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Edited Transcript of HF earnings conference call or presentation 26-Apr-17 10:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 HFF Inc Earnings Call

Pittsburgh Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of HFF Inc earnings conference call or presentation Wednesday, April 26, 2017 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory R. Conley

HFF, Inc. - CFO

* Mark D. Gibson

HFF, Inc. - Vice Chairman, CEO and Executive MD

* Myra F. Moren

HFF, Inc. - MD of IR

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Conference Call Participants

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* Brandon Burke Dobell

William Blair & Company L.L.C., Research Division - Partner and Group Head of Global Services

* Jade J. Rahmani

Keefe, Bruyette, & Woods, Inc., Research Division - Director

* Mitchell Bradley Germain

JMP Securities LLC, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good evening, and welcome to the HFF, Inc.'s First Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would like to turn the call over to your host, Ms. Myra Moren, HFF's Director of Investor Relations. Ms. Moren, Please go ahead.

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Myra F. Moren, HFF, Inc. - MD of IR [2]

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Welcome to HFF, Inc.'s earnings conference call to review the company's operating performance and production results for the first quarter of 2017.

Earlier today, we issued a press release announcing our financial results. This release is available on our IR website at hfflp.com. This conference call is being webcast and is available on the Investor Relations section of our website along with the slide deck you may reference.

Please turn to the slide labeled Disclaimer and the reference to forward-looking statements. This presentation contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 including statements regarding our future growth momentum, operations, financial performance and business outlook. These statements should be considered as estimates only, and actual results may ultimately differ. Except to the extent required by applicable securities laws, we undertake no obligation to update or revise any of the forward-looking statements you may hear today. For more detailed discussion of risks and other factors that could cause results to differ, please refer to our first quarter earnings release filed on Form 8-K and our most recent annual report on Form 10-K, all of which are filed with the SEC.

We may make certain statements during today's call, which refer to a non-GAAP financial measure, and we have provided a reconciliation of this measure to GAAP figures in our earnings release.

With that in mind, I will introduce our senior management team. Conducting the call today will be Mark Gibson, HFF's Chief Executive Officer; and Greg Conley, HFF's Chief Financial Officer.

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

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [3]

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Thank you, Myra. Good evening, everyone, and welcome to the call. As outlined in our earnings release, revenue totaled $138.8 million in the first quarter of 2017 and net income totaled $19.7 million, representing an 18.1% increase and a 41.7% increase, respectively when compared to the same period of the previous year.

As stated in our last earnings call, the commercial real estate capital markets remain unsettled due to uncertainty regarding domestic and global economic growth, economic cycle risk, geopolitical risk and the effects of the regulatory burden on financial institutions. These concerns resulted in the institutional commercial real estate market entering the period of price discovery or the formation of bid-ask gap between buyers and sellers. The statement is supported by the 9.6% decline in the industry's investment sales volumes in 2016 and an 18.3% decline in the first quarter of 2017 as reported by Real Capital Analytics. However, these statistics do not change our view of the favorable long-term fundamentals supporting the commercial real estate industry and the potential growth of future transaction activity.

Accordingly, we continue to invest in our core business as evidenced by the following points: A 10.8% increase in headcount over the past 12 months resulting in 90 net new associates joining the firm. Included in this figure is the addition of 42 net new transaction professionals, the highest such growth in HFF's history. As we've mentioned on previous earnings calls, our headcount growth is a result of both our organic and external recruiting efforts. The firm will balance these 2 approaches based on the strategic needs and the operating environment.

In the first quarter of 2017, HFF announced the concurrent closing of the acquisition of Leon Partners and the opening of an HFF office in London, England as well as the acquisition of Hentschel & Company, a boutique investment banking advisory firm in New York. The completion of these 2 long-term strategic initiatives, entering London historically one of the largest commercial real estate transaction markets in the world and significantly expanding the firm's M&A and corporate advisory services will allow the firm to continue to provide one stop capital markets advisory services to both the public and private domains of the commercial real estate industry.

The combination of the strategic initiatives previously mentioned, along with the opening of our Phoenix office and the initiation of the Seattle presence in 2016 should be viewed as an indication of the company's belief in the fundamentals of the commercial real estate industry and confidence in our business model, culture and people.

