily related to salaries of the production support personnel and other payroll related items. Operating administrative and other expenses increased approximately $1 million from $11.9 million in the fourth quarter 2006 to $12.9 million in the fourth quarter 2007. For the full year, theses costs also increased approximately $13.9 million from 41.9 million in 2006 to approximately $55.8 million in 2007.
These year over year increases for both the quarter and full year can be primarily attributable to the cost associated with supporting our public company structure following the IPO transaction. The associated organizational change cost and other cost increases associated with operating the business and the cost of support our growth and increased business activity in 2007. The public company and organizational change cost primarily relate to the cost associated with consummating the IPO and the ongoing cost necessary to support the new organization structure as a public entity.
These costs include professional fees, personnel additions, and board related costs including fees, and equity incentive compensation. These costs obviously do not exist in 2006 and continue to be a significant portion of the difference when comparing the year over year changes. We have estimated these year over year cost increases to be approximately $5.9 million on an annual basis. Increased cost to support the growth in increased business activity were incurred in 2007 as the full year of revenue growth was 11.3%. These costs primarily relate to increased occupancy to support the increased growth in personnel as the total number of employees increased from 409 at the end of 2006 to 468 employees at the end of 2007, representing a net increase of 59 employees.
Nancy Goodson will expand on this in her operational report as well. We also experienced increased costs associated with travel and entertainment, supplies, research and printing as well as increased profit participation bonus and other incentive compensation expenses resulting from the increased operating income. The company also experience certain cost increases in the normal course of operating its business such as personnel costs and other operating cost increases.
As we mentioned last quarter, the company’s net income for the periods in 2007 and 2006 is not directly comparable due primarily to the minority interest adjustment which is related to holdings ownership interest in the operating partnerships and the change in tax structure following the company’s reorganization transactions and the initial public offering on January 30th, 2007. Prior to this reorganization transactions in the offering, the operating partnerships were not tax paying entities for federal or state income tax purposes and their income and expenses were passed through to the individual income tax returns of the members of holdings. Following the offering, a portion of the company’s income will now be subject to US federal and state income taxes and taxed at the prevailing corporate tax rates.
So given the reorganization, the offering and tax effects, the company’s net income reported for the fourth quarter 2007 was $2.1 million after an adjustment of $5.5 million to reflect the impact of the minority owner interest of holdings in the operating partnerships and a $2 million provision for income taxes. This compares to the fourth quarter 2006 net income of $12.5 million a period which had no minority interest adjustment as holdings on 100% of the operating partnerships at that time and there was no adjustment for corporate and federal taxes.
Net income for the full year was $14.4 million, after an adjustment of $29.7 million to reflect the impact of the minority ownership interest of holdings and $9.9 million provision for income taxes. This compares to the full year 2006 net income of $51.6 million during which time holding under 100% of the operating partnerships and there were no adjustments for corporate federal taxes.
Net income attributable to class A common stockholders for the fourth quarter 2007 was $0.13 per share per diluted share and $0.84 for diluted share for the full year ended December 31st, 2007. IBIDTA for the fourth quarter 2007 was 10.6 million representing a decrease of 9.7 million when compared to the same period last year. Our IBIDTA margins in the fourth quarter of 2007 were 20.3% which was a decrease from the IBIDTA margin in the fourth quarter of 2006 of 27.8%.
For the full year of 2007, IBIDTA was58.3 million which was approximately $100,000 higher than IBIDTA 58.2 million for the same period last year. The corresponding IBIDTA margin for the full year of 2007 was 22.8% compared to 25.4% for the same period a year ago. The slight decline in IBIDTA margins is attributable to the increased costs associated with the consummation of the public offering, the added and ongoing cost of being a public company and the step increase in cost to support the growth and increased business activity as well as other operating expenses.
Due to the factors associated with the reorganization and the IPO, the most meaningful year over year comparison is primarily reflected in the operating activity of the company as can be seen in the operating income and IBIDTA measures that we just reviewed. I would now like to make some comments regarding liquidity issues as well as certain balance sheet items.
Our cash balance at the December 31st, 2007 was $43.7 million, which $40.4 million higher than the balance at December 31, 2006. The company’s internally generated cash is highly correlated to net income before minority interest adjustments as the company made limited capital expenditures and has limited working capital needs during the year on an on going basis.
During the year, and at December 31st, 2007, we had no outstanding borrowings on our $40 million line of credit. We also had $41 million of outstanding borrowings under our warehouse credit facility to support our Freddie Mac multifamily business and this also has a corresponding asset recorded in the same amount for the related mortgage notes receivable.
The December 31st, 2007 balance sheet also reflects a deferred tax asset amount of $131.8 million and a payable to the minority interest holder at the tax receivable agreement of $117.4 million. As you will recall, the initial sale of the partnership units as a result of the offering and the exercising of the over allotment option, increased the tax basis of the assets owned by the operating partnerships to their fair market value. This increase in tax basis allows the company to reduce the amount of future tax payments to the extent that the company has future taxable income.
As a result of this initial increase in tax basis of $137.3 million, the company’s currently entitled to future tax benefits of about $132.7 million as has recorded this amount as a deferred tax asset on its consolidated balance sheet as of 12/31/07. The company is correspondingly obligated however pursuant to tax receivable agreement to pay holding on an after tax basis, 85% of the amount of cash savings if any US federal state and local income tax that the company actually realizes as a result of the increase in tax basis and certain other tax benefits arising from this tax receivable agreement.
The balance sheet also reflects a minority interest balance of $21.8 million which represents HFF holding approximate 55% ownership interest in the operating partnerships. With that, I’ll now turn the call over to Nancy Goodson, to discuss our production volume and loan servicing business, Nancy?
Thanks Greg, and good morning everyone, I’d like to review our production volume by platform services and our loan servicing business for the fourth quarter and full year 2007 and compare these results with the fourth quarter and the full year 2006. As John mentioned earlier in the face of very strong headwinds and all domestic and global debt markets, the lack of investor confidence and all fixed income debt markets and the resulting global credit and liquidity issues, in the subsequent re pricing of debt and equity risks our production volume for the fourth quarter of 2007 totaled approximately $7.2 billion on 270 transactions, compared to fourth quarter 2006 productions volume of approximately $12.3 billion on 385 transactions.
