HFF, Inc. Q1 2008 Earnings Call Transcript

May.28.08 | About: HFF, Inc. (HF)

HFF, Inc. (NYSE:HF)

Q1 2008 Earnings Call

May 6, 2008 8:30 am ET

Executives

Myra Moren - Director of Investor Relations

John H. Pelusi, Jr. – Chief Executive Officer

Gregory R. Conley – Chief Financial Officer

Nancy O. Goodson – Chief Operating Officer

Analysts

Jonathan Habermann - Goldman Sachs

Michael Grossman - MFS Investment Management

Operator

Welcome to the first quarter of 2008 HFF, Inc. earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today's call, Myra Moren, Director of Investor Relations.

Myra Moren

Welcome to HFF Inc.'s Earnings Conference Call to review the company's first quarter of 2008 results. Last night, we issued a press release announcing our financial results for the first quarter of 2008. This release is available on our Investor Relations website at www.hfflp.com. This conference call is being webcast live and is being recorded.

Also available on our website is a related presentation, which you may use to follow along with our prepared remarks. A .pdf version of the presentation along with the transcript of this call will be archived on our website.

Several investors have requested that we continue to update our capital markets outlook during these challenging times. Therefore in addition to the slides we discuss during today's' conference call, we have compiled an update to the capital markets presentation we made during our year-end call in March, which provides a more detailed view of the current capital markets. This presentation will not be discussed on today's call but will be posted to our website later today and will be provided in .pdf format.

Before we start, let me offer the cautionary note that this call contains forward-looking statements within the meaning of the Federal Securities laws. Statements about our beliefs and expectations and statements containing the words may, could, would, should, believe, expect, anticipate, plan, estimate, target, project, intend and similar expressions constitute forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties, and other factors, which could cause actual results to differ materially from those contained in any forward-looking statement. For more detailed discussion of these risks and other factors that could cause results to differ, please refer to our first quarter of 2008 earnings release dated May 5, 2008 and filed on Form 8-K and our most recent annual report on Form 10-K, all of which are filed with the Securities and Exchange Commission and available at the SEC website.

Investors, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Except as required by applicable law including the Securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements after the date of this conference call. We may make certain statements during today's call, which will refer to certain non-GAAP financial measures, and we have provided reconciliations of these measures to GAAP figures in our earnings release.

With that in mind, I will introduce our senior management team. Conducting the call today will John Pelusi, Chief Executive Officer, Gregory Conley, Chief Financial Officer, and Nancy Goodson, Chief Operating Officer.

I will now turn the call over to our CEO, John Pelusi.

John H. Pelusi, Jr.

Our first quarter results clearly reflect the turbulent, volatile conditions in the global and domestic capital markets, which have seen an unprecedented level of write-downs, credit losses by both domestic and international financial institutions, $319 billion as of the beginning of May, as well as a softening in the US economic environment, especially on the consumer front. These conditions continue to erode the already tepid investor confidence in nearly every aspect of the fixed income debt markets resulting in further negative pressures on the re-pricing of debt and equity risk.

These conditions, coupled with a weakening US economy, caused a number of capital sources to cease or significantly curtail their lending, especially in the US commercial real estate capital markets, which had a significant adverse impact on the company's production volumes, revenues, net income, EBITDA for the first quarter of 2008.

Despite these volatile conditions, we remain focused on our strategic business expansion plan to position the company for the future by taking advantage of our strong balance sheet, our solid cash and liquidity position, and our fully-integrated capital markets services platform by adding high-quality production personnel through both organic advancements and external recruitment.

We have a very full agenda today in light of the above and during this call, we are going to focus on the following, report on our first quarter operating results, an update on the capital markets for all asset classes with an emphasis on commercial real estate. As Myra mentioned, we are not going to spend a great deal of time on these conditions, and the goal is to attempt to highlight relevant changes to the issues and concerns from our year-end call at the beginning of March that we believe are pertinent to today's call.

Some of the highlights we will touch on are as follows: new headwinds in the global capital markets since our last call, improvements as well as stubborn liquidity and credit concerns in the global capital markets, positives in the global capital markets, highlights of where we believe the US commercial real estate market fundamentals are, where the US commercial real estate debt and equity markets are today versus where they were at the end of 2007, improvements in the US commercial real estate capital markets, as well as some of the same stubborn liquidity and credit concerns affecting all global capital markets, the impact on pricing of US commercial real estate debt and equity as well as transaction volumes, and then positives in the US capital markets.

The third thing we are going to touch on is our strategy and recent organic growth and recruitment as well as our past experience in previous downturns, most recently during 1998, '99 as well as during 2001 and ‘02 and why we were undertaking these strategic growth initiatives today, the depth and experience of our transaction professionals, our senior management, almost all of which are transaction professionals, which we believe is key in today's challenging economic environment, and finally, our pay-for-performance business model and how we believe we are aligned with our shareholders related to the strategic investments we are making, which we believe will lead to future earnings growth and shareholder value when the issues and concerns facing all global capital markets and the current economic conditions in the US and other parts of the world recover from the unprecedented hits they have taken.

Following these presentations, we'll open the call to answer any questions. Before turning this call over to Greg and Nancy, on behalf of all of our associates, I would like to express our appreciation to our clients who continue to show their confidence in our ability to perform value-added services for their commercial real estate and capital markets needs as evidenced by the $4 billion in consummated transactions during the first quarter in these demanding and 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 to provide superior value-added service to our clients.

I will now turn this call over to Greg and Nancy, who will report on our financial and operational results in the face of these challenging times, which we believe started back in late February 2007, as we have reported on each of the previous earnings calls in 2007 and in March 2008. I will now ask Greg to discuss our first quarter of 2008 financial results in more detail.

Gregory R. Conley

I would like to go through our first quarter of 2008 results. I want to highlight again that the financial results presented in the earnings press release reflect the consolidated financial position and results of operations of Holiday GP, HFF Partnership Holdings, LLC, the operating partnerships, and HFF, Inc. for all periods presented. A minority interest line item included in the financial statements relates to the ownership interest 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 its initial public offering. Revenue for the first quarter of 2008 was $32.2 million, which compares to $55.5 million in the first quarter of 2007, a decrease of $23.4 million or 42.1% from the first quarter last year. This decrease was due to the conditions briefly described earlier by John.

The company had an operating loss of $1.5 million for the first quarter of 2008 compared to an operating profit of $7.7 million in the comparable period in 2007, a decrease of $9.3 million. This decrease in operating income is attributable to the decrease in production volumes and related revenue from the prior year in several of the company's capital markets service platforms.

Offsetting this decrease in revenue of approximately $23.4 million is a reduction in total operating expenses of approximately $14.1 million in the first quarter of 2008 as compared to the same period in the prior year. This reduction in operating expenses is a result of a decrease in cost of services of approximately $11 million, which is primarily due to the decrease in commissions and other incentive compensation directly related to the lower capital markets services revenues and a decrease in operating, administrative and other expenses including depreciation and amortization of $3.1 million, which is primarily related to a reduction in other performance-based accruals and depreciation and amortization.