In keeping with the firm's long-term strategic plan, we will continue to add personnel to our offices, property verticals and business lines throughout 2017 subject to the overall performance of the U.S. economy as only 2 of the firm's 24 offices offers a complete complement of the firm's business lines and property sectors and the related synergies they generate.

In order to accommodate both our recent and future growth, we have significantly invested in the firm's general infrastructure, including additional administrative personnel in our accounting, human resources, research and information technology support functions.

Related to technology in 2016, the firm made a significant investment in expanding our infrastructure to allow our transaction professionals to more efficiently and effectively originate and conduct their business. HFF views these instruments, these investments as capital expenditures to support the future growth of the firm and to enhance the services we provide our clients.

Per our commentary on previous earnings calls, the length of the current economic cycle combined with the previously mentioned investor concerns have resulted in the redefining of risk relative to underwriting metrics for the majority of investors. In essence, investors have taken a more conservative underwriting approach relative to rent growth, expense recognition, exit assumptions, et cetera.

While the total return targets of investors have remained generally consistent relative to 1 year ago, the changes in underwriting metrics utilized to achieve that return have resulted in lower bid prices on many assets, which has created the aforementioned bid-ask gap. Stated differently, the market is experiencing price discovery whereby sellers and buyers are trying to determine the appropriate price given investors' perception of increased risk.

Additionally, with an underlying concern for economic cycle risk, investors have also opted, in some situations, to curtail investing large amounts of equity in single transactions of scale in favor of diversifying equity over multiple assets in separate geographic regions and across differing property verticals. The 38.4% decline in portfolio at any level transactions reported by RCA in the first quarter of 2017 thus contributed to an outsized impact on the aforementioned headline decline of 18.3% in the same time period.

However, as we stated on previous earnings calls, volatile capital market conditions can result in an increasing demand for HFF's capital market knowledge, advisory services and execution capabilities as investors seek clarity in asset valuations and in determining the most suitable strategy for their commercial real estate holdings. Despite this risk off commentary, the commercial real estate industry and HFF in particular are benefiting from several positive events. Those events are as follows: In regard to the industry at large, commercial real estate as an asset class remains in favor with investors. Additionally, the composition of ownership is becoming increasingly institutional, which we believe is and will continue to positively impact transactional volumes. This is best illustrated by the following points.

Effective in the third quarter of 2016, commercial real estate was recategorized from the broader financial sector and became a stand-alone category as the 11th Global Industry Classification Standard or GICS trading vertical, the first distinct trading vertical created since 1999.

HFF believes the emergence of commercial real estate as a core investment holding ensures the industry will continue to benefit from consistent annual allocations of capital and that investing in the asset class is necessary in order to attain a diversified investment portfolio. This is best illustrated on Slide 16, showing approximate 85% increase of the allocation to commercial real estate since 2010.

Additionally, actual investment in the asset class is approximately 140 basis points below target as a percentage of AUM. As illustrated on Slide 16, capital managed by institutional investors in real estate measured by assets held within closed-end and open-ended funds has increased approximately 105% since 2007, approximately 83% net of price appreciation, suggesting both increased demand for the asset class and a larger denominator of assets, which could be a positive relative to future transactional volume.

Interestingly, for the year 2016, transactional activity, as reported by RCA, was down 13.5% from the 2007 transaction market peak of $571.1 billion. Therefore, the increases in AUM since 2007 mentioned previously should be a positive catalyst for future transaction volumes.

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

Given the political and social unrest in many parts of the globe, the flow of foreign capital into the U.S. commercial real estate market increased more than twofold from approximately $42.7 billion in 2014 to $97.1 billion in 2015 as shown on Slide 19. However, foreign capital flows into the U.S. totaled $65.6 billion in 2016, a 32% decrease from previous year and $11.4 billion in the first quarter of 2017, an approximate 3% increase from the same time period in the previous year. HFF believes the declines are largely due to the same investor concerns previously mentioned as well as the shift from acquisition to development strategies and ultimately a tough comparison given the regular capital flows of previous few years.

