HF
#Thank you, <UNK>.
Good evening everyone, and welcome to the review of HFF's First Quarter 2015 Results.
We are very pleased with the firm's performance for the quarter.
Based on our results, which <UNK> <UNK> will review in detail, we believe the commercial real estate industry continues to embrace the Company's team-oriented approach in executing capital markets transactions thereby affirming HFF's strategic plan and its unwavering adherence to its core cultural guiding principles.
Revenues in the first quarter 2015 grew approximately 24% year-over-year.
HFF's operating income increased $7.4 million as operating margins expanded to 11.9% compared to 4.9% in the first quarter of 2014.
While we continue to invest in our businesses, the firms increase in total headcount of 78 employees over the past 12 months or 11.9%, our revenue growth and strong operating performance are consistent with our philosophy of measured, sustainable and profitable growth.
Adjusted EBITDA for the first quarter of 2015 totaled $17.8 million as compared to $11.8 million in the first quarter of 2014, equating to an increase of 50.7%.
Additionally, our revenue per producer increased to $1.6 million equating to an increase of 7.1% which we consider indicative of the firm's team-oriented culture and the efficiencies obtained from the synergies between and among the firm's business lines and property verticals.
The commercial real estate industry as an asset class remains in favor with investors.
Additionally, the composition of ownership is becoming increasingly institutional contributing to HFF's attractive position as an intermediary.
This is best illustrated by the following points: Standard & Poor's along with MSCI has officially recognized commercial real estate as a valid asset class and in the third quarter of 2016 will separate commercial real estates from broader financial sector into its 11th Global Industry Classification Standard or GICS trading vertical.
While the private market has long recognized commercial real estate as a valid asset class, this globally recognized designation affirms commercial real estate has earned its place among the investment portfolios of the public sector and thus is deserving of consistent annual allocations.
Please note the CRE industry's returns as compared to competing asset classes on slide 15.
Institutional investors as defined as the private market have consistently been under-invested to commercial real estate relative to their allocation in the amount of 90 basis points of AUM and are poised to further increase target allocations by an additional 20 basis points this year, as shown on slide 16.
Additionally, sovereign wealth funds are decreasing allocations to public equities and private equity in favor of real estate as shown on slide 17.
Private sector investment in commercial real estate continue to multi-year increase in the first quarter of 2015.
As shown on slide 18, the increase in assets managed by institutional investors in real estate measured by assets held within open-end and closed-end funds has increased 40% and 77%, respectively since 2007, suggesting both increased demand for the asset class and a larger denominator of assets relative to transactional volume.
Finally, the economic and social unrest in many parts of the globe appear to be increasing the flow of foreign capital into the US with commercial real estate being a beneficiary of this inflow of capital as shown on slides 19 and 20.
In our opinion, this data suggests there will be ample equity capital to deploy in the commercial real estate, barring any exogenous events that would be detrimental to the US economy at large.
Underpinning that statement as reported by the RCA and illustrated on slide 21, transaction volumes in the first quarter of 2015 totaled $129 billion compared to $89 billion in the first quarter of 2014, representing a 45% increase.
When considering the aforementioned increases in AUM for both the closed-end and open-ended fund markets, it would appear the market has the potential to sustain current transaction levels.
Of particular note is the transaction volume likely to emerge from the closed-end fund market given the compensation structures of the same.
As is illustrated on slide 22, the average hold period for 64% of participants in the closed-end fund market is less than five years in duration.
Additionally, as shown on slide 23, the $1.4 trillion of maturing CRE loans should serve as a catalyst for investment sales or refinancing transactions.
However, given the liquidity in the US banking industry and the need for earning assets on balance sheet, the competition to extend the aforementioned loan maturities will be intense.
In regard to HFF, our investment sale transaction volumes for the first quarter of 2015 totaled $5.6 billion as compared to $4.7 billion in the first quarter of 2014, equating to an increase of 19%.
As illustrated on slide 24, HFF's investment sale transaction volume for the full year of 2014 increased 70% from 2007 as compared to a decrease of 26% for the industry.
Further, HFF's investment sale transaction volume for the full year 2014 represented 187% increase from 2006, while the industry showed a decrease of 1% for the same period.
While we are pleased with our growth in investment sale transaction volume over the last several years, we are mindful the industry has largely recovered from the trough of the 2009 non-financial crisis relative to historical metrics.