The largest portion of our expenses is cost of services. A majority of the costs 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, a significant portion of this cost category is variable.

There are, however, fluctuations in this category quarter to quarter, depending on the reported revenue amounts, the timing of certain payroll and other benefit costs as well as fluctuations that occur from time to time in the fixed cost portion of this cost category. As such, a longer-term comparison such as a year-over-year basis of this cost category is the most representative measure and is evidenced in part when comparing the first quarter of 2008 results to the results for the first quarter of 2007.

Having said that, the cost of services decreased $11 million or 33% from the first quarter of 2007. As previously stated, this decrease is primarily attributable to the decrease in commissions and in other incentive compensation directly related to the lower capital markets services revenue.

However, cost of services as a percentage of revenue increased from 60% in 2007 to 69.3% in 2008. This increase in the cost as a percent of revenue is attributable in part to a year-over-year increase in the fixed cost component of this category, which is primarily related to salaries of the production support personnel and other payroll-related items.

This year-over-year percentage increase was further impacted in the first quarter of 2008 as a result of the increased fixed cost amount spread over a lower revenue base than in the first quarter of 2007. It's important to note that we continued to support our strategic growth initiatives by expanding in the first quarter of 2008 with the addition of 28 new positions, bringing total employment to 487, which is a 12% increase from the first quarter of 2007 employment level of 435. Nancy and John will further amplify this point later on the call.

Operating, administrative, and other expenses decreased approximately $2.8 million from $13.5 million in the first quarter of 2007 to $10.7 million in the first quarter of 2008. These year-over-year decreases can be primarily attributable to a reduction in certain performance-based accruals and a year-over-year reduction in professional fees associated with supporting our public company structure and the requirements that were associated with our first year as a public company.

These decreases were partially offset by certain normal increases in other operating expenses and increased costs associated with the increase in personnel. Increased cost to support the growth in increased business activity were incurred throughout 2007 as the full-year revenue growth was approximately 11.3% from 2006 to 2007 and these costs primarily related to the 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, which represented a net increase of 59 employees.

The company continues to focus on pursuing opportunities to position itself for future growth by adding key personnel in targeted markets who can help us expand our platform services. We supported this strategic growth initiative by expanding in the first quarter of 2008 as the total number of employees had increased from 468 at the end of the 2007 to, as I said earlier, 487 at the end of the first quarter of 2008.

And again, Nancy will expand upon this in her operational report, and John will further amplify this point as well when he discusses our strategic initiatives. As mentioned earlier, these cost increases associated with increased personnel partially offset the decreases in accruals related to performance-based compensation and other public company and organizational change cost decreases.

The company's net loss reported for the first quarter of 2008 is not directly comparable to the net income reported for the first quarter of 2007 primarily due to the minority interest adjustment, which reflects HFF Holdings' ownership interest in the operating partnerships as well as the change in the income tax structure following the reorganization transactions and the initial public offering on January 30th, 2007.

This quarter's net loss includes an approximately $100,000 adjustment to the first quarter results to reflect the impact of a minority ownership interest of Holdings in the operating partnerships for the entire three months of the quarter. The company made an adjustment of $3.9 million in the first quarter of 2007 to reflect the minority ownership interest of

Holdings in the operating partnerships for two months of the quarter subsequent to the initial public offering on January 30, 2007. Again, prior to January 30, 2007, Holdings owned 100% of the operating partnerships and accordingly, there were no adjustments to reflect the impact as a minority ownership interest or associated corporate, Federal, and state income taxes for the period of January 1, 2007, through January 30, 2007.

Given the reorganizations, the offering and the tax effects, the company's net loss reported for the first quarter of 2008 was approximately $1 million. This compares to the first quarter of 2007 net income of $3.2 million after an adjustment of $3.9 million for the minority ownership interest of Holdings.

The net loss attributable to Class A common stockholders for the first quarter of 2008 was approximately $0.06 per diluted share as compared to net income of $0.13 per diluted share for the same period in 2007, given the caveats I mentioned earlier related to the comparability and the fact that the first quarter of 2007 only included two months. EBITDA for the first quarter of 2008 was approximately $200,000, which is a decrease of $9.5 million or 97.9% compared to the same period last year. This decrease again is primarily attributable to the decrease in our operating income, as discussed above.

I would now like to make some comments concerning our liquidity as well as certain balance sheet items. Our cash balance at March 31st, 2008 was $36.5 million, which was $7.6 million less than the balance at 12/31/07. 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 limited capital expenditures and virtually no debt to service.

I'd like to make a couple of key points regarding our use of cash during the first quarter of 2008. The majority of the reduction of cash during the first quarter of 2008 was primarily related to the payment of certain performance and other incentive-based compensation related to 2007's performance.

This is reflected on the balance sheet as the accrued compensation and other current liability comp was reduced from $17.4 million as of 12/31/07 to $10.1 million as of 3/31/08 for a total reduction of $7.3 million. Again second point, despite the reduced level of revenue in the first quarter of 2008, the company generated EBITDA of approximately $200,000. After considering non-cash expenses and income items and working capital needs for the 2007 accruals, the company had a net cash use of approximately $250,000, so for the most part, the company broke even from a cash perspective.

As of March 31st, 2008, we had no outstanding borrowings on our $40 million line of credit facility. On the balance sheet is reflected $36.3 million of outstanding borrowings under our warehouse credit facility to support our Freddie Mac Multifamily business, and we also had a corresponding asset recorded in the same amount for the related mortgage notes receivable.

The March 31, 2008, balance sheet also reflects a deferred tax asset amount of $125.6 million and a payable to the minority interest holder under the tax receivable agreement of $113.8 million, which is related to the step-up in tax basis of the operating partnerships assets to their fair market value from the initial sale of the partnership units as a result of the offering and the exercise of the over-allotment option. The balance sheet also reflects a minority interest balance of $21.7 million, which represents Holdings' approximate 55% ownership in the operating partnerships.

Now I'll turn the call over to Nancy Goodson to discuss our production volume and loan servicing business.

Nancy O. Goodson

I'd like to review our production volume by platform services and our loan servicing business for the first quarter of 2008 and compare these results with the first quarter of 2007. As mentioned earlier, in the face of the continuing difficult and challenging credit and liquidity conditions in all global capital markets, especially in the US capital markets, the company's production volume for the first quarter of 2008 totaled approximately $4 billion on 166 transactions compared to the first quarter of 2007 production volume of approximately $10.1 billion on 336 transactions.

This represents a 60.2% decrease in volume and a decrease of 50.6% in the number of transactions. The average transaction size for the first quarter of 2008 was approximately $24.3 million or 19.5% lower than the comparable figure in the first quarter of 2007 of $30.1 million. It should be noted that a portion of this 19.5% decrease in average deal size was due to an extraordinarily large investment sales portfolio transaction, which closed during the first quarter of 2007.