However, there are additional factors impacting foreign investment flows into the U.S. commercial real estate industry, the majority of which were centered on currency risk and, in particular, the recent relative strength of the U.S. dollar. Though we have not witnessed a reduction in foreign investors interest to participating in the U.S. commercial real estate market, these investors are impacted by currency fluctuations and as a result, are less price competitive than in the recent past.

Finally, as mentioned on previous earnings calls, commercial real estate in effect houses the U.S. economy, and therefore its health is correlated to U.S. job growth. Another significant factor affecting the overall health of the U.S. commercial real estate industry is the supply of new assets being delivered.

As shown on Slide 27, supply remains largely in balance with demand and relatively modest relative to previous economic cycles. When the current pipeline of new supply is paired with constraints currently imposed by commercial banks on new construction lending, an environment of sustaining job growth over the next 2 to 3 years could in the future afford landlords additional pricing power.

In the interim, the prices of U.S. commercial real estate will largely be determined by investors' perception of and conviction relating to tenant demand for commercial real estate as investors are not willing to underwrite future capitalization rate compression and/or multiple expansion as a major contributor to total return expectations.

In order to put this commentary into perspective relative to the performance of HFF, we believe it is important to reiterate a few key themes from previous earnings calls.

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

Additionally, some volatility above the norm in U.S. capital markets has generally proved beneficial to the firm given HFF's role as a real estate transaction intermediary, because it can result in an increase in demand for our capital markets knowledge advisory services and execution capabilities.

However, it is also important to note that a period of sustained volatility in the U.S. capital markets could result in the development of a prolonged divergence in bid-ask prices, which could adversely affect U.S. investment sales transaction volumes, which occurred in 2016. In the event, a bid-ask gap persists and the investment sales business a viable alternative for owners, we'll be refinancing in the private debt markets, which are anticipated to have ample liquidity in 2017.

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

Third, the firm is highly diversified relative to its client base. In the 12-month period ending first quarter 2017, no one client accounted for more than 2.5% of capital market services revenue, and our top 10 clients combined represent a 10% of capital markets services revenue.

In regard to future transaction volumes, the aforementioned increases in AUM for both the closed-end and open-ended fund markets suggest the market has potential to sustain current transaction levels absent a significant deceleration in economic activity. Of particular note is the transaction volume emerging from the closed-end fund market.

As illustrated on Slide 20, the average hold period for 64% of participants in the closed-end fund market is less than 5 years in duration due to the value-add investment objectives, the underlying compensation structure of these funds and the need to post realized returns for future fundraisers.

Finally, as shown on Slide 22, the $1.07 trillion of maturing commercial real estate loans through 2019 should serve as a catalyst for investment sales and refinancing transactions, particularly given the percentage represented by CMBS maturities.

In regard to HFF, our investment sale transaction volumes for the first quarter 2017 totaled $8.6 billion, an increase of 5.2% when compared to the same period in the previous year. As reported by RCA, the industry experienced a decline of 18.3% in the first quarter 2017 versus the same period in the previous year.

As illustrated on Slide 23, HFF's investment sale volume for the full year 2016 increased 115% from 2007 as compared to a decrease of 13.5% for the industry.

In regard to HFF's debt business line, our originations for the first quarter 2017 totaled $11.1 billion, an increase of 16.9% compared to the same period in the previous year.

As illustrated on Slide 24, HFF's debt volume for the full year of 2016 increased 73% from 2007 as compared to a decrease of 3.7% for the industry.

In summary, we believe there is ample availability of capital in both debt and equity markets to sustain current real estate transaction volumes, absent a precipitous decline in global economic activity.

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

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Gregory R. Conley, HFF, Inc. - CFO [4]

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Thank you, Mark. The information I'll discuss today is also set forth on Slides 32 through 40. As shown on Slide 32 and 33, during the first quarter, our revenue was up 18.1% year-over-year to $138.8 million.

Total transaction volumes grew 12.9% led by an increase in debt placement volumes of 16.9% year-over-year.