Therefore, we believe future growth will be dependent on the ability of HFF to continue to differentiate and build out its platform in a consolidating industry.
Regarding debt capital availability, in HFF's opinion, there continues to be ample liquidity to sustain current transaction volume levels.
However, as has been reported by industry periodicals and several general media outlets, Freddie Mac and Fannie Mae have experience robust origination volumes in the first quarter of 2015.
Therefore, the agencies which manage to FHFA mandated caps totaling approximately $60 billion are expected to moderate their respective appetites for new financing commitments in the coming months and quarters.
HFF does not anticipate this will create an adverse material impact on debt availability for the multi-housing industry, given the banks, insurance companies in the CMBS market are generally under allocated to the sector.
Corporate America continues to migrate to the investment grade bond market, which when combined with the banking industry's ample liquidity and need for earning assets on book increases the banking industry's demand for commercial real estate loans including both construction and longer term durations.
The CMBS market is quite sound with increasing participants in the BP's market as well as increased demand for virtually all tranches of CMBS bonds across various rating levels.
The insurance industry's demand for mortgages both in fixed and floating rate instruments is robust and unlikely to change in the near future given fixed income alternatives and their need to affect prudent asset liability management strategies within insurance products.
In regard to HFF, our debt transaction volumes for the first quarter of 2015 totaled $7.8 billion as compared to $5.3 billion in first quarter of 2014, equating to an increase of 49%.
As illustrated on slide 25, HFF's debt transaction volume for the full year 2014 increased 37% from 2007 as compared to a decrease of 25% for the industry.
Further, HFF's debt transaction volume for the full year 2014 represented a 45% increase from 2006, while the industry showed a 7% decrease from the same period.
Many investors are concerned about the potential for rising rates and any associated adverse impact on asset valuations and/or volumes of transactions.
HFF is encouraged by the fact that majority of investors have acknowledged the risks of such an outcome and have communicated to all constituencies the various outcomes which might occur in an environment of rapidly rising interest rates.
The recognition and discussion of these potential risks stand in stark contrast to the lack of same in 2006 and 2007, which in our view is a welcome change that speaks to increased transparency in the market.
Of note and as previously mentioned in our commentary and illustrated on slides 21 and 27, historical volumes seem to indicate that the volume of transactions is more dependent on availability of capital rather than cost of capital.
In regard to pricing, it is largely believed the capitalization rate compression and multiple expansion have run their course as the market is currently pricing slightly above the long-term average spreads of cap rates above both the 10-year treasury and the triple-B corporate bond benchmarks illustrated on slides 28 and 29.
Therefore, most investors are keenly focused on fundamentals such as leasing velocity, rental rates and occupancy increases.
As illustrated on slide 30 in terms of geographic market preference, as previously reported, we expect the long-term trend of migrating up the risk curve at this point in cycle to continue as investors seek total return for a portion of their (technical difficulty) real estate investment portfolio in market outside of traditional gateway cities.
Additionally, investors are increasingly focused on corporate relocation trends, long-term employment, population shifts and the velocity of trades in a given market meeting the liquidity of the market and determining allocations to a given geography.
In terms of supply of new product affecting price, HFF believes the supply of product in general will remain reasonable relative to history, given the transparency of information which now exists versus past cycles.
In essence, virtually every institutional lender and equity investor is keenly aware of the actual projects underway and pipeline of potential new products as well.
Therefore, if there is a risk of oversupply in a given property type or geography, the capital markets are quick to react relative to history.
Additionally, the continued rise in construction costs have the slowed the pace of new construction given compression in return on cost metrics.
However, given the recent decline in oil prices, we expect construction costs to moderate in some parts of the country.
In summary, as stated at the outset, HFF believes there is ample availability of capital in both the debt and equity markets to sustain a reasonable foundation for real estate transaction volumes.
Perhaps, more importantly, we are encouraged by the transparency of discussions regarding obvious potential risks to asset level pricing and associated underwriting of same.
However, as is our custom, HFF is always mindful of both domestic and global macroeconomic events which could dramatically and negatively impact both the volume and pricing levels of real estate.
Commercial real estate, in effect, houses the US economy and therefore, its health is directly correlated to the US economy primarily defined as US job growth.