If this large portfolio transaction was excluded, our first quarter of 2008 production average deal size would have increased by approximately 2.9%. Debt placement production volume was approximately $2.3 billion in the first quarter of 2008 representing a 56.3% decrease from the first quarter of 2007 volume of approximately $5.3 billion.

Investment sales production volume was approximately $1.5 billion in the first quarter of 2008, representing a 65.9% decrease from the first quarter of 2007 volume of approximately $4.3 billion. As previously mentioned, when excluding the extraordinarily large portfolio sales transaction from our first quarter of 2007 average deal size, our first quarter of 2008 investment sale production average deal size would have increased by 29.1%. By comparison, according to Real Capital Analytics, sales transactions nationwide across our industry during first quarter of 2008 fell by 69.3% compared to a year earlier.

Structured finance production volume was approximately $210 million in the first quarter of 2008, decreasing 44.1% over the first quarter of 2007 volume of approximately $376 million. Net sales and net sale advisory services production volume was approximately $19.3 million for the first quarter of 2008, a decrease of 83.5% from first quarter of 2007 volume of approximately $117.2 million.

The amount of active private equity discretionary fund transactions on which HFF Securities has been engaged and may recognize additional future revenue at the end of the first quarter of 2008 is approximately $2.3 billion compared to approximately $1.3 billion at the end of the first quarter of 2007 representing a 72.6% increase. The principal balance of HFF's loan servicing portfolio increased 23.9% to approximately $23.6 billion at the end of the first quarter of 2008 from approximately $19 billion at the end of the first quarter of 2007.

Our average fees in the first quarter of 2008 increased to 79 basis points compared to the average basis points earned in the first quarter of 2007 of 54. When excluding the large transaction in the first quarter of 2007, the average basis points earned were 70.

As we have stated in past calls, as part of our strategic growth initiatives, we continue to build the firm through organic measures as well as to recruit with a focus on hiring the associates with the highest integrity and best reputation so we can serve our clients by putting the best team on the field. During the first quarter of 2008, we added 28 new positions including 13 transaction professionals and 11 production support personnel, bringing total employment to 487, which is a 4.1% increase from the previous quarter and a 12% increase from the first quarter of 2007 employment level of 435.

I will now turn the call back over to John for his presentation on the capital markets and his remarks.

John H. Pelusi, Jr.

I'll now attempt to highlight some of the more relevant changes to the issues and concerns from our year-end call at the beginning of March that we believe are pertinent to today's call. I would like to now refer you to the PowerPoint presentation made available to you prior to the call and would ask you to go to Slides 4 through 6 entitled “Strong Headwinds - But May Be Slowing, The New Headlines Are Not Good!” Since March 4th, just over 60 days since we last reported, we have seen a further increase of $138 billion in asset write-downs and credit losses, and the total now stands at $319 billion since the beginning of 2007.

As of April 22nd, just over 40 days since we last reported, banks and securities firms have sold additional stakes to raise an additional $89 billion where the total stood at $194 billion when that was when asset write-downs and credit losses stood at only $290 billion. On May 5, just yesterday, the Federal Reserve said that a net 70% of banks increased their loan rates over their cost of funds for commercial and industrial borrowing compared to just 45% in January.

The portion of US banks making it tougher for companies and consumers to borrow approached a record in the past three months as the credit crunch deepened in the banks. The total number of US banks reporting tighter lending standards were close to or above historical highs for nearly all loan categories in the survey.

Despite more than $400 billion of liquidity dumped into the markets by the Fed and other central banks and a 325 basis points reduction in the Federal Reserve Target Rate, we believe there has been some modest improvements in the credit conditions. However, there are still some serious liquidity and credit concerns, especially in the financial sector, which are very clearly highlighted on Slides 7 through 9, which were pulled directly from Bloomberg on May 2nd, 2008.

As you can see from these slides, while short-term LIBOR rates, both 30 and 90 days, have dropped by about 50% to roughly 2.7% from a year ago, spreads relative to the Federal Reserve Target Rate are well above historical norms, 70 basis points and 77 basis points respectively. What's even more concerning is that the ten-year AAA banking and finance rate has actually increased from 5.39% to 5.56% from a year ago, and the spread between the ten-year and the Federal Reserve Target Rate continues to widen almost daily to nearly 340 basis points from approximately 15 basis points a year ago.

Five-year AAA banking and finance rate has dropped marginally to 5.9% from 5.05% a year ago. However, the spread between the five-year and the Federal Reserve Target Rate continues to widen almost daily to nearly 260 basis points from the point where it was trading nearly 20 basis points inside of that rate a year ago. Therefore, while the most serious risk may be behind us, we are still facing many of the same global, domestic, and capital market issues and concerns that we were facing some 60 days ago, which are highlighted on Slides 10 and 11.

I'm not going to go through all of these, but we believe there are more losses to come from the global and domestic financial institutions and their balance sheets are still constrained for new lending. There's still a general lack of confidence in collateral and past financial engineering products, and the ability to leverage the leverage is gone for now and may be for quite some time. The de-leveraging will take some time to fully unwind, maybe as long as the end of 2009.

There is a general lack of liquidity for new deals, especially large loans, but balance sheet lenders that have capacity are lending on the right deals but in a lender-friendly environment. We are clearly in a lender-friendly environment. He who has the gold makes the rules. There is a continuing global re-pricing of debt and equity risk, especially in the debt markets.

The US residential markets will be a problem until at least mid-2009, and the US and possibly other parts of the world are also slowing and experience an economic slowdown and/or recession, and we are faced with stubborn inflation in the food and energy sectors. Most of this is not positive for higher values for most asset classes in the near term. However, we believe that assets with solid and increasing cash flow, earnings will stand out and attract investment dollars.

As was the case some 60 days ago, there are some positives which we highlight on Slides 12 through 15. If you thought rates were low last year, the Federal Funds Rate and Prime are down 325 basis points. One month and three month LIBOR are down approximately 2.6%. The two year Treasury is down over 3%. The five year is down nearly 2.4%, and the ten year is down almost 1% and is nearly at a 47-year low.

There are clearly large pools of capital waiting to be deployed including the sovereign wealth funds who have clearly demonstrated willingness to step up to the plate based on their investments in many global and domestic banks and securities firms.

I think Slide 15 sums up how far we have come in the current crisis as GE deal clearly demonstrated that well capitalized, well run corporate credits can access significant liquidity in a very short window as it raised nearly $8.5 billion of capital, which was the largest single bond deal since 2002 when GE raised $11 billion, which now brings us to the US commercial real estate markets, which we will try to cover quickly in Slides 17 through 40. Turning to Slide 17, we will review the US commercial real estate capital markets and touch on the following.