We produced strong first quarter operating margins and continued to demonstrate our ability to generate cash from operations and maintain healthy levels of liquidity. In addition, we continue to operate a highly diversified and fully integrated capital market services platform as it relates to both consumers and providers of capital as no one borrower or seller client represented more than 2.5% of our capital market services revenue for the trailing 12-month period ending March 31, 2017.

Continuing on Slide 33, operating income increased 24% to $20.8 million in the first quarter of 2017 compared to $16.7 million in the same period last year. The increase in operating income for the quarter was primarily attributable to the growth in revenues, partially offset by increases in compensation related and other expenses associated with the growth in headcount and increases in other operating expenses.

Operating margin for the first quarter of 2017 was 15% compared to 14.2% for the first quarter of 2016, representing a margin expansion of 80 basis points. We continue to strategically invest in our business through growth in headcount, expansion of offices and platform services and other operating expenses, such as infrastructure support and technology.

The company's adjusted EBITDA for the first quarter of 2017 was $32.5 million, an increase of $7.7 million or 31.3% when compared to adjusted EBITDA in the first quarter of 2016. This increase in adjusted EBITDA for the quarter was driven primarily by the growth in operating income, and to a lesser extent, from increase in other income related to our agency business.

The adjusted EBITDA margin for the first quarter expanded 240 basis points year-over-year to 23.4%. Cost of services as a percentage of revenue was 57.7% for the first quarter of 2017 compared to 58.3% in the same period of 2016. The 60 basis point improvement is primarily attributable to the fixed cost component being spread over the higher revenue base in the quarter.

Operating, administrative and other expenses were up by approximately $4.6 million or 15.6% in the first quarter of 2017 when compared to the same period in 2016. This increase is primarily due to additional compensation-related expenses, including incentive plan accruals and stock compensation as well as increased occupancy and additional other operating expenses due to higher transactional activity and the growth in headcount. In addition, other operating expenses have increased as the company's strategic investments in technology continued into the first quarter of 2017 as we roll out and integrate a customer relationship management software system to our IT environment, which includes our proprietary CapTrack database.

Also, as shown on Slide 33, interest and other income increased approximately $4.5 million in the first quarter due to increases in the valuation of mortgage servicing rights and other agency-related income. The company's Freddie Mac business has been very strong in the past 2 years with a record level of originations in 2015 of over $5.2 billion and $4.6 billion in 2016. The company's Freddie Mac business continued to be strong in the first quarter of 2017 with slightly more than $2 billion of loans originated compared to approximately $1 billion for the same period in 2016.

Earnings per share on a fully diluted basis grew 38.9% to $0.50 per share for the first quarter of 2017 from $0.36 for the same period in 2016. The company's effective tax rate for the first quarter of 2017 was approximately 38%.

Slides 36 and 37 relate to the balance sheet and liquidity. Our cash balance, net of client advances at March 31, 2017, was $171.1 million compared to $139.2 million at March 31, 2016.

During the first quarter of 2017, the company generated $13.1 million in cash from operating activities. The net cash generated during the quarter was primarily a result of the net income generated, partially offset by the decrease in working capital due to the typical first quarter payment of compensation items, including our performance-based awards related to 2016 and accrued for in the balance sheet at December 31, 2016.

The company's use of cash is typically related to limited working capital needs during the year and the payment of taxes. The company has virtually no corporate level debt to service other than that related to our Freddie Mac business, which is offset with the mortgage note receivable.

As shown on Slide 36, our balance sheet as of March 31, 2017 included $841.6 million of outstanding borrowings on 39 loans under our warehouse credit facilities to support our Freddie Mac Multifamily business, and we also had a corresponding asset reported for the related mortgage notes receivable.

To date, the majority of these loans have been purchased by Freddie Mac.

On February 21, the company paid a special cash dividend of $1.57 per share, the aggregate dividend payment totaled $60 million. Since December 2012, the company has returned capital to our shareholders in the form of 5 special cash dividends totaling $320.7 million.

I would like to make a few comments regarding our production volume and operational measurements, which can be found on Slides 38 through 40. As noted on Slide 38, on a year-over-year basis, our production volume grew 12.9% or approximately $2.4 billion for the first quarter of 2017. The company's loan servicing portfolio grew by $9.1 billion or 17.7% when compared to the portfolio size at the end of the first quarter of 2016. Our loan servicing portfolio is $60.7 billion as of March 31, 2017.