I would like to thank the HFF team that generated our first quarter 2015 results as they are directly attributable to the efforts of this incredibly talented group of individuals.
And with that, let me turn the call over to <UNK>.
Thank you, <UNK>.
I would like to review our financial results for the first quarter, 2015.
This information is also set forth on slides 31 through 41 in the PDF materials referenced earlier.
Beginning on slide 32, as <UNK> stated, we are very pleased with our performance for the first quarter of 2015.
During the first quarter, our topline revenue increased by 24% due to an increase in transaction volume of 33.1%.
The increase in transaction volumes was led by 48.9% increase in debt transaction volume and for the quarter, our servicing portfolio grew by over $6.5 billion or 18.7% as compared to the first quarter of 2014.
We produced solid operating margins and continue to 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.
For the first three months of 2015, no one client represented more than 3.6% of our capital market services revenue and the combined fees of our Top 10 clients represented 15.9% of our capital markets services revenues.
Adjusted EBITDA margin increased by approximately 330 basis points for the quarter, which is primarily due to the growth in operating income as well as $1 million increase in securitization and other agency related income.
Turning to slide 33.
Revenue for the first quarter was $94.3 million, an increase of 24% or $18.2 million.
The growth in revenue for the quarter was driven by a 48.9% increase in our debt transaction volume and a 19.1% increase in our investment sales transaction volumes.
Operating income grew $7.4 million or by 194.3% to $11.2 million in the first quarter of 2015 compared to the same period last year.
The increase in operating income for the quarter was primarily attributable to the growth in revenues and a $2.5 million reduction in non-cash stock compensation expense, which were partially offset by increases in compensation related and other operating expenses, including approximately $800,000 in contractual performance-based incentives for recruited transaction professionals.
Operating margin for the first quarter was 11.9% compared to the operating margin of 5.0% for the first quarter of 2014.
The 690 basis point increase is primarily due to the 24% growth in revenue and $2.5 million reduction in stock compensation expense, which is primarily related to the roll-off of the liability based stock awards that required mark-to-market adjustments in cliff vested on March 1, 2014 and the improved operating leverage achieved by the Company, which in part was attributable to the productivity gains realized from the nearly 80% increase in transaction professionals added since the beginning of 2010.
Cost of services as a percentage of revenue was 59.8% in the first quarter of 2015 versus 60.6% in the first quarter of 2014.
The 80 basis point improvement is primarily attributable to the fixed cost component being spread over the higher revenue base and is evidence that our cost increases, relative to growth in personnel, is commensurate with our revenue increases.
Operating, administrative and other expenses were up by approximately $500,000 in the first quarter of 2015 when compared to the same periods in 2014.
This is primarily due to increased compensation-related expenses and other operating expenses due to the higher transactional activity, offset by the $2.5 million reduction in non-cash stock compensation expense.
As shown on slide 33, interest and other income increased $2.6 million in the first quarter, which is primarily attributable to higher income from the initial recording of mortgage servicing rights of $1.6 million and an increase of $1 million in securitization and other agency-related income.
We have seen a significant improvement in our Freddie Mac originations beginning in the second half of 2014 and continuing through the first quarter of 2015.
Freddie Mac originations were extremely strong in the first quarter of 2015 as the Company ended the quarter with Freddie Mac originations of approximately $1.1 billion, which is an increase of nearly $800 million or 250% over the first quarter of 2014 originations.
As <UNK> previously mentioned, given the robust financing volumes by Freddie Mac in the first quarter of 2015, there is concern in the market as to whether Freddie Mac can continue this pace of financing for the remainder of 2015.
Income tax expense for the first quarter of 2015 was up approximately $4.9 million, primarily due to the increase in pre-tax book income.
The Company's effective tax rate for the first quarter of 2015 was approximately 40%.
Earnings per share on a fully diluted basis increased $0.15 to $0.25 for the first quarter of 2015, which represents growth of 150% over the comparable prior year period.
The Company's adjusted EBITDA for the first quarter of 2015 grew by $6 million, which is an increase of 50.7% when compared to the first quarter of 2014.
Adjusted EBITDA margin for the first quarter as previously mentioned was primarily impacted by the growth in operating income as well as the $1 million increase in securitization and other agency related income, partly offset by an increase of approximately $800,000 in the compensation expense related to performance-based incentives for recruited transaction professionals.