This is a very large market with underwriting and due diligence. The total US commercial real estate market is $4.7 trillion. There are numerous on-book lenders that hold risk for their own account. There are underwriting standards, e-buyers, due diligence, there's income, there are generally tenants with their own credit, and there's always loan documentation. It is not residential. We do not do no-doc loans, and sponsorship is important.

The industry tries to lend money to people who will pay them back on hard assets. This is graphically readily apparent when you take a look at Slides 18, 19, and 20. The current 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, 0.52% in the CMBS market as of March 2008 as shown Slide 21.

Although we believe there will be some increased delinquencies coming due to maturity defaults, which are expected to increase due to balance sheet and liquidity issues in all debt markets, we think the defaults will primarily be on the short floating term rate deals that were originated in the past 12 to 18 months, which total approximately $125 billion. That will start to mature in the next 6 to 18 months.

We think recent property performance since 2004 has generally been healthy with growth in rents and NOIs and while projected property performance is expected to moderate and slow due to the slowing economy, we think if there are any decreases, they will be from a very strong base, as shown on Slide 22.

Project supply is in check, and we think current credit market conditions will ensure it will remain so. High reproduction placement costs offsets office and rental growth as tenants will think twice about relocating or building out new space due to higher rent costs needed to justify new or renovated space, and we believe fund flows in the commercial real estate sector will likely moderate or decline slightly but from very high levels from a historical standpoint, and over the long term, we think they'll be sufficient to support the overall health of the market.

De-leveraging will cause net outflows in the debt markets, and the denominator affect on the equity due to decreases in equity values globally and domestically may slow funds’ flow into commercial real estate equity but again from very high historical levels. There are similar stubborn liquidity and credit concerns in the US commercial real estate debt markets as well, as touched on in Slides 23 through 26.

It is important to note that banks make up approximately 50% of the capital provided to the US real estate markets, as evidenced on Slide 23. Many of the local regional banks have no exposure to the residential markets, LBO markets, SIVs, CDOs, et cetera. They have been significant players in the fourth quarter of 2007 and have continued right into the first quarter of 2008.

Our business with this group of capital providers has increased dramatically in the first quarter of 2008. That said, we believe this group will slow as the regulators begin to push into the regional local banks, having completed their due diligence on the national banks and securities firms. We believe that historical mortgage flows, as shown on Slide 24, will definitely be lower in 2008. The question is, how much lower? US CMBS issuance will definitely be a lot lower.

It is basically non-existent in 2008 when the flop-over deals from 2007 are excluded, but it is off 90% from last year's levels including the flop-over deals from 2007. We do not believe the CMBS market has to get back to the $200 billion mark, as it was in 2006 and 2007, as we think much of this was driven in large part by the public-to-private phenomenon.

We do believe it will need to reach the $100 billion plus range to provide necessary liquidity to support the market on a go-forward basis, or some other form of debt capital will need to be created to step into the void for reasons outlined later in our presentation. We think it likely that one of these scenarios will happen, but it might not be until the end of 2008 before the CMBS market begins to get its footings again as the balance sheets are still constrained, as noted earlier.

We are hopeful that the life companies, as noted on Slide 26, will increase their programs in 2008. However, there is no way they can step into the void left by the CMBS market. Many have stepped up their lending but have recently pulled back, some due to the significant sums they have invested in the first quarter of 2008, and they want to maintain their liquidity through 2008 for their existing clients. The agencies, as noted on Slide 27, appear to be poised to be the new batting champs in 2008 and have significantly ramped up their lending to the multifamily markets, but again, they cannot fill the void left by the CMBS market.

As we discussed on our year-end call, 2004 through the first quarter of 2007, as shown on Slide 18, saw dramatic increases in funds flow, increasing leverage, financial leverage, coupled with a healthy economy, strong property performance and a limited supply. We called it the perfect storm for great commercial real estate valuations and frankly for all valuations. This is really highlighted on Slide 29.

These conditions drove values, sales volumes and CMBS volumes until mid-2007 when the music suddenly stopped. This brings us back to the same issues we discussed back on Slide 10 when we discussed the global capital markets. Commercial real estate, despite its strong fundamentals, is faced with the same issues facing global capital markets, as shown on Slide 30. If it sounds familiar, it is.

As shown on Slides 31 and 32, there have been some improvements in the commercial real estate capital markets, however we still have a long way to go to get back to what we believe will be equilibrium, and there is still a great deal of concern from the fixed income investors who invested in debt instruments in this market. The question everyone has been asking is when the CMBS market will recover.

Based on past experiences, see Slides 33, it should have recovered by now. We believe that the recovery will start in the third quarter or fourth quarter of 2008 as we have been hearing some pricing inquiries from some of our CMBS lenders that if we price debt at this level or that level, do we believe there will be some takers? We have obviously told them there would be.

The net impact of all these unprecedented events that we have talked about has been quite dramatic on commercial real estate debt and equity transactions and volumes in the first quarter of 2008, as evidenced on Slides 34 through 39. CMBS issuance in the first quarter was $5.9 billion, down 90% from $62.1 billion in the first quarter of 2007, which includes some flop-over deals from 2007.

CMBS new issuance supplied through April 2008 totaled $9.9 billion, down 88% from the $81 billion during the same period in 2007. Portfolio lenders have picked up some of the slack but have done so on their own terms. In all cases, these lenders who are making loans are doing so on vastly different terms and conditions than they were in 2006 and 2007, again giving new meaning to the phrase, he who has the gold makes the rules. This is readily apparent on Slides 39 through 40.

This is causing many borrowers to ask the question, “What happened?” and is also part of the reason why the investment sales market has been negatively impacted. That said, many portfolio and other lenders have to justify making whole loans on a relative value basis, which is difficult to do when they can buy AA bonds at higher spreads; however, many lenders will not touch the nearly $500 billion of vintage loans made between 2005 and 2007.

You can refer back to Slide 25 to see those vintage loans and the years they were originated. These conditions and the significant liquidity and credit concerns as well as the re-pricing of debt and equity risk has had an equally dramatic impact on investment sales, as shown on Slides 29, 34, and 35.

According to Real Capital Analytics' report on US office, industrial, retail and apartment markets, through March 31, 2008, sales are down 69% year-over-year and cap rates are up almost across the board. Office sales are down 82%. Industrial sales are down 36%. Multifamily sales are down 41%. Retail sales are down 76%. Hotel sales are down 47%, which brings us back full-circle to the same positives we had discussed in the beginning when we talked about global capital markets.

As was the case some 60 days ago, there are some positives, which are highlighted on Slides 41 through 45. For example, if you thought rates were low a year ago, the Fed Funds and prime rate are down 3.25%. The one month and three month LIBOR are down approximately 2.6%. The two year Treasury is down 3% and the five year is down nearly 2.4%. The ten year is down almost 1% and is at nearly a 47-year low.