This represents 41.6% decrease in production volume and a decrease of 29.9% in the number of transactions. The average transaction size for the fourth quarter 2007 was approximately $26.7 million or 16.8% lower than the comparable figure in the fourth quarter 2006. Production volume for the full year 2007 totaled more than $43.5 billion in 1251 transactions representing a 23.3% increase in production volume and a 3.3% decrease in the number of transactions when compared to full year 2006 production of approximately $35.3 billion on 1294 transactions.
The average transaction size for the full year 2007 was $34.8 million approximately 27.4% higher than the comparable figure for the full year 2006. It should be noted that a portion of the 23.2% increase in production volume was achieved due to four large investment sales portfolio transactions which closed during the year 2007. If these large portfolio transactions were excluded our production volume would have increased by 2.2% and our average transaction size for the full year 2007 would have been $29 million or approximately 6% higher than the average transaction size for the comparable period in 2006.
Debt placement in production volume was approximately $4.5 billion in the fourth quarter of 2007 representing a 41.4% decrease from fourth quarter 2006 volume of approximately $7.6 billion. For the full year of 2007, debt volume totaled $23.5 billion up 6.4% from 2006. Investment sales production volume was approximately $1.7 billion in the fourth quarter of 2007 representing a 54.2% decrease from fourth quarter 2006 volume of nearly $3.7 billion. For the full year of 2007, investment sales volume totaled $17.1 billion, up 68.8% from 2006.
Structured finance production volume was approximately $968 million in the fourth quarter of 2007 increasing 63% over the fourth quarter 2006 volume of approximately $594 million. For the full year of 2007, structured finance volume totaled $2.32 billion, a decrease of 14.5% from 2006. Note sales and note sale advisory services production volume was approximately $67 million for the fourth quarter 2007 a decrease of 80.8% from fourth quarter 2006 volume of approximately $414 million. For the full year 2007, note sales and note sale advisory services totaled $608 million an increase of 53.6% over 2006.
The amount of active private equity discretionary fund transactions on which HFF securities has been engaged and they recognize additional future revenue at the end of 2007, is approximately $2 billion compared to approximately $1.3 billion at the end of 2006, representing a 53.6% increase. The principle balance of HFF loan servicing portfolio increase approximately 28.9% to approximately $23.2 billion at the end of 2007 of approximately $18 billion at the end of 2006. As we stated in the past calls we continue to recruit with the focus on hiring the associates with the highest integrity and best reputations so we can serve our clients by putting the best team on the field.
We expanded our workforce during the fourth quarter of 2007 through the addition of 16 new positions including 11 production support personnel and 2 transaction professionals. As Greg mentioned earlier, our total employee count at the end of 2007 is 468 compared to 409 total employees at the end of 2006. The year over year net increase of 59 employees included 32 production support personnel, 12 transaction professionals and 15 overhead and servicing support functions.
I’d like to turn the call back over to John now for his presentation on Capital Markets and concluding remarks.
Thank you Nancy, I will now review the state of the capital markets as I’m sure it is of keen interest to most of you on the call today. While the state of the capital markets impacts how we conduct our business, we can continue to transact business whether the market is up or down as the only way to a for a debt or equity investor to get into the commercial real estate market is through a trade or transaction, and the only way for the investor to get its money out is also through a trade or transaction.
We continue to believe there’s a great deal of uncertainty and strong headwinds in the global and domestic capital markets for all asset classes not just real estate. But before we discuss the commercial real estate markets, for a perspective, we think it’s essential to get a better understanding of the magnitude of the issues facing all global and domestic capital markets especially the fixed income debt markets. I would now like to refer you to the power point presentation we made available prior to the call.
I would like to begin the presentation on slide 7 and 8, titled strong headwinds, the headlines are not good. Some of last week’s headlines were the S&P retreated 2.8% this week, the Dow lost 3% this week, the Russell 2000 dropped 3.8% to a 2 year low. The S&P 500 financials index dropped 6% bringing its year to date loss to7%. Yesterday, March 7th, employment reports showed the economy lost 85,000 jobs in the first 2 months of 2008. The dollar has dropped 12% against the Yen in the past 12 months.
Since the beginning of 2007, more than 45 of the worlds biggest banks and security firms have taken losses of about $181 billion and asset write downs and credit losses including reserves set aside for bad loans. After being battered by record US foreclosures, banks and securities firms have sold stakes to raise approximately $105 billion of capital. Mortgage related losses since the beginning of last year, the world’s largest banks and brokers amount to more that $180 billion led by Citigroup’s $24.5 billion.
Citigroup, the largest US bank by assets posted record loss of $9.8 billion in the fourth quarter. It raised $7.5 billion in November from Abu Dabi and said in January is getting another $14.5 billion from investors including Singapore and Kuwait. In January, Citigroup announced a 41% cut in dividends. I think we would all agree that these are challenging times and very tough headlines. However when we move to slide nine, to review the lending delinquency comparison as measured by the federal reserve, we have to ask with all the bad news, why doesn’t this look worse.
It should be worse based on the headlines. As measured by the Federal Reserve, note that commercial real estate performance on this chart at 1.92 in the third quarter of 2007 has consistently been at or below 3% since the first quarter of 1997. And from the end of 1999, through the first quarter of 2006, it is consistently been among the best performing asset classes in these categories and it is now only marginally above commercial industrial loans still less than a 2% delinquency.
I think when we move to slide 10 and begin to study the global and domestic capital markets for all asset classes, and then begin to assess the strong headwinds in slide 7 and 8; you can better assess the issues concerns, fears, especially from the standpoint of the fixed income investor. For example, the global and domestic financial institutions have very real balance sheet constraints. Existing paper such as LBFSIV, CLO asset backed commercial paper must be clear. There’s clearly fear in the market and a lack in confidence in collateral and past financial engineering products such as CDOSIVs and asset backed commercial paper.
The ability to leverage the leverage i.e., leverage squared is gone. There is an asset to leverage happening in the global markets and we think this will take some time to fully unwind. There is a lack of liquidity for new deals, especially large loans but balance sheet lenders that have capacity are lending on the right deals in a lender friendly environment. The lender friendly environment is lower leverage, less IO, more amortization and significantly higher spreads and better yield terms. The old adage, he who has the gold makes the rules is very much invoked today. This has resulted in global re pricing of debt and equity risk especially debt. Overlay all this will the US residential market with a overhang of 18 to 24 month of excess supply, then to top it off with either and economic slow down or recession or inflation or some combination thereof for good measure.