Slide 39 provides a historical summary of our headcount and also shows the first quarter comparison for the same period last year. Total headcount and transaction professionals as of March 31, 2017 were up 10.8% and 13.9%, respectively, year-over-year.

Slide 40 provides a summary of select production and operational measures. The revenue per transaction professional is up by approximately 3.6% for the quarter and down 7.6% for the trailing 12-month period to $1.663 million from $1.799 million for the same period in 2016. However, the revenue per transaction professional of $1.663 million for the trailing 12 months as of March 31, 2017 is up sequentially from $1.653 million for the trailing 12 months as of December 31, 2016. Please note that the addition of 42 net new transaction professionals representing the highest 12-month growth in HFF's history had an impact on the aforementioned productivity measures.

In summary, overall, despite the challenging capital markets environment, as mentioned by Mark, we're pleased with the company's performance in the first quarter of 2017 as increases in our transaction volumes across most of our business lines drove revenues higher. However, operating costs increased as we continue to make strategic investments in our business through investments in people, infrastructure and technology, which are consistent with our growth strategy. Adjusted EBITDA margins improved 240 basis points in large measure due to the 18.1% increase in revenue as this level of revenue increase enabled us to absorb a portion of the operating cost increases.

We continue to be very disciplined, efficient and strategic as it relates to the management of our expenses and are always mindful of balancing our long-term strategic growth initiatives with the current operating environment.

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

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [5]

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Thank you, Greg. As we look forward into 2017, we think it's important to convey the firm's strategic plan remains largely unchanged from previous years. HFF's future growth will continue to be premised on our core guiding principles, which we believe significantly differentiate HFF in real estate industry. These core guiding principles are briefly described as follows.

First is our client-centric business model, which avoids business lines or services that directly compete with the business interest of our clients, such as investment management, landlord and tenant representation and/or property asset management services.

Second is our player/coach leadership style, whereby the firm's leadership mentors transaction professionals through the origination and execution of real estate transactions.

Third is our pay-for-performance compensation structure, which aligns the interest of HFF's leadership with the performance of the firm through our profit participation in Omnibus compensation plans.

Fourth is maintaining an owner mentality versus an employee mentality, which is illustrated by the fact that HFF employees own approximately 12.7% of the outstanding Class A common shares of HFF. Highlighting the importance of our adherence to an owner mentality is the firm's granting of one million, five hundred thousand shares since January 2014 to our leadership team and transaction professionals based on value-add metrics, which vest over 5 years.

Our fifth guiding principle is risk mitigation. The company has virtually no corporate-level debt to service, and we continue to maintain significant cash balances to fund our working capital needs, our future growth and to mitigate downside risks as occurred in 2008 and 2009. Once we have met these needs and have sufficient capital reserve to not only survive but thrive in a down market, the company, led by the Board of Directors, looks at all options regarding the best use of capital. This has been illustrated by returning capital to shareholders over the past 5 years in the form of special dividends, in aggregate, totaling $320.7 million or $8.52 per share.

The sixth guiding principle is the maintenance of our partnership mentality, whereby the governing body of HFF, its executive committee, is elected by the firm's leadership team, which is comprised of 75 individuals who run the firm's 24 offices, its business lines and its property-type verticals. This approach to governance reinforces our team partnership culture and significantly differentiates the firm from the industry at large.

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

HFF's ability to differentiate and build out its platform in a consolidating industry as well as to continue its expansion into the real estate industry at large remains a primary focus of management. We believe these guiding principles allow the firm to recruit and retain best-in-class industry professionals. Evidencing this statement, and as illustrated on Slide 39, since year-end 2009, the company has increased its headcount by 548, representing a 145.7% increase, and we have grown our transaction professionals by 186, representing an increase of 117%. We have accomplished this profitably in a sustainable, measured pace. HFF remains committed to protecting its culture via an unwavering adherence to its deliberate hiring practices.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jade Rahmani with KBW.