In addition to the sovereign wealth funds, there are large pools of private equity capital waiting to be deployed as shown on Slide 43. $318 billion in 2008, up from $236 billion in 2007, with 2008 buying power of over $900 billion. Another positive is that the US is ranked as the country providing the most stable and secure real estate climate by AFIRE in its 2007 year-end study, which is shown on Slide 44.

And finally, like in discussions on global capital markets, Slide 45 sums up how far we have come in terms of the current credit liquidity crisis in the US commercial real estate deal markets as the iStar deal clearly demonstrated that high-quality real estate with great sponsorship and good credit can access significant liquidity in a very short window as it raised nearly $1 billion of capital from GE. It's ironic as GE was our example in the global capital markets. This deal is probably the single largest financing provided by one lender in 2008 and was arranged by HFFs Boston and New York City offices.

Slides 47 and 48 show that cap rates have begun to move up, but we believe pricing on both the debt and equity is still attractive on a historical basis as you can see by the graph. While prices are above 2007 levels, which were at historic highs, they are still at the low end of the range, dating all the way back to 1982.

While all the above is interesting, we think it is important to remind everyone that HFF is in the transaction business, not the principal business, and we'd like to refer you to Slide 49, but before I get into that, I think it's important that a number of our clients believe that market conditions will improve dramatically in the second half of the year, and there's an equal number of those people that believe that prices will be lower and conditions will continue to worsen, which is why we think the transaction volume for HFF was off in the first quarter. There's a lot of people just sitting on the sidelines waiting to see how this thing is going to turn out.

But getting back to the presentation, going to Slide 49, in the face of one of the most difficult capital markets we have seen in over 25 years, we have consummated more than $4 billion of debt and equity transactions in the first quarter. It's important to remember that mortgage flows were approximately $2.1 trillion from 1998 through 2007, and those loans will have to roll over as they mature.

The US sales were approximately $1.7 trillion from 2001 to 2007. The CMBS mortgage flows were approximately $1.07 trillion from 1998 to 2007. Freddie and Fannie Mae flows were approximately $455 billion from 1998 to 2007. Life company mortgage flows were approximately $325 billion from '98 to 2007. Equity will need to be harvested and loans do mature. Regardless of whether there is one more property built, there is a great deal of business for HFF to transact on.

I would now like to refer you to Slides 50 through 57 to review HFF in light of the above, where we have been, our historical perspective, and we believe we are uniquely positioned and prepared for the future. Slide 51 is probably the most important slide in our presentation. It's our mission and vision statement.

Covering less than a page, this important message clearly articulates our approach to clients, our vision for the business and the high value we place on our people, and it exemplifies our pay-for-performance philosophy and clearly articulates why our interests are aligned with our shareholders. From a competitive standpoint, we believe on an overall percentage basis. We are a small part of the transactions that occur in the US capital markets, probably in the 5% to 7% range, and we continue to believe we have plenty of outside opportunity to increase our market share, regardless of the current market conditions.

That said, from an institutional standpoint, we believe we are clearly one of the select handful of commercial real estate intermediaries in the US. Our integrated capital market service platform puts us in the unique position as an independent, objective advisor to provide value-added services to our clients, particularly now in a volatile capital market. In a consolidating environment like the one we have been in and the one we are in now, it provides a unique opportunity, a platform and avenue for regional firms and/or key individuals from competing firms to grow their businesses and maintain their client relationship as we are not, like some of our competitors, have more than 100 offices in the US.

Slides 52 and 53 clearly point out how and why we believe we can continue to grow our firm both organically and through strategic recruitments, which we have a demonstrated historic track record of successfully accomplishing in difficult credit and economic times, which is also shown on Slide 54.

We can expand our geographic footprint. If you look at Slides 52 and 53, we only have 18 offices, and there are several MSAs who would like to have an office, provided we can find the right strategic people with the right culture to open up an office. As you can see on Slide 52, we have the ability to add platform services to our existing offices and leverage off of the current fixed income investments we have made in those markets.

While we believe 2008 will be very challenging, we also think it will be the best time to strategically grow this firm since 1998 and 2001 when there were also significant issues that are very similar in some cases, some as severe with long-term credit capital in 1998 and 9/11 in 2001, as shown on Slide 54.

In those challenging times, we were able to grow the firm by opening our LA office in 1999, which is now the home of HFF Securities. We opened our DC office in 1999 as well, which is one of our largest offices and is a market leader in DC on the IS and debt side. We added a significant IS platform to our New York office in 2001. We opened our Chicago office in January of 2002, and it too has grown to be one of our larger offices with IS, debt, structured finance, note sales and recently, HFF Securities.

We added the southeast region [inaudible] office to our Miami office in January 2002 as well as consolidated all of our Florida operations and today it is one of our larger 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 our prior entities such as Fenoglio, PNS Realty Partners, Vanguard, and acquisitions made by AMRESCO from January 1998 through September 1998, then had to deal with AMRESCO selling our businesses to Lend Lease in March of 2000 and then continued to grow the firm from June 2003 when we were able to purchase the firm from Lend Lease through our reset ownership at the end of 2006 and then the subsequent IPO in 2007.

So we have demonstrated we have a track record of growing difficult environments. Therefore, we believe Slides 52 through 54 are important to keep in mind when you look at our growth in high-quality people from 2007 through the first quarter of 2008. As Nancy mentioned earlier, over the past year, we have brought our total employment to 487 people, which is a 4.1% increase from the previous quarter and a 12% increase from the first quarter of 2007 when our employment levels stood at 435 people.

Some of the more notable transaction professionals we have recruited to the firm include the following, and we are hopeful that they and our current group of associates will allow us to achieve similar results, as shown on Slide 54. We were very fortunate in bringing over Danny Miller and Rusty Tamlyn, who came to us as a result of the [Tramil Crouse] CBRE merger. They did not want to stay part of that group and we recruited them to our firm at the beginning of 2007. At the beginning of 2007, we were able to also add Jim Meisel and Dek Potts, who from GBS Advantis, which was a smaller regional firm in DC, they were looking for a home, a larger platform to grow into.

We were able to add significant presence to our Los Angeles debt operation with three debt producers throughout 2007 and in Atlanta, we added a debt producer, Michael Kale, and in late 2007 we were able to recruit, Dan Peek came to us from the Placencia Group. He was looking to expand his reach through our platform. And then, we added Bill Mitchell in our note sales group in Chicago who came to us from Lake Forest Advisors. Beginning in 2008, we added some investment sales professionals. Brain Lay came to us from Sperry Van Ness. He's in our LA office doing investment sales. We were able to bring Doug Hazelbaker and Ryan Shore to us from CBRE. They're now in our Dallas office in the retail side.

We were able to add Alan Davis in the Washington, DC, who is part of our multifamily group. We added another debt producer from George Smith Partners, Norman Lee. And we added Erik Dowling in our New York City debt office. We significantly bolstered some of our calling efforts for HFF Securities by adding Eddie DiDomenico, who's in our New York office, and he's with HFF Securities.