This leads to slide 11 and it’s not hard to understand why the title of the slide, risk sure wasn’t priced like this last year. This chart illustrates what happens when b leveraging, credit concerns, liquidity issues and fixed income investor fear all meet. This leads us to take a look at slide 12, what does all this mean for all asset values? As we already stated there’s massive level b leveraging underway, and we do not appear to be at the bottom. This b leveraging is causing an outflow of funds in all global debt markets. This is creating liquidity issues for all types of debt regardless of asset class. Municipal market and student loans are just recent examples of the stress in the financial system. This is causing debt and equity risk to be re priced. The US is slowing in likely in a recession and maybe the rest of the world is slowing as well.
With declines in global and domestic equities and if annual pension fund total returns are less that 8 to 10%, companies may have to contribute additional earnings to meet future pension fund obligations. Energy and commodity costs are increasing. In the US, taxes at the federal, state, and local level are likely to be going up as we don’t believe they will be going down. When the US economy recovers, it is likely interest rates will be heading higher and some would argue maybe they should be moving higher due, higher now to curb commodity inflation.
These are all clearly negatives for most asset valuations in the near term. While they’re clearly challenging times and clearly new issues, clearly challenging issues, you must also keep things in perspective and study past experience as we’ve attempted to do in slide 13. While this experience clearly feels different, especially for larger transactions and some capital sources, there are domestic and local and regional banks who are not as impacted. You can not forget that in 1981, prime was really at 21%. In 1986, 1988 we had the tax reform act in the syndication blow up. In 1990, 91 we had the S&L collapse and I’m sure a lot of us remember the RTC. In 1994 we had the mortgage meltdown, 1998 we had long term credit capital, 2001, 2002 we had 9/11 and the corporate credit squeeze.
And here we are in 2007; the question is when will this end. Remember these are past experiences; remember these past experiences for the balance of the presentation as I think they will come in handy to keep things in context. Enough of the bad news, now turning to slide 14 there’s an analysis of the key rate summary. There are some clear positives. If you thought rates were low last year, the federal funds rate prime are down 2.25% one month and three month LIBOR are down approximately 2.3%. The 2 year treasury is down over 3% and the 5 year treasury is down nearly 2%. And the 10 year is down almost 1%.
I don’t think it makes sense to only look at 1 year so let’s look at the 47 year history of the 10 year treasury on slide 15 for some more positive. No we have overlaid the past experiences going back to 1981 on this chart to give you some perspective. The 10 year treasury is now at nearly a 47 year historic low. The purpose of reviewing all this is not to restate all the difficulties facing the market but I think it is essential in order to put the commercial real estate industry in perspective as part of the diversified investment portfolio. In this next part of the presentation I will cover US institutional commercial real estate markets, portfolio investors and asset allocations in attempt to answer the question is there still a compelling case for US commercial real estate.
Turning to slide 17 we will review the US institutional commercial real estate and capital markets to touch on the following, this is a very large market with underwriting and due diligence. The total US institutional commercial real estate universe is $4.7 trillion. There are numerous on book lenders that hold risk for their own account. There are underwriting standards, there is B buyer due diligence, there is income, there are generally tenants with their own credit and there is always loan documentation. It is not residential. We do not do no doc loans and our sponsorship is important.
The industry tries to lend money to people who will pay them back on hard assets. Commercial real estate fundamentals are relatively healthy although the risk of a slowing economy or recession does have negative implications. Current delinquencies remain at all time lows although we think increases are looming, maturity defaults are expected to increase due to balance sheet and liquidity issues in all debt markets. We think the faults will be primarily on the short term floating rate deals that originated over the past 12 to 18 months.
Recent property performance since 2004 has been generally healthy with growth and [ransom in our lives]. Projected property performance is expected to moderate and slow due to the slowing economy, however any decreases will be from a very strong base. Projected supplies is in check and we think with current credit market conditions, we think it will remain so. High reproduction replacement cost could offset some softness in rent growth. We believe as funds flow into the commercial real estate sector we will likely moderate or decline slightly, but from buyer very high levels from a historical standpoint and we still think it will be sufficient to support the overall health of the market.
B leveraging will cause net outflows in the debt markets and the denominator effect on equity due to increases, decreases in equity values, globally and domestically may slow funds flow into the commercial real estate equity but again, from very high levels from a historical standpoint. We will also touch on the debt and equity markets and look at 2004 to the first quarter of 2007 which we call the perfect storm that drove values. We will look at the post 1st quarter 2007 to whenever the credit issue, liquidity concerns, lack of investor confidence and fixed income debt security and fear of the fixed income investor all have to be addressed.
Well this has caused all debt coupons, all in debt coupons and cap rates to move higher pricing we believe is very attractive, which brings us back to keep it in perspective, credit and liquidity markets will recover, the question is when. To answer this question we need to look at the facts and can downside risks be mitigated by current strong fundamentals. Many of our senior members in our group have been at this over 20 to 25 years and we have been through many cycles over this period. We believe based on past experiences through other downturns and other difficult credit cycles that we will return to stabilize and normalize basis for doing business.
But we think this will take some time to reach stabilization in the capital markets, especially in the CMBS markets. As you can see from slide 18 we believe the US institutional commercial real estate universe is a $4.7 trillion market, $3 trillion in fixed income and $1.7 trillion in equity. To determine how healthy this market is, we will review the current fundamentals. Beginning with slide 19 – 21, you can readily see there is a current lack of problems reflected in the historically low delinquency rates. Because of federal fund lending delinquency analysis that we previously discussed and the strong headwinds in all capital markets for all asset classes on slide that showed commercial real estate performance at 1.9% in the third quarter of 2007, and from the first, from the end of 1999 through the first quarter of 2006 was consistently the best performing assets class between those categories and is now only marginally above the commercial industrial loans with less than a 2% delinquency rate.