Slides 34 to 36 relate to the balance sheet and liquidity.
Our cash balance at March 31, 2015, was $142.5 million compared to $232.1 million at December 31, 2014, representing a decrease of $89.6 million.
The significant portion of this change in cash is related to the $67.8 million special dividend payment declared by our Board and distributed to the stockholders of our Class A common stock on February 13, 2015.
During the first quarter of 2015, the Company used [$16.2] million in cash from operating activities, net of the $2.8 million decrease in client advances.
The net use of cash during the quarter was primarily driven by the decrease in working capital due to the payment of compensation items including our performance based awards related to 2014 and accrued for in our balance sheet at December 31, 2014.
The Company's use of cash is typically related to the limited working capital needs during the year and the payment of taxes.
The Company has virtually no corporate level debt to service other than that related to our Freddie Mac business, which is offset with the mortgage notes receivable.
On slide 34, I would like to point out that our balance sheet as of March 31, 2015, we had $604.2 million of outstanding borrowings on 19 loans under our warehouse credit facilities to support our Freddie Mac multi-family business and we also had a corresponding asset recorded in the same amount for the related mortgage notes receivable.
All 19 of these loans have subsequently been purchased by Freddie Mac.
I would like to make a few comments regarding our production volume and operational measures, which can be found on slides 38 to 40.
As noted on slide 38, our production volume increased by 33.1% or $3.5 billion for the first quarter of 2015 when compared to the volumes in the same period of 2014.
The total number of transactions grew by 38.8% or 133 in the first quarter of 2015.
The Company's loan servicing portfolio increased by 18.7% in the first quarter of 2015 when compared to the balance at March 31, 2014.
Slide 39 provides a historical summary of our headcount and also shows the first quarter comparison to the same period in 2014.
Total headcount and number of transaction professionals as of March 31, 2015, were up 11.9% and 10%, respectively over the prior 12 months.
We have increased the total number of transaction professionals by 127 or 79.9% since the beginning of 2010.
Slide 40 provides a summary of certain production and operational measures.
The revenue per transaction professional is up by approximately 13% for the quarter and up 7.1% to [$1.608] million for the trailing 12 months, which is evidence of the productivity gains achieved by the Company.
In summary, we are extremely pleased with the Company's continued strong operating performance for the first quarter of 2015.
We achieved improving operating margins while continuing to make strategic investments in our business, consistent with our growth strategy.
We continue to believe that we have been very efficient and strategic as it relates to our management of expenses and that any incremental increase should have minimal impact to our bottom line results on a full year-over-year comparative basis provided the market continues to expand and we continue to experience revenue growth consistent with the investments made in our business.
With that, let me turn the call back over to <UNK>.
<UNK>.
Thank you, <UNK>.
As we look further into 2015, we think it's important to convey the firm's strategic plan remains unchanged from previous years in terms of continuing to build out the Company's platform to ensure the HFF offices domiciled in major markets in the US have a full complement of our existing business lines and products sector specialties.
Further, our future growth will continue to be premised on our core guiding principles which we believe significantly differentiate HFF in the real estate industry.
These core guiding principles, I will briefly describe as follows.
First is our clients centric business model which avoids business lines or product services that directly compete with the business interests of our clients such as investment management, land lord and tenant representation and our property asset management practices.
Our capital markets professionals appreciate this lack of conflict of interest with their clientele.
Second is our player coach leadership style whereby the firms leadership mentors are transaction professionals through being engaged in generating revenue for the firm by actively originating and executing real estate transactions.
Our transactional professionals prefer to be led and mentored through transactional deal flow versus managed in a corporate context.
Third is our pay-for-performance compensation structure, which aligns the interests of HFF's leadership with the performance of the firm through our profit participation and omnibus compensation plans.
Please refer to our 10-K for a complete description of the plan.
It is important to note the leadership team of HFF earns the majority of its compensation through our office profit participation plan, our firm profit participation plan and commissions, not salaries.
Fourth is maintaining an owner mentality versus an employee mentality which is illustrated by the fact that HFF employees own more than 17% of the outstanding Class A common shares of HFF.
Highlighting the importance of our adherence to an owner mentality is the firm's granting of 750,000 shares in January of 2014 and an additional 250,000 shares in February of 2015 to our leadership team and transaction professionals based on value added metrics, which vest over five years.