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Jade J. Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [2]

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I wanted to ask what you think drove the surge in equity placement volumes and also if you expect them to wane since your disclosure says you're engaged on lower discretionary fundraising than the year-ago period.

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [3]

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So Jade, as I'm sure it will be an answer I give a lot on this call, I wouldn't draw trends from a quarter. And as you know, we manage this firm for the long term. So I wouldn't read too much into any significant change here in this quarter. Regarding, specifically, the equity placement though, generally speaking, when you have a market like we're having now and you have an end-of-cycle risk concern, which we mentioned in the comments, and some of the other risks that people are thinking about, yet you also have an opposite tension occurring of reinvestment risk. So in many cases, the answer is the selling of partial interest rather than a full interest in an asset. So in large part, we do a tremendous amount of volume in equity placement across the board, ranging from development projects to recapitalization of enterprises, to recapitalization of portfolios in specific projects. And lately, we have been seeing more and more selling of partial interest, which partially contributed to that equity placement volume there.

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Jade J. Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [4]

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That's helpful. In terms of the progression or cadence of transaction trends through the quarter, can you provide any commentary? Was it choppy and not a lot of sort of upward momentum through the quarter? Or did you see sequential improvement?

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [5]

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In what metric -- on what metric, Jade?

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Jade J. Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [6]

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Say, number of transactions or number of bidders on transactions?

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [7]

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Well, the number of transactions are documented well by RCA, and you can take a look at that. We also have released our transactions, which were up roughly 13%. With respect to number of bidders, nothing has really changed from 2016. When you're in a period of price discovery, you generally have a fewer number of bidders at price-competitive levels. You have plenty of people bidding, it's just a divergence of price. And price is largely determined in this kind of environment by a conviction of fundamentals, which is tenant demand. So if you have strong conviction in a given geographic area, which is -- it's as diverse as we have seen it in quite some time in terms of different economic engines driving different areas of the economy and therefore different results. If you have strong conviction in a given property vertical or a given geographic location, you will be much more competitive on price. That seems to be the determining factor today.

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Jade J. Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [8]

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Was there any sort of holdup of deal closings in the fourth quarter that once the election passed and people saw a positive market reaction, some of those 4Q deals that were slated for year-end closing began closing this quarter?

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [9]

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No, we look into that, Jade. And the answer to that would be nothing measurable. What I can tell you is that the institutional investor market, in general, has determined that end-of-cycle risk is not imminent, that there are further legs here. And so the mindset, as I mentioned earlier, has moderated from risk-off to reinvestment risk concerns. So you do have a shift in mentality and thought process that we have witnessed in the first quarter, and we don't anticipate that changing.

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Jade J. Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [10]

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And just on the Freddie business, was there anything in terms of outsized transactions or perhaps, I guess, your booking revenues based on rate-lock? Anything timing-related that drove the strength in that business?

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [11]

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Greg, do you want to take that?

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Gregory R. Conley, HFF, Inc. - CFO [12]

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Sure. In this particular quarter, we did have one portfolio that was a little over $0.5 billion that was impacting that $2 billion number, but other than that, I think that was the one that's measurable to speak of. But other than that, it just was a strong quarter overall for our Freddie business. But as you know, that business can be lumpy quarter-to-quarter, but obviously, we're very pleased with where we ended up for the first quarter of the year, with $2 billion of loans originated.

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Jade J. Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [13]

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And just lastly, I wanted to ask you about the retail sector, which has become a source of major concern for investors. Do you view this as an opportunity or a risk? For example, could you see increased deal flow in terms of big-box retailer dispositions or perhaps, space-repositioning transactions to alternative investors?

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [14]

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Jade, we can spend another hour on the retail industry. But let me -- rather than give you our opinion, let me just relate what investors are stating. Number one, most institutional investors are under-allocated to retail. They would like to increase allocations. But due to the complexity of retail, it has more segmentation than virtually any other property class, and the adverse headline risk, they are slow to determine which path to take. So we have seen, of late, renewed interest in retail for a number of reasons, but again, it is very diverse. As you know, there are a lot of segmentations in retail from specialty based retailing to entertainment thematics, to malls, to various stratas of open air. And so every institutional investor has a different view of which strategy to pursue. I personally believe that you could see more transactional activity via passive capital teaming up with active operators, that have specific expertise in these differentiated verticals.