We move to slide 19 and 20 to review the life company delinquency rates, we believe the data here is even more indicative of relative to the properties and clients we work with and the debt and equity capital we source for them. Based on ACLI information, the 2007 fourth quarter life company delinquency rate is .01%, down from 0.03% in the first quarter and it has been at or below half of one percent since 1999. We believe HFF’s current commercial loan servicing portfolio of approximately $23 billion closely resembles the fourth quarter 2007 life company experience. Please note the overlay of past experience on these charts as well. Even when we read the delinquencies on slide 21, for the CMBS market, as compiled by [Trap and TTR] we believe CMBS delinquency as tracked below 3% since 1998, below 2% since 2003, below 1% since the end of 2005 and is today approximately 0.4%.
Why is commercial real estate asset class at present out performing other asset classes relative to historical delinquencies? Not that this industry has been perfect and it is clearly taken advantage of the financial engineering and fund flows into the sector, we do believe that it is performing better and will perform better than other asset classes, especially the residential markets for the following reasons. There are no doc loans at least none that we have ever seen. Loans to borrower with bad credit do not easily occur and if they do, they are made by hard money lenders who intend to make loans to own the property.
Life company’s banks and agencies have been originating loans for many years for their own book through all types of cycles as it is an asset class that matches up well if their liabilities they need to cover with assets from the policies they write. Most if not all require third party appraisals, outside reports, auditor certified financial statements. And while non-recourse to a borrower, there are clear standard [bad-boy] carve-outs that significantly deter bad borrower behavior even in bad times. Construction loans generally require significant recourse from credit-worth entities. CMBS originators make loans, put them on their books for a time and have the same third party requirements; have B buyers review the loans to take the first loss piece and are also reviewed and rated by one or more rating agencies. Overbuilding and supply have not as of yet taken place in the, as it has in the residential area, arena.
While the above does not make loans immune from economic downturns, tenant defaults or borrower issues, it clearly has a recent demonstrated track record much better than other current asset classes, especially the residential asset class. That said, we believe there are, there will be increasing delinquency rates due to the looming maturities, especially in the floating rate markets, due to the large volume of loans that will be maturing in the next six months to 18 months that will be underwritten at a different environment than the one that exists today.
When you look at the historical and forecasted rent and NOI changes from PPR on slides 22 and 23, we believe there was negative rent and NOI growth from 2002 until about 2005. There were a great many loans that were put on the books during this period of time, yet there are little to no delinquencies to speak of, as we have just reviewed. Beginning in 2005 and 2006, we believe the trend reversed and, as you can see, substantial rent and NOI growth in all asset classes, according to PPR, and this growth is forecasted to continue through 2011 for all asset classes, again, subject to recession or downturn. If there is a downturn in the economy, we believe this asset class is starting from a very solid base.
Next we'll look at the level of construction in the U.S. as presented by the real estate roundtable, Torto Wheaton, on slide 24. According to this data, we believe that since 2003 through 2006 new construction has generally been below 2% of the existing stock for all asset classes and is forecasted to remain at approximately 2% through 2008. Turning to slides 25 and 26 from PPR and ConstructionTrak, we believe new construction underway, while clearly on a slight up tick since 2004, appears to be reasonable based on the past six-year expansion going on in the US economy and the low levels of new construction from 2003 to 2006. Given the current global and domestic credit issues confronting all borrowers, we believe it is unlikely some of the projects in the planning stage will ever be developed.
Turning to slide 27, construction cost base compiled by Real Capital Analytics, we believe that since 2001, basic building materials, steel, general materials, cement, lumber costs, have increased dramatically. Generally speaking, we believe most asset sales we've been involved with have had acquisition prices that are below replacement cost. We believe these high costs are real barriers to entry, both to land constrained markets and non-land constrained markets. Simply stated, markets must justify the rents to justify new construction to attract debt and equity capital. Absent a recession, generally speaking, we believe these trends will continue to drive rents and NOI’s higher.
On slide 28 we'll analyze the substantial real estate equity markets, which are a $1.3 trillion market dominated by private investors or $1.7 trillion market dominated by private investors, public REIT’s, pension funds and foreign investors. I'll first review the annual flows to real estate as compiled by the Federal Reserve NAREIT PPR on slide 29. As you can see from this slide, there have been tremendous flows into this sector, including both public and private equity.
However, in 2007 there's a noticeable outflow of dollars from the public equity sector. In reviewing these historical returns to the past 20 years, as compiled by NAREIT and the NASDAQ composite returns on slide 30, we believe this asset class that HFF is focused on has produced superior results, not only recently but over the past 20 years. While the slide on 31, Pension Fund Allocations, compiled by Kingsley Associates, an institutional real estate investor, has not been updated to reflect the equity market declines in January and February 2008, this slide shows real estate is getting closer to its targeted allocations. With declines in global and domestic equities, it is likely that if this report were issued today, it would likely show allocations at or slightly above targeted allocations.
However, it should be noted that survey results reported by Kingsley were not completed by all participants, which may explain some of the conflicting data on slide 32 regarding recent announcement from several pension funds. For example, Virginia's retirement system approved policy changes that lifted investment caps for the $58.7 billion system's real estate, private equity and credit strategy allocations. The investment limit for real estate and private equity was raised to 10% of total asset from 7%. CalPERS has increased its allocation for real estate investments to 10% from 8%, which will increase its investment by $5.1 billion to real estate. The $175 billion CalSTRS approved a plan that would allow it to step its real estate allocations up to 11% of its total investment. The move gives the fund the ability to invest approximately $1.7 billion more in commercial real estate investments based on its current size. The $109 billion Texas teacher’s retirement system has more than doubled its targeted investment allocation to real estate to 10%. The $64 billion Oregon public employees’ pension system increased its target real estate allocation from 8% to 11% of total assets, or $7 billion.
Regardless of whether allocations are reaching their target, it is clear, based on slide 33 and the year-to-date summary strategy, that everyone is chasing yield. We believe this is due simply to the fact that the investors are seeking yield due to the low base interest rate indexes that have been present since 2001. Everyone appears to be chasing yield. If we would look have looked at this slide about five years ago, we believe core would have been approximately 65%. This is further evidenced by slide 34 from Real Estate Alert. We believe there are plenty of equity raised and it's just waiting to be deployed. Based on this data, we believe the number of funds has jumped to more than 350 with targeted equity raises more than $200 billion in 2007 versus approximately $130 billion in 2006.