We announced earlier this year the acquisition of SAI, a self-storage group, and we were able to bring Aaron Swerdlin and his group into our Houston office, and they also have producers that are in our LA office. We are in the middle of several key negotiations. We were hoping to be able to announce one this morning. I don't know if certain documents got signed or not, so I'm not at liberty to talk about them.

But, I think you can see by just talking about those recent hires in 2007 and 2008, you can see that we have spent a great deal of time of trying to grow and expand our business. We think it's important that you keep the following in mind when you look at our business and our people and again, looking at Slides 55 through 57, we have significant depth and experience within our transaction professional and senior management ranks, which is why we believe it is key in today's challenging environment.

Our top 25 transaction professionals by initial leads have average tenure with HFF and it predecessor companies of 13.3 years. In 2007, 60% of the initial leads by revenues were generated by owner transaction professionals. It is also noteworthy that 27% of our transaction professionals are also owners. Recall that our transaction professionals, for the most part, do not make money unless they are consummating transactions.

We also believe our pay-for-performance business model better aligns us with our shareholders. It is important to note that 80% of our mangers are owners, and only three of our most senior managers are not transactional professionals: Greg Conley, our CFO, Nancy Goodson, our COO, and David Croskery, who runs our serving platform are those people.

But, all of them have some form of ownership in the company and therefore, they too have a vested interest in the performance of the firm. Recall that our managers, for the most part, are all transaction professionals and make the majority of their compensation as transaction professionals, but they also participate in our profit participation pool providing they hit a 14.5% profit margin. They get 15% of the net for their office and/or line of business, which we believe align them with ownership even if they're not currently owners.

Recall that there are more than 40 transaction professionals who currently own 55% of the market value of the firm and are on equal footing with our shareholders in all investments and profits resulting therefrom. We have a fiduciary responsibility to our outside shareholders, and we currently invest $0.55 of every dollar related to strategic investments we are making from our side of the current ownership group that we have, which we believe will lead to future earnings growth and future shareholder value when the issues and concerns facing all global capital markets and the current economic conditions in the US and other parts of the world recover from these unprecedented events that have taken place.

We believe the above correctly aligns our interests with those of our shareholders, and we do not believe there are many other companies, if any, that are so structured and so aligned. In conclusion, we have significant free cash flows, resources to invest in the acquisitions and in our people to strategically grow the business; however we will not grow for growth's sake, as we repeatedly stated on our road show. We continue to actively recruit new associates to our firm as well as continuing to mentor our existing associates to grow into producers.

As Greg mentioned, we have an un-drawn $40 million unsecured line of credit to use if there is something bigger that we want to step into. We have our Omnibus plan in place to reward the value-added performance and to strategically grow the company. We also have our stock to use as currency to strategically grow the company.

The above is an incredible financial base to grow with. In the 26-plus I've been doing this, my partners and I have never had access to this financial power and ammunition to grow transaction-based firms such as HFF. Today, there are less than a handful of firms that have this platform and financial footing. 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.

Therefore, we believe we have the opportunity to repeat history. While others are focused on the disruptions and negative things going on, we intend to continue to focus on our strategic growth initiatives and grow our firm and seize upon the opportunities that come out of major disruptions such as these. We believe we have the chance to do even bigger and better things than we did from 1998 to 2007, provided we continue to respect and trust each other and keep all of this in perspective.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jay Habermann - Goldman Sachs.

Jonathan Habermann - Goldman Sachs

You obviously cited a lot of data, but can you perhaps give us some perspective in terms of how we are sitting today? Obviously in May versus say in January, just how business is trending and obviously in light of your performance in the first quarter?

John H. Pelusi, Jr.

We really don't give guidance. What I can tell you is I don't believe in January or February we would have been able to get the iStar deal, or the iStar transaction, and we have recently been announcing several large transactions that we've done. So clearly from the credit markets, there has been some improvement. Some of the lenders are stepping up to the table.

I'd say that the unrated spreads have come in about 150 basis points, but they're still at very wide levels. The life insurance companies are still lending money, but they have trended down from 65% to more in the 60% range. They have lowered their spreads. We are seeing Freddie and Fannie lowering their spreads. We're seeing the life companies lowering their spreads.

We're seeing the local regional banks continue to lend, but we're seeing some softness there simply because the OCCs into their shops having come out of the national banks. So I would say that we're seeing some improvements, but there's still some very stubborn liquidity and credit concerns in these capital markets.

That said, and again as I pointed out, we have a number of our clients who are sitting on the sidelines, some of whom think the markets are going to get worse. They don't want to buy today because they don't want to catch, as it's been said, the falling knife. They don't want to buy a property today and then have a mark-to-market later, so they're waiting to buy later on.

And then conversely, you have a whole group of people that own properties who are saying, I think the market's going to get better in the second part of the year and therefore, I'm going to wait and hold off from selling. So you're going to have an interesting dynamic of two different groups who have two totally different views of the world in the second half of the year.

But again from our perspective, we don't really have a stake in the fight there. We don't have a say one way or the other. We only care about transactions happening and clearly, we believe the first quarter was one where there was a lot of confusion. People were waiting to see how the markets shake out and if you absolutely did not have to transact, people basically sat on the sidelines, which is part and parcel of why I think the industry statistics are down. It's why our statistics are down. We believe we picked up market share in the first quarter.

If you recall the statistics that Nancy gave, all of our statistics, while down, were well above, or were down less, I guess is the best way to say it, we're down less than the national statistics. So we feel very good about our business. We've asked all of our producers to get out, talk to our clients. I've probably never gone to more meetings. I know our senior people have been in more meetings than they care to count because everybody wants to know what's happening in the markets.

And as I mentioned earlier on the call, we have had a couple of CMBS lenders make calls to us and say, “Look if we bring a product to the market that's 65% loan to value that's priced at 300 over plus or minus, do you think there will be takers for that debt in the market?” So we're starting to see some of this stuff unclog, but I think there's just got to be a lot more losses coming on the financial institution side related to the residential markets. That's going to hang with until the middle of 2009, so I think you're going to see starts and stops. But, we feel a lot better about the markets today than we did in January.

Jonathan Habermann - Goldman Sachs

In terms of obviously looking at the expenses and you mentioned margins, if John's correct and things remain choppy here, and again I know you're not providing guidance, but if you expect revenues to roughly remain at the level that they are for the next couple of quarters, is it fair to say that margins probably remain similar, in that 69% range? How much of the $36.5 million of cash on balance sheet, do you expect it to remain at that level? Or do you expect that to go down roughly over the course of the year as you continue to hire new personnel?

Gregory R. Conley

Well, a couple of points on the question there Jay, first if revenues remained at the level that we had in the first quarter and cost of services obviously being the line item you are referring to, there's a couple of things that go on in that line item, and we discussed this in prior calls.