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Operator [15]

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Our next question comes from Mitch Germain with JMP Securities.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [16]

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So Mark, I know that you mentioned only 2 of your offices have this, the full suite of services, but I mean, is there like a normalized target? I mean, given how many offices you have, is there like a number that you feel that you're striving to hit in terms of how many you want to have the full complete array of services?

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [17]

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Mitch, that's a great question. The answer is we do. We haven't published it. The logical conclusion though would be -- are major markets, where you have significant MSA population and inventory -- real estate inventory levels that can support the full breadth of our platform. However, if you get below those major markets and you start looking at what Moody's or others might call secondary markets, we believe several of them could also support a full complement of our business lines. So there is a lot of wood to chop is the short answer. To complete this, and as you know, it's been a long-term strategic plan of the firm to do it, and the, I guess, the only restraining factor or constraint on that is finding high-quality individuals that fit our culture. And that's why we have built the company with generally one brick at a time, and well, it takes time to get the right people in the right place and the right seat here. But the answer is, a majority of our offices could support the majority of our business lines.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [18]

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And just remind me, with regards to hiring producers, I know there's a differentiation between some of the younger versus more experienced, but how should we think about the lead time to get these individuals' production to the levels that are consistent with where your more professional and more kind of producers that have put in some time in the industry? I mean, what is the time in which from when they joined, when they start really making money for you guys?

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [19]

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Yes, it varies, as you can imagine, Mitch. But I would say, in general, that we -- when you're talking about organic growth, so when we hire an analyst out of school and that analyst begins to learn our business and our culture, it is generally a 2- to 4-year time frame for that analyst to make his or her way into the production field. And then it does take a few years for that producer to mature into a mean production number for HFF. So while the organic growth is preferred at HFF simply because of cultural reasons and lower risk that we see there, it does take a longer period of time, which is why we initiated this some time ago in terms of a very robust recruiting effort, both from a collegiate standpoint and others. From a recruiting perspective, in bringing an experienced person, of course, the time frames are much more condensed.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [20]

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How do you expect to integrate Hentschel into the business? Obviously, it's a bit of a departure from what your core business is, but clearly, an extension of, like you said, where you're headed. What's the goal to get them fully integrated?

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [21]

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Well, it really isn't a departure of the way we think about it, Mitch. So we have been active in the M&A and the Corporate Advisory space for some time. However, the inquiries from -- we do it very quietly, by the way. But the requests and inquiries from our clients continues to increase fairly dramatically. And so the need to expand headcount in that arena as well as to bring in a little different expertise from a public market perspective was essential in our view. And that's really where they came into play. In terms of integrating, they have already moved in to our New York office. And at this moment, we are -- it's a normal -- the way I would think of it, Mitch, would just be a normal recruiting process for HFF and an expansion of an existing service.

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Operator [22]

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Our next question comes from Brandon Dobell with William Blair.

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Brandon Burke Dobell, William Blair & Company L.L.C., Research Division - Partner and Group Head of Global Services [23]

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Maybe leveraging off of Mitch's question, should we expect you guys to pursue, I guess, the same kind of strategy with the London office, right, all -- in all property types, all services, or is that just a different market so it's going to be a little bit of a different mix of professionals?

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [24]

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No, I think, Brandon, we're going to pursue the same path we would take with any new office opening in the U.S. London should be viewed no differently. It's a major market. And as you know, we're measured and we are conservative, and when we walk before we run. And people are very important. So to the extent we can find like-minded culturally oriented people and best-in-class professionals, we will build out that London business very similar to our major markets in the U.S.

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Brandon Burke Dobell, William Blair & Company L.L.C., Research Division - Partner and Group Head of Global Services [25]

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Okay. And maybe this is for Greg, but not sure. If you look at the $60 billion or so servicing portfolio now versus 12 months ago, I guess kind of a 2-angle question, what's been the, I guess, the primary sources of growth in that portfolio? And as we think about how to model that in the balance of the year, given the answer of the first part of the question, should it track a certain part of the market, maybe is -- is it going to be or has it been more GSE-focused? Or is there anything that you can kind of add in there that helps us understand the dynamics?