Based on these numbers, we believe the projected buying power for these funds is approximately $670 billion and we believe most of this money is simply waiting to be deployed. On slide 35 we see data from the Federal Reserve, ACLI and principal investors that indicates the total US institutional debt market is $3.0 trillion market dominated by banks, CMBS, life companies and agencies. Slide 36 and 37 track historical mortgage flows based on the data from the Federal Reserve, NAREIT and PPR and the MBA. We believe the level of commercial multifamily mortgage debt exceeded $3 trillion in the first quarter 2007. As you can see, depository institutions, commercial banks, have held a substantial portion of this debt, remaining above a 50% market share since 1990 while the CMBS has been steadily increasing since 2001 when it exceeded the life company levels and has grown dramatically through 2007.
We expect these volumes to drop in 2008 due to the disruptions in the global capital markets, especially in light of the new limited originations in the CMBS debt in the first part of 2008. We believe life companies will remain at current levels, perhaps at a slight up tick due to the risk adjusted base returns now available . Please pay particular attention to the numbers from 1998 to 2007, which we believe total $2.1 trillion and include the long term credit capital and 9/11 events which showed downturns in flows after each event and then subsequent recoveries and flows. If only a portion of this $2.1 trillion inflows are ten-year fixed rate loans, we believe there will be many refinancing and sale opportunities over the next seven years for firms like ours.
Slide 38 tracks the historical CMBS issuance as compiled by Commercial Mortgage Alert. Please note the significant events that have been overlaid on this slide as well. According to this data, as reported on, and as reported on previous calls, while the
CMBS has steadily increased since 2001 when it exceeded life company levels and has grown dramatically through 2007, we expect CMBS volumes to drop significantly in 2008, as there has only been one CMBS securitization so far this year, the $1.2
billion Tops deal in January 2008.
And it was the first time in, January 2008 was the first month in over 18 years where there was not a CMBS securitization brought to market. That said, pay particular attention to the numbers from 1998 to 2007, which we believe total more than $1 trillion. If only a portion of these are ten-year fixed rate loans, we believe there will be many financing and sale opportunities over the next seven years for firms like ours. Slide 39 shows the historical life company mortgage commitments, as compiled by ACLI. And again, note that the significant events that have been overlaid on this slide as well. According to this data, we believe the level of life company commitments from 1998 through 2007 has been or exceeded $25 billion in every year, with the exception of 1999 and 2000 when it was approximately $22 billion each year, and has averaged more than $42 billion since 2003.
Please note that we do not believe the life companies will be able to make up the expected drop-off of CMBS originations. Also note that from 1998 to 2007 we believe the total combined commitments totaled more than $325 billion. If only a portion of these are ten-year fixed rate loans, we believe there'll be many refinance sale opportunities over the next seven years for firms like ours. Slide 40 shows the Freddie Mac and Fannie Mae production, as taken from Freddie and Fannie. The GSAs such as Freddie and Fannie have been very large players in the commercial real estate multifamily lending markets for multifamily product.
Based on the information provided from these agencies, we believe they have collectively provided approximately $455 billion from 1998 through 2007, an average of $39 billion over this period. From 2003 through 2007, we believe they have averaged nearly
$60 billion per year. Slide 41 from Citi shows that a key driver to the growth in CMBS market was the growth in B note and mez market. We believe the increased use of B notes and mez pieces for the CMBS capital stack and the ability to leverage them was key to the dramatic growth of the CMBS. We believe that the debt funding vehicles that fueled these buyers has largely evaporated and we do not see any near term relief to bring some of these buyers back.
However, the tradition of buyers who have been there since 1998 are there and still enjoying some of the highest and best risk adjusted rate of returns they have ever seen. Slide 42, sourced from the rating agencies, detailed the pre first, 2007 first quarter CMBS underwriting trends. Please note in 2002 debt service coverage was over 1.15% and LTVs were at or below 85%. In 2002, less than 10% of the deals had I/O periods.
Also note in 2007 over 85% had some period of interest only and over 40%, 50% were full term I/Os. Also note in 1999 AAA subordination was 30% and in 2007 it had dropped to 11%.
Slide 43 from JPMorgan shows how the ability to leverage leveraged, or leverage squared as we refer to it, also helped fuel the CMBS market. Note the growth of hedge funds, CDOs and proprietary trading desks in the AAA group to 35% in 2006 and BBB
grew to 69% in 2006. These sources have pretty much dried up today, which one is, is one of a number of reasons we expect CMBS volumes to decline significantly in 2008, as we outlined in our third quarter call. Slides 44 to slide 46, sourced from Trepp and Citi, also highlight the pre 2007 first quarter CMBS underwriting trends and its impact on value. As you can see, CMBS aggressive underwriting trends, especially since 2004 where interest only grew dramatically, now target paying for more than two to three years of interest only unless there's lower leverage involved.
Escrows over the same period dropped dramatically and are now back in vogue. Originators underwrote pro forma and not income in place and actual results have not panned out relative to forecasts. Generally speaking, today originators are only writing in, only underwriting income in place provided it's supported by leases with some meaningful term.
Slide 47 shows the impact of flows to sector in the CMBS underwriting on U.S. commercial real estate industry from a debt and equity standpoint, as compiled by Real Capital Analytics and Commercial Real Estate Alert. We believe the numbers speak for themselves but do not forget the facts on the fundamentals as discussed earlier, such as delinquencies, property performance, high reproduction costs and limited supply coming on. Please pay particular attention to the sales activity from 2001 to 2007, over $1.7 trillion of investment sale activity and more than $1 trillion of CMBS financings from 1998 to 2007. This is a good pipeline of product when and if the equity is to be harvested and when these loans mature. There are substantial numbers relative to historical data. If the market moves back to 2004 levels, you will still have over $200 billion in sales activity and over $90 billion of CMBS activity. Both are very healthy numbers, even though they are more than 50% below 2007 numbers.
Slide 48 from Data Sourced from Trepp and Citi shows the period covering 2004 to the first quarter of 2007 will likely be remembered as the perfect storm due to healthy increases of fund flows into the sector, increasing leverage levels, compressing spreads, lower all in coupons, borrower friendly debt structures and financial engineering or leverage squared. We had a healthy economy and strong property performance. There was manageable and limited supply and it was coupled with very high reproduction costs. So what happened? How did we get here? Slide 49 provides a pretty good analysis. Housing slowdown in late 2006 with resulting subprime residential mortgage defaults increasing in 2007 and 2008. Housing issues are likely to continue through 2009 and probably into 2010.