The first quarter also has slightly higher expenses in that quarter for payroll taxes and 401(k) contributions relative to our higher comp people max out on those items in the first quarter, and we've typically seen as much as $1 million more in the first quarter on those expense items than we do in the next three quarters, and we expect that trend to continue on a line item basis because that's just in general how the expenses work here in the company.

So that line item in general we’ll see just some abatement from perspective, so you'll see a slight reduction there. However, the fixed component of that and our commission incentive base structure will be the same, so that cost line item will react similarly, as it did in the first quarter, for everything but those payroll tax and 401(k) type items.

As far as our cash, as I mentioned in the first quarter from an operating perspective, setting aside the non-cash items that affect our P&L as well as the fact that in the first quarter of '08 we did pay out a significant amount of bonus money, if you will, for things that relate to 2007 performance. We broke even from a cash perspective.

So again, given the level that we're talking about in the first quarter, if that were to continue and no other fundamental changes occurred, I would expect that we would continue to break even or in fact generate a little bit of cash going forward, given that additional reduction in expenses from the payroll tax and 401(k) contributions. Adding people, clearly when you add people, to the extent that we're adding producer level people, they're on commission plans.

Again, the business model that we have and the structure that we have is very beneficial. Working capital needs are limited when it comes to dealing with the producer-level people, because we only pay them as we get paid fees on transactions. However, if we add any groups of people, they come with some support level, so there will be some fixed cost component to that to the extent that we're adding some of the production support personnel. So we could see some increase at that level with the support personnel and the salaries and other benefits that we provide.

John H. Pelusi, Jr.

I think, Jay, there's a couple of other points there. As you can tell, we added a significant number of outside people in 2007. And I think if you exclude the $7 million plus or minus that Greg talked about that related to 2007 compensation matters that were accrued for 2007 but paid out in 2008, I think it's very clear, based on what Greg said, is that we basically were able to generate a break-even scenario of cash flows on reduced levels.

And I think one of the other points that I did not make in the presentation that I neglected to make, we turned down a great deal of business in the first quarter of 2008. We had a lot of clients who came to us and said, we want to sell this building at X, or we want to sell this retail center at Y, or we need to finance this property at this level and these terms and conditions and we said, look if you are really serious about doing that at those levels, we don't believe that can happen in the marketplace. We don't make the market, but we're in it everyday.

And when somebody comes to us and is asking for terms and conditions that are at 20% and 30% above what we're seeing transact, because we have senior level people and because they're smart enough to understand that that is not have-to business, it's more as I call it want-to business, I really want to sell this at a fuller cap rate, I really want to finance this at 85% loan to value at a 5% interest rate, no amortization, interest-only for the full term, we have enough smart people that we basically said to a lot of our clients, we cannot transact at that level. If you're not willing to transact at the market, we're passing on the business and we're moving on to the next level.

So I think that is another thing that I think should not be lost on the market, and I think as the market continues to muddle along as it is, I think more and more people are going to get the sense of reality that this isn't going to get cleared up any time soon. And if you have a transaction that needs to clear in the market in the next 12 to 18 months, you're probably better off doing it sooner rather than later, at least in my opinion. I think the other point that should not be lost on anyone on this call, and I think Nancy pointed it out, our basis points for fees for services went up.

And as we stated on our road show, if and when you get into these environments, the demand for high-quality people who have huge, significant experience, who have been through this before, who have been there and done that before, are able to command a higher fee for their services, which is why you saw our basis points go up in this quarter as compared to if you go back and look at our historical numbers that were in the S-1, I think they were in the 61 to 62 basis point range.

So I think there's a lot of very strong positives for this company. We don't know when all these things are going to get better. What I can tell you, being in this business for 27 years, is it will get better. And when it gets better, we are going to have the best people on the field, and we are going to be ready to transact and take market share, which is what we believe we're doing now.

Jonathan Habermann - Goldman Sachs

Nancy, what were the fees in the most recent quarter? Did you say 70, or was it 80 basis points?

Nancy O. Goodson

This recent quarter, it was 79 basis points.

Jonathan Habermann - Goldman Sachs

John, just following on that point, obviously on higher fees, you mentioned the $125 billion of shorter-term, floating-rate debt that will likely come due and obviously force owners to make decisions. But do you see that again as an opportunity to really continue to push fees in this environment?

John H. Pelusi, Jr.

We think that and other deals. We have some proprietary calling initiatives, Jay, that we have that we are spending a great deal of time with our producers to put them in front of business that has to transact, i.e. deals that are going to mature in later 2008 and 2009 and getting out in front of that business.

So I would say that we think there's a lot of great opportunities out there despite these market conditions. It's time like these when good companies distinguish themselves from great companies, and great companies distinguish themselves, and really great companies distinguish themselves from just ordinary great companies. And we think we're going to be in that latter category.

Jonathan Habermann - Goldman Sachs

You mentioned a lot of the clients sitting on cash. How long do you think this ultimately takes? Is it really a function of the debt market simply not being there? Or, do you think it's the latter and that obviously pricing needs to adjust? And clearly, they're both related. But I'm just curious, what do you see as the major driver at this point? Is it really the debt markets?

John H. Pelusi, Jr.

I think the debt markets are what's really holding a lot of this back. When you take the CMBS market, which was $230 billion and effectively call it zero because that's what it is, and while $230 billion is probably not the right number, it's clearly $100 billion to $125 billion, and the life companies don't have the ability to step into that gap. Freddie and Fannie have clearly stepped into it, but they can only step into it on multifamily.

And say multifamily is 20% of the market, you're still off $80 billion to $90 billion of debt that just isn't here, and it's not just in the commercial real estate sector. It's all sectors. And when you really look at the fundamentals, and I think you see this because you cover a lot of REITS, by and large, the real estate fundamentals across the country are, we're seeing , we're starting to go through our servicing portfolio. We're not seeing diminishing debt service coverage ratios. Things are pretty much holding in there. Rents are holding up. NOIs are holding up. Occupancies are holding up.

So we have tons of opportunity funds who call us every day, we want to buy your distressed debt. And we say, we don't know where it is. The CMBS market being at 0.52% delinquency, and we've been reporting on this for going on five quarters, it's just not moving. And where the distress is in the vintage loans. There are pools of securities that the street and banks have been sitting on, and that's where the distress is right now in the marketplace. But it's vintage loans, and a lot of people don't want to buy it because they can't get financing for it.

And then the second part of this thing is that the lenders, the CMBS lenders, are somewhat concerned about making loans. First of all, their balance sheets are still constrained. But if they make the loans, they need to clear the paper and right now, there's no mechanism out there to clear the paper. So all this stuff is just backing up and at some point in time, the street is going to raise enough money to stem the losses and then start to lend money, as will the banks.

It's just, I think, going to take a lot longer than people think, and I think a lot of it is going to play out with the residential market because a lot of these institutions are still holding residential paper, which is not going to clear. That problem's not going to go away until mid-2009 at best.