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Gregory R. Conley, HFF, Inc. - CFO [26]

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Well, as you know, our portfolio mix, Brandon, has been pretty consistent. We have a large portion of that portfolio as institutional lenders. We're very heavy with life insurance companies. And about 24%, 25% of that portfolio is agency-related, whether it's Freddie Mac or securitized loans under the CME program. And that's been pretty consistent over the period of time. And we -- I mean, I can't speak to the future, and we don't give guidance, but I think it's been -- and if you even look at the average basis points overall, when you look at the portfolio, it's been somewhere in that 4-plus range. So the mix and the average basis point we're earning off of that portfolio has been fairly consistent over time. So -- and again, this just goes back to the type of debt practice we have and the fact that we are strong with the agency and we're strong with the corresponding lenders. And that's been basically going back to the roots of the company, if you will. So that's really what's going on with that portfolio. We certainly have run-off every quarter, every year, and it's been phenomenal the way we've been able to replace the run-off and having the portfolio grow the way it has.

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Brandon Burke Dobell, William Blair & Company L.L.C., Research Division - Partner and Group Head of Global Services [27]

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And is there anything that you've heard from your clients that gives you any sense of whether the trajectory, especially within the life insurance business, of using guys like you to service these portfolios is going to change, whether it's a regulatory thing or a changing mix of customers, changing mix of property types? Anything that would -- that stands out for you?

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [28]

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No. Brandon, there really isn't. And you're talking about the mix of servicing clients?

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Brandon Burke Dobell, William Blair & Company L.L.C., Research Division - Partner and Group Head of Global Services [29]

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Yes. It's either mix or whether people are choosing to -- choosing somebody else to service the portfolios or bringing in-house, I guess, would be the 2 ways that this -- the trajectory could change, I guess.

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [30]

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Yes, I mean, it could. We don't see anything like that occurring. You never know what might happen in the future. But at present, we do not see that trend.

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Brandon Burke Dobell, William Blair & Company L.L.C., Research Division - Partner and Group Head of Global Services [31]

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Okay. And then final one for me. If you look at the broader, let's call it, a regulatory or policy landscape, anything notable that you've seen in the past couple of months as people have been discussing what commercial banks may look like, what the regulatory framework may look like, or how people are approaching some of these rules or rule changes? Anything that sticks out for you that's a notable positive or negative relative to how you think your clients are going to be, they're allocating capital or looking at your loan books?

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [32]

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Yes. So here is what we're seeing from the commercial bank standpoint. First of all, construction lending is significantly down. It is extraordinarily difficult for even the best capitalized companies and the best projects to obtain construction financing. And when you do obtain it, it is different, both in pricing and in structure, than it was a year ago, which is why we stated in the earnings script that -- which most people are not focusing on, that we're entering into a market from a cycle standpoint toward the end, however, we're relatively measured to previous cycles in terms of supply. And if you forecast even modest job growth, moderate job growth over the next 2 to 3 years, given the cutback that we're seeing in construction lending and the difficulty it is to obtain it, given the fact that our open-ended fund market participants, which were very significant providers of capital to the development industry, have essentially cut significantly back for 2 reasons, primarily end-of-cycle risk and the length of time it takes for a project to come online. And number two, the return on cost metrics are not nearly as beneficial as they were even a year ago due to cost rising and other things. So due to a combination of construction lending moderating very significantly, return on cost metrics becoming thin and end-of-cycle risk eliminating essentially build-to-core opportunities in the marketplace, it could be an interesting positive environment for existing landlords. And not many people are addressing that. Again, it's predicated upon continued U.S. job growth. But we do see that as a positive.

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Operator [33]

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Because I'm showing no further questions at this time, I would now like to turn the call back to Mr. Mark Gibson for any closing remarks.

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Mark D. Gibson, HFF, Inc. - Vice Chairman, CEO and Executive MD [34]

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Well, thank you, everyone, for joining us today, and hope that you can join us again for our second quarter 2017 call. Thank you.

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Operator [35]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect, and have a wonderful day.