This fuels concerns about the commercial real estate sector. Moody's LTV for the first quarter 2007 hit 111% and the disparity between Moody's and the actual LTV was at an all-time high. There was increased use of interest only loans, averaging more than 85% of first quarter 2007 CMBS transactions. There was an erosion in underwriting standards where future income was counted towards debt service tests. Actual cash flow results were below underwritten NOI projections. And we are now back to Underwriting 101 where we should have been and should always be.
There are credit and liquidity issues and fixed income investor fear in all debt instruments, both globally and domestically. This brings us to slide 51 and it sounds very familiar, as we are back to the same issues, which are fear, concerns that we discussed back on slide ten for all the global debt markets. Though the global financial institutions have balance sheet constraints, existing paper still has to clear. We've got to remove the fear and develop confidence in collateral, especially the past financial engineering. We, the de-leveraging of leverage squared, this is going to take some time to unwind. There's a clear lack of liquidity for new deals, especially large loans, but Freddie, Fannie, the life companies, the balance sheet lenders, are operating at full capacity.
But they are doing so in a lender friendly environment. The borrower friendly environment has gone. Lower leverage, less I/O, more amortization, higher spreads, it's the same old rule; he who has the gold makes the rules. There has been a re-pricing of debt and equity risk, especially debt, and the residential markets will continue to be in overhang for the next 18 months to 24 months and we are still faced with the same economic slowdown, recession and inflation.
Slide 51 is the same slide you've seen before. The source is JPMorgan. One of the ways to leverage leverage, leverage squared, that previously fueled the CMBS market as we've reported is now gone. Slide 52 and slide 53, based on data source from Morgan Stanley and Bloomberg, is a great example of what happens when de leverage, credit concerns and fixed income investor fear all meet. The data speaks for itself. We believe it has clearly swung too far; just like REIT took the market to exuberance, fear has
taken it beyond rational thinking, in our opinion.
How long will it take for the CMBS markets to recover? When we look at slide 54, as prepared by Citi, we sure think this is a little different than 1998 and 2001. Their data suggest a six to eight month recovery from the start of the issue. However, if this is the case, we should have been recovered by now. Slide 55 shows the private commercial spreads to ten-year treasuries, as compiled by Giliberto-Levy. This data does not reflect the spread widening as it was from the second quarter of 2007 and does not pick up the widening that has occurred over the past 120 days. We believe that current spreads are very wide of historic norms. However, until the market's normalized, we believe these spreads can go higher.
What are the early signs? Slide 56 shows the January 2008 effects of the above on the CMBS and sales volume. CMBS new issue supply in the first two months of 2008 is only $1.2 billion, down 97% from the $34.1 billion over the same period in 2007. According to Real Capital Analytics' report on the U.S. office, industrial, retail and apartment markets, sales are down drastically year-over-year and cap rates are up across the board. Office sales are down 80%, industrial sales are down 65%, multifamily sales are down 47% and retail sales are down 57%. We believe this is overblown given the fundamentals discussed in the earlier part of the presentation.
Slide 57 shows that cap rates have begun to move up, but we believe pricing is still very attractive on a historical basis. Slide 58 attempts to address where values are heading. In 2008 on a relative basis, we believe prices are still very attractive. We think that volatility and uncertainty creates opportunities. Equity flows to the sector may be leveling off, but equity is still plentiful and waiting to be deployed. Debt flows will likely be lower in 2008 but all in coupons are still attractive on a relative historical cost basis. Credit issues,
De-leveraging, widening spreads due to re-pricing of risk, higher all in coupons, less borrower friendly documents and more lender friendly debt structures, i.e. who has the gold makes the rules. The U.S. economy is slowing but for now property performance remains stable. If there is a downturn, commercial real estate is starting from a very strong base. And as already mentioned, there's a manageable and limited supply coupled with very high reproduction costs.
Which brings us to slide 59. While the experience clearly feels different, especially for larger transactions and some capital sources, there are domestic and regional banks that are not as impacted and who are active participants in the market at very attractive spreads and fair leverage levels. But as we said before, if you look back to 1991,1981, prime was really at 21%. In '86 through '88 we had the Tax Reform Act and the syndication blowup, the S&L crisis in '90, '91 and the RTC. The mortgage meltdown in '94, long term credit capital in 1998, 2001, 2002 we had 9-11 and the corporate credit squeeze and now 2007, when is this going to end? That's the $64 question.
There are a number of local and regional banks who are actively lending at very competitive spreads and realistic loan to value in today's market and there's plenty of equity waiting to be deployed. And again, there's a lot of good news out here as well. We can't always focus on the negatives. If you look at slide 60 and the analysis of the key interest rate summary, there are positives. And I already went through this before and you can see all rates are down significantly from where they were a year ago. And if you look at the ten-year treasury on the next slide you can see that, on slide 61 at almost a 47-year low.
Slide 62 tries to form some conclusions and you yourselves can judge if we made the case. Commercial real estate fundamentals remain healthy and positive. We believe these fundamentals are as strong as they have been in the past 25 years. An economic slowdown or recession will impact fundamentals, but any decline will be from a position of strength. We expect improvement in debt markets, however, new CMBS originations may not start to really recover until the end of the second or third quarter and the way we're going it could be at the end of 2008. Clearly, size, structure, leverage and sponsorship matter; as they should have in the past. There has been a re-pricing of risk, especially debt, however, all in coupons are attractive on both a historical and relative basis. There has been a re-pricing of risk. However, all in pricing remains attractive on a historical and relative basis.
There's still plenty of equity raised looking for a home. We have a hard asset with strong fundamentals . We believe it's an attractive relative value play versus other alternatives, especially in this environment. If you don't think we made the case, slide 63 needs to be considered. Remember that HFF is in the transaction business, not in the principal business. Mortgage flows were approximately $2.1 trillion from 1998 through 2007. U.S. sales were approximately $1.7 trillion from 2001 to 2007. CMBS mortgage flows were approximately $1.7 trillion from 1998 to 2007. Freddie and Fannie mortgage flows were approximately $455 billion. Life company mortgage flows were approximately $325 billion.