Operator

Your next question comes from Michael Grossman - MFS Investment Management.

Michael Grossman - MFS Investment Management

I think you've commented before that you've never seen the operating margins below 15% to 17%, and I assume that's a full-year number. Yet this quarter the operating margins were negative. My sense was that the fixed costs just weren't that high. And so is 1Q just an anomaly? You talked about some one-time costs, but I know your people really don't get paid unless they hit that 15% EBIT target, and we're really far away from that now, and if you can just comment on that?

Gregory R. Conley

Michael, just a couple of points to make sure we've got perspective. You're right, when we talked about the margins in the past, it was on a historical annual basis when we were looking at comparisons. And obviously in any particular quarter you can have swings and we talked about that. It's difficult to measure the company and look at just one quarter. You've got to look at it on an annual basis.

However, in the first quarter of 2008, the revenue number was $32.2 million, which is significantly less than any other quarter we've had in the past. It was almost 50% off from the first quarter of '07. So again, any fixed cost you have is spread over that lower revenue base, which is going to create a stress on the margins. Just walking down the line items, the most significant or variable cost component we have is the cost of services, and 85% of that line item is variable.

The rest is fixed. It's salaries for the production support personnel, benefits, and things of that nature that we provide to our employees. The other line items, occupancy and insurance, professional fees to a certain extent, and some elements of T&E and supplies have a fixed cost element. We have rents. We spent almost $1.9 million this quarter on occupancy costs.

So if you go back and you look at each quarter last year, you can see that the fixed cost components, or the items for most part below the cost of services line, and that amount is over $11 million in this particular quarter. So I think that being said, at a $32 million revenue level, I think you're going to see some stress on the margins. The positive aspect to that is all the things John mentioned regarding where we see things and where we're going and the jump from $32 million to $55 million is significant because for the most part, 50% of that increase in revenue will be paid out in our incentive comps.

And for the most part, the rest of that'll drop to the bottom line but for any additional fixed costs that we add from the addition of people. So what you see is a fixed cost structure that's in place. We put that in place all throughout 2007 to build up the infrastructure to support a public company. We've seen some positive aspects in this quarter in the abatement of some of our professional fees, given that last year was an unusual year and our first year as a public company.

We have our infrastructure in place relative to occupancy, signed on a lot of new leases throughout 2007, increased our office space to take on some of the new people we've been adding. So I think for the most part, the infrastructure is in place. It's a function of revenue at this point.

Michael Grossman - MFS Investment Management

Yes. I was less looking at last year and more looking at over the course of history, which of course we don't have all the information on those numbers. But if you go back over the last 10, 15 years, you've said on prior calls this didn't feel as bad as some of the prior downturns and I presume when you've stated you've never seen margins below 15% that that included those times.

Have times changed now in the last couple of quarters where things are worse than they were and therefore, being able to hold that 15% operating margin and the threshold for your employees where they get paid on that hurdle rate, that's probably in jeopardy until things get better here?

John H. Pelusi, Jr.

No. I don't know that I can say that, Michael. I think first of all, things have gotten materially worse than what anyone has expected, $319 billion of write-offs and credit losses with more to come. If you think back on the comments that I made, the Fed has dumped $400 billion of liquidity into the market. They've cut the discount rate by 325 basis points, yet the ten year AAA finance rate has actually gone up, that spreads in the five year and ten year have continued to widen from a year ago, every day they get wider.

That is financial stress that I don't control, that Greg doesn't control. We have no ability to control it. Also we are in the transaction business. The single worst thing that could happen to our company is exactly what happened in the first quarter, where you have an equal number of clients who own property and/or have money to invest, half of whom, or three-quarters of whom, or whatever the relationship is, some of them believe that things are going to get worse in the second part of the year. Therefore, they don't want to spend the money. They want to wait, because they don't want to catch the "falling knife".

The other half, or the other chunk of the group, believes things are going to get better, and they're going to wait and put their properties on the market, or they're going to wait and go finance. I can tell you that what we're seeing today right now is there's more and more people saying they're not sure where it's going, and they're probably going to try and start to put their toes back into the water.

And again, as Greg mentioned, these cut offs, these quarters, we're a transaction-based company. We have no control over when something happens. I can't tell you what happened in April, but if there were three or four deals that would have happened instead of happening at the beginning of April into March, we would have made money and our margins would have been better.

So looking at a company like ours that's totally transaction-based on a quarter-to-quarter basis is really a difficult to do, and that's not how we look at it. It's not how we manage the company. We look at it on a year-over-year basis. Our view is how do we, and again, we're in the same boat that you are. For every dollar that we spend, first of all, we have fiduciary responsibility for your $0.45 our public shareholders.

But likewise, we have $0.55 that we put in every single deal that we do so that when we're looking to make strategic investments or we're investing in the business, we not only do it with a fiduciary responsibility to yours, but we pay a great deal of attention to it because $0.50, $0.55 of every dollar, and in my case $0.05 of every dollar, is money that's coming out of our pockets. So we think that we are totally aligned.

We totally understand and can appreciate the question. We look at it on a daily basis. We look at our pipeline. We look at a whole bunch of things. All I can tell you is that with all of these capital flows that have come into the system, they've got to come out. Loans are going to mature, and it's our job to get in front of it. So if this thing continues to languish, I think our revenues are down but I think we're going to capture more and more revenues, and as Greg mentioned, the first quarter is generally one of our higher expense quarters, so I think that you're going to see some improvements on the margins there.

But I think as we go into the year, I think we're going to see more and more transaction volumes occur and I think when this thing does break, it's those people who have made the investments, who have the very best people who are going to capture the market share and the business when this thing breaks loose. And that's where we want to be.

Michael Grossman - MFS Investment Management

On personnel, I know you're adding here, but what's the attrition numbers? Have you lost folks so somewhere it would be you don't hit your payout thresholds, so people get paid a lot less and they leave? So what does attrition look like now?

John H. Pelusi, Jr.

Well, the profit participation is really for our managers. We haven't lost any managers. Nancy, I think we lost five or six existing producers in the quarter?

Nancy O. Goodson

That's correct. We lost six.

John H. Pelusi, Jr.

Six producers, so people get disillusioned. Maybe they're not doing enough business, and they move on. That happens every year. We have 171 producers today. So we have a big base to continue to grow from. And again, you're exactly right. I'm a transaction professional. Mark Gibson's a transaction professional, Jody Thornton, John Fowler, all of the people that sit on our operating committee. If we don't do deals, we don't get paid money.

The salaries that our managers get paid are at the very, very low end and the profit participation, they’ve got to get to a 14.5% profit margin to achieve the 15% profit participation payment from the first dollar, so we think that we are very much focused on driving at least to that number and frankly to a lot more.

There are no other questions. We'll go ahead and end the call. We want to thank everybody for participating on the call today, and we look forward to reporting our earnings on the second quarter.

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