Our fifth guiding principle is risk mitigation.
The Company has virtually no corporate level debt to service and we continue to maintain significant cash balances to fund our working capital needs for future growth and to mitigate downside risks as occurred in 2008 and 2009.
Once we have met these needs and have sufficient capital reserve to not only survive but thrive in a down market, the Company led by the Board of Directors always looks at all options regarding the highest and best use of its capital.
Over the recent past, this has been illustrated by returning capital to shareholders on three previous occasions in 2012, 2014 and recently in February of 2015 in the form of special dividends totaling $192.3 million or $5.15 per share over the last 28 months.
The sixth guiding principle is the maintenance of our partnership mentality where by the governing body of HFF, its executive committee is elected by the firm's leadership team, which is comprised of 56 individuals who run the firm's 22 offices, its business lines and its property type verticals.
This approach to governance reinforces our team partnership culture and significantly differentiates the firm from the industry at large.
Finally, our seventh core guiding principle is the maintenance of the firm's value add philosophy which permeates every aspect of the HFF culture.
All leadership positions, compensation awards and executive appointments are based on long held value add principles, which were developed internally and are communicated to all employees.
The ability of HFF to continue to differentiate via the aforementioned guiding principles and build out its platform remains a primary focus of management.
The competition for talent remains extremely intense, given the consolidating industry and the opportunities for growth in the current cycle and therefore, management remains extremely vigilant in the protection of the firm's unique culture in order to mitigate this increasing risk.
We believe the aforementioned guiding principles will continue to allow the firm to recruit and retain only best-in-class industry professionals.
The previously mentioned tenets of our corporate culture have historically attracted highly motivated entrepreneurial individuals to the Company, where they have a voice in the firm's leadership where the Company's platform does not conflict the business interests of their clients and where the entire leadership of the firm is focused on the player coach business model which constantly reinforces our pay-for-performance compensation structure.
Illustrating this, since 2010, the firm has opened six new offices including Tampa, Orlando, Austin, Denver, Philadelphia and most recently Charlotte.
To support our new office growth as well as expanding existing offices, during that same time frame, as shown on slide 39, we have grown our total headcount by 356, representing a 94.7% increase and we've grown our total transaction professionals by 127, representing an increase of 79.9%.
We have accomplished this profitably and at a measured pace.
HFF's primary [strength] to future growth is our ability to attract and retain best-in-class individuals who desire to work in our unique collaborative culture as previously defined.
HFF remains committed to protecting its culture via an unwavering adherence to its deliberative hiring practices.
We strongly believe the results generated by HFF for the first quarter 2015 are directly attributable to the incredibly talented group of individuals which comprise the HFF team.
Operator, I would now like to turn the call over to questions from our callers.
(technical difficulty) disclose operations from a city perspective, but I can give you a global comment, in that we have not seen an adverse impact, HFF Texas (technical difficulty) in the previous quarter.
I think (technical difficulty) perspective, we would not believe that there would be an adverse impact (technical difficulty).
You have to also remember my comments earlier in the presentation whereby the vast majority of other participants in the debt market are under allocated to the multi-housing space and are quite eager to fill any void that may or may not be left as a result of perhaps the agencies having such a phenomenal first quarter in 2015.
It remains to be seen the activity that will happen for the remainder of the year, but we are quite confident that you have ample liquidity in the debt space to pick up any slack.
<UNK>, can you restate it.
In terms of an impact regarding what.
Well, again, I really cannot comment on any competitors business model or plans.
I'm just not educated enough to do so, but relative to HFF, we have not seen any impact regarding [this segment].
<UNK>, it's a great question.
Unfortunately, I do not have the specific answer for you.
So, I'll defer on that but I will tell you that as part of our compensation metrics in the way that we measure things over time, we do absolutely track new clients into the firm from a both debt and investment sale perspective and that primarily is consumers of capital.
From a provider of capital perspective, which may be where you're coming from, I don't again have the specific numbers, but I can tell you that there have been a significant influx of new investors, both domestic and foreign, increasing allocations and are new to the real estate asset class over the last 12 months.
We do not see that abating.
I think it really goes back to, if you just stand back a minute everyone and look at what really has occurred, if you look at the public announcements that have been made by some very large state plans and they're increasing allocations for direct real estate investments and then you compile and contrast that with also the S&P designation of real estate as its own separate trading vertical [via the GIK] in August of 2016, the branding of real estate as an asset class and the return history of real estate asset class is very, very compelling to those who have not yet invested and as that mantra becomes more dominant in investing circles, I think what you'll find is real estate becomes less volatile in terms of capital allocation, because it is becoming quickly less about risk adjusted return relative to competing asset classes and rather more fitting into a situation where it is being viewed as a necessary diversifier within a well constructed portfolio, which over time we believe will translate into more consistent allocations and not as much dependent upon the risk adjusted return premiums to competing asset classes.
Well, it's always difficult to find talent.
We have a very unique culture and as many of you have heard several years on these calls, it takes us many years to find the right individuals that work within the team and collaborative partnership culture that we have and we are unwilling to bend from that premise whether we're opening a new office or adding existing property lines or business lines to our existing offices.
So, that has not changed, <UNK>, at all.
However, as I've stated on previous earnings calls, we are extremely focused on two components relative to headcount.
One is we have a very active on-boarding program, an internship training program in terms of organic growth and we have a very focused and intense effort on the recruiting front relative to our business lines and property verticals in various of our existing businesses.
At any one point of time in the cycle, those two areas in terms of headcount increases will change on the margin.
In times of robust activity, you tend to find much more lift in the organic front and in times of less than robust activity, you tend to find more traction from a recruiting standpoint, but I will comment that, that is on the margin.
Well, it certainly is not a regular dividend.
It is called a special for that very reason and I would like to make that very clear.
Number two is, we have consistently put forth in these earnings calls, we have three guiding principles relative to our use of cash, which we briefly discussed in our commentary but just to refresh everyone's memory, we will keep adequate working capital to support the business.
We'll have adequate working capital to fund the next year's strategic plan and we will have sufficient capital reserves to not only withstand [a 2008-2009] but to significantly grow in an adverse capital markets environment.
When we have met those criteria on book and subject to the Board of Directors approval and authority, it would be our intention, if there is not a better use of cash that we see on the horizon based on those three principles, to return capital to our owners.
It's a great question and I would attribute it to mix and as you know, it will change.
It will change.
And so, I wouldn't put a lot of emphasis on a quarter and I would wait for the full year to make an accurate assessment.
But I would say that it really is just a mix and they vary due primarily to timing and when they hit in a given quarter and as you know, there generally is a fairly significant time lag in these larger transactions which does affect the back pretty materially on a quarter-by-quarter basis.
<UNK>, I would say that it is always competitive and it always is intense in terms of very capable firms that we compete with every day.
In terms of slipping a little bit or getting back or whatever it may be, I'll reserve comment on that in terms of let's get through the year and take a look at how things ultimately pan out for full year.
It's a little hard to do on a quarter-by-quarter basis, again just due to timing and mix of business, et cetera.
But your premise of intense competition, particularly with larger transactions that affect volumes pretty dramatically versus revenue is a fair one.
So, I would consider that, that is a risk that people face in the intermediary space in terms of this type of competition continuing.
I don't see a difference, which in terms of the competitive pressure relative to now versus last year or the year before if that is where you're heading.
Peter, we are quite active with foreign investors.
As you know, in our business model, we are one of the few real estate intermediaries that also act as a placement agent.
So, as a placement agent, you're raising discretionary and non-discretionary funds, the majority of those investors are large sovereign wealth funds, large foreign corporates and domestic state plans, endowments and domestic corporates.
So, in terms of our activity with those groups and that translating into asset sales or assets financings in the United States, it's quite robust.
So, what I can tell you is that we are quite unique in the foreign arena.
While we do not have a global platform, we have a much different strategy in approaching foreign capital and it seems to be working fine.
As you're aware, we recently completed an open-ended fund raise for MetLife to get them into the investment management business and we are also in the market with several other closed-end large funds as we speak and again, a good portion of that investor community will be foreign.
Well, it's a good question, <UNK>, but I'll turn that around a little bit to.
As you'll see with these cap rates, particularly on 28, you'll see that we're trading outside the mean here.
And when you look at it on relative risk adjusted return to equities or fixed income or private equity or others in the marketplace, given the relative security of a fixed asset or hard asset in conjunction with current income, it's very