Equity will be harvested, loans do mature. I'd now like to turn to slide 64 through 74 for review of HFF, Inc. in light of the above, where have we been, a historical perspective 1998 to 2007. And we believe we are prepared for the future. We believe over the past 15 years real estate has been viewed as a valid asset class by the pension fund consultants and financial planners. We believe that trend will continue. We believe the demographics of the U.S. population, especially when one looks at the demographic baby boomers entering retirement age and frankly much of the industrialized world, plays into the strengths of the U.S. commercial real estate.
Regardless of whether there's equity or debt, it's secured by a hard asset. It has fixed income return characteristics along with an inflation hedge and we believe it is a necessary asset class for portfolio diversification. Over the past 20 years we believe this asset class has produced superior risk adjusted rates of return. Relative to other risk adjusted investment alternatives today, we believe the trend will continue. Would you rather own investment grade corporate paper or unrated and non-investment junk bonds or a similarly rated paper secured by a hard asset such as commercial real estate?
We believe there is,if there is an economic downturn in the future, an equity investor, if it has sustained power, owns the hard asset. That is if it located in the right geographic market, the right location, it should come back with the economy. We believe that a lender who has the hard asset collateral, even if the borrower does not support the loan, has the ability to recover some or all of its investment, depending on the debt structure, economy and holding power. We believe the same cannot easily be said of other non-asset based lending or equity investing. All you have to do is look at the write-offs described earlier.
We believe the re-pricing of risk and more stringent credit standards, while painful to HFF, its clients and shareholders, we believe in the long run is healthy and a good thing for the U.S. commercial real estate markets and for the long term prospects of our firm. We have not seen this level of inefficiencies in the market since 1998 and 2001 and frankly in some segments we haven't seen it in the past 25 years. We believe the uncertainty and volatility is good for our business, provided there are transactions occurring. We believe unlike other U.S. capital markets, the U.S. institutional commercial real estate credit markets never shut down or closed its doors.
We believe there was and continues to be bidding rate locks, hard deposits. While this does not alleviate nor mitigate the clear pain and the issues many of our clients are dealing with, we believe it is worth noting. We believe the pendulum has swing too far relative to the current quoted spreads and where current credit underwriting is based on historical spreads and historic underwriting. We believe that investment grade spreads, non-investment grade spreads will contract in the future. The question is to when and how far. There's still a great deal of liquidity in the market for the right deals, the right markets, the right sponsors. The equity has been raised and there's waiting to come into the market.
We believe it is important to remember that all in coupons are a combination of index and spread. If index has gone down and spreads are going up slower or equal to the rate of decrease in the index, all things being equal, the total coupon will not move much. We believe total coupons from historical standpoint are very attractive, especially relative to other asset classes. We believe deal structures will likely revert to the deal structures done in 2005 and 2006. We think they're already there for the right markets and right sponsors for high quality institutional grade commercial real estate. We believe the markets should have not, should not have been able to price 90% interest only debt and 110 basis points to 120 basis points over certain asset classes and the spread differential between an 85% loan and a 65% loan should not have been as little as 10 basis points.
However, if that is what a free market allows, then it will continue until the free market does not allow it to be, such as the case now. We believe real estate fundamentals are continuing to prove, improve and have never been better over the past five years. However, it remains to be seen what impact the slowing economy or recession will have on growth rates. We believe it bears repeating that the current fundamentals are at a very high starting point relative to past events, so there is a cushion here, even if there is a slowing of recent trend.
Real estate is a hard asset. If there is a problem, a lender has real collateral versus a financial instrument structure, such as SIV, asset-backed commercial paper or CDO, where in most cases you have a piece of paper as collateral if something goes sideways. We believe that replacement cost continues to be effective barrier of entry to new supply coming on line and supports continued growth in rents and NOI, which bodes well for existing and new real estate.
We believe you can still get quality deals done today, including opportunistic and value add deals. It's just harder, which should produce higher risk adjusted returns for those who want to play. We believe the impact on core high quality institutional investment grade real estate on the investment sales side has not been impacted too much, especially on core multifamily industrial products as there's still a great deal of liquidity that needs to be invested. We believe our collective market share as well as the many relationships we have developed over the years with capital will provide additional ongoing opportunities in the future with existing and new clients.
What if we, HFF, were wrong on all the above? Remember we are a transaction-based commercial real estate intermediary providing capital market services to the owners and providers of capital. The money is going to leave the sector; it needs to have a transaction to occur to come out. That is our business and what we need to do is make sure we attempt to get in front of the right business.
I want to refer to the current conditions that reported on by Greg and Nancy. We have significant free cash resources to invest in acquisitions and in our people to strategically grow the business. We will not grow for growth's sake, as we have repeatedly stated in our road show and subsequent non-road show meetings. In addition to our growth in 2007 and as already reported, we have already invested in growing our business during the first two months of 2008 by adding 14 new producers and promoting 13 analysts to the role of producer based on their past achievements and merit.
The additions so far in 2008 are 22 producers due to the loss of five producers for various reasons. We are actively recruiting new associates to our firm and continue to mentor our existing associates to grow into producers. We have an un-drawn $40 million unsecured line of credit to use if there's something a little bigger we want to step into. We have our omnibus plan in place to reward value added performance and strategically grow the Company. We also have our stock as currency to strategically grow the Company. The above is incredible financial basis from which to grow.
In the 25 plus years I've been doing this, my partners and I have never had access to this kind of financial powder and ammunition to grow a transaction-based business such as HFF. Today there are less than a handful of firms that have the financial footing and, however, their management teams are not major owners in the same economic manner we are, nor do they control their destiny in the same manner we do. We'd also like to point out that we are a very small part of the transactions that occur in the US capital markets, maybe 5% to 6% market share, and continue to have plenty of upside opportunity to increase market share, regardless of market conditions.
Our integrated capital market services platform puts us in a very unique position as an independent, objective advisor to provide value add services to our clients, especially in the volatile capital market environment that exists today. We believe 2008 will be very challenging, but we also think it will be the best time to strategically grow this firm since 1998 and 2001 when there were also significant issues similar to the ones that we face, that we're facing now, long term credit capital in 1998 and 9/11 in 2001. We've already discussed that we've made significant hires in 2008 and are actively seeking to make
In those challenging times we were able to grow the firm. We opened our LA office in 1999, which is now also the home of HFF Securities. We opened our Washington, D.C. office in 1999, which is one of our larger offices and is a market leader in D.C. on the IS and debt side. We added a significant IS platform in our New York office in 2001. We opened our Chicago office in 2002 and it has grown to be one of our largest offices with IS debt, structured finance, note sale and recently HFF Securities. We added the southeast region [Sauna Block] office to our Miami office in 2002 and today it's one of our largest offices with IS debt structured finance in place and covers the entire southeast region of the US as well as doing deals in the Caribbean.
We did all of this while integrating the former partners, [Figeo], PNS Realty Partners, Vanguard, acquisitions made by Amresco from January 1998 through September '98. We then had a deal with Amresco, selling our business to Lend Lease in March of 2000, and continued to grow the firm from 2003 when we were able to purchase the firm from Wind Lease through our first reset ownership at the end of 2006 and the subsequent IPO in January 2007.
Therefore, we believe we have the opportunity to repeat history. While others are focused on the disruptions of negative things going on, we intend to continue to focus on strategically growing our firm and seize upon the opportunities that come out of major disruptions such as these. We believe that we have a chance to do even bigger and better things than we did from 1998 to 2007, provided we respect each other and keep all of this in perspective.
We have the ability to expand our geographic footprint. If you look at slide 69 and slide 68, we only have 18 offices and there are several MSA’s where we'd like to have an office, provided we can find the right strategic people with the right culture to open up an office. We can add platform services to our existing offices and leverage off the current fixed income investments we have made in those offices. If you refer to slides 67, 68 and 71, you can see those.
We can continue to grow by adding new people who have the right partnership culture and also grow organically as we have successfully done in the past. Refer to slide 70 for that . Based on past experiences, if we successfully do this, we can continue to grow and enhance our firm. And again, slide 71 shows you what's happened when we've done that. We believe we have more scale, more knowledge, better people than we did in April 1998 and hopefully we are smarter and wiser. I think if you look at slide 74 you can see a listing of our board and senior management team and we really believe that we are smarter and wiser.
Finally, we believe that we are a pay for performance firm. If you look at slide 72 and 73 you can see that. All of our transaction professionals for the most part do not make money unless they are consummating transactions. You can also see that our managers for the most part are transaction professionals as well and participate in our profit participation pool. Provided they hit a 14.5% profit margin, they get 15% of their net for the office or line of business.
Recall also that there are more than 40 transaction professionals who currently own approximately 55% of the market value of the firm and are on an equal footing with our shareholders in all investments and profits resulting thereon. These transaction professionals represent more than 80% of our management and are responsible for approximately 60% of the total capital markets revenue. We believe the above correctly aligns our interests with those of our shareholders and we do not believe there are many other public companies, if any, that are so structured and aligned.
With that, I'd like to turn this back over to the operator. We appreciate you joining us today. We welcome your questions and hope you can join us again in a few months for our first quarter 2008 call.
HFF, Inc. (HF) Q4 2007 Earnings Call March 11, 2008 8:30 AM ET
(Operator instructions). Your first question comes from the line of Sloan Bohlen from Goldman Sachs, please proceed.
Sloan Bohlen - Goldman Sachs
Morning, everyone. Question for John and Greg. John, just talk a little bit about growing the business in a downward market. In past experiences, and maybe this is a question for Greg, are there particular businesses that you look to invest in more and what does that do for your EBITDA margin in the near term as you look to grow past, through the down market?
Well, I think, Sloan, first of all, we are very interested in high quality people that have the best reputations in town and highest integrity. So we're very interested in all debt producers, structured finance producers, investment sales transaction professionals. We're interested in expanding our HFF Securities business. So to us it's more about the people and the best athletes on the field. And clearly, if you look at the history of this firm, we have continued to invest in the business, both in good times downturns like today. And in downturns like today, the pay packages that you have to put forth are less than what they a year or two years ago. So we think this is a great opportunity to grow the business. And again, from a margin perspective, I’ll let Greg speak to that, but I think if you look at our past results we've always been adding people to the business.
And, Sloan, on the margin side, I think we've talked about this in the past as well. As we continue to grow, you're not; you're going to see limited impact on the margins from that because we're going to continue to invest. So our margins have always been on an EBITDA basis north of the 20% range and we anticipate that we should be able to hold that as we continue forward.
Obviously that'll, that can shift just looking at things quarter to quarter, but when you look overall on an annual basis, as we're growing the business, you're not going to see much of an up tick in the margin side. That will occur if you get your infrastructure in place and can leverage off of it for a period of time.
Sloan Bohlen - Goldman Sachs
Okay. And maybe a question for Nancy just on the 14 new producers that have been added this year and the 13 people that were promoted.
Sloan Bohlen – Goldman Sachs
A breakout on how many of those were investment sales versus debt placement?
Of the 14 new people, approximately ten are investment sales and four are debt. On the promotions, seven are investment sales and seven are debt or, excuse me, six are debt. Can't add.
Sloan Bohlen – Goldman Sachs
Okay. And on the 14 new people that were added, were any of those in new markets or in existing markets?
They're all in existing markets.
Sloan Bohlen – Goldman Sachs
Sloan, we had some really great hires at the beginning of the year. Doug Hazelbaker and Ryan Shore came to us from a competitor. They were very highly sought after retail investment sales professionals. They joined us in Dallas. We were also able to work out an arrangement where we brought over the entire self-storage group that was pretty much headquartered in Houston and probably owned a fairly significant chunk of the self-storage business. [Aaron Swardlyn] and his entire group, which consisted of people in Houston and LA, we were able to make that deal happen about three or four weeks ago. And then we've added people in New York City, both debt and HFF Securities, and debt and investment sales in Los Angeles. And those were all new people joining us from outside of the firm. And then, as Nancy mentioned, the promotions of analysts or junior producers to fulltime producers, those occurred in Atlanta, Chicago, Dallas, Houston, Indianapolis, San Francisco, New York and Washington, D.C.
Sloan Bohlen – Goldman Sachs
Great. Thank you for the detail. Thanks, guys.
(Operator instructions). At this time we have no questions in queue. I would now like to turn the call back over to Mr. John Pelusi for closing remarks.
And we apologize for the length of the call but thought it was important to get through all of that. And we look forward to speaking with you on our next call in 2008. Thank you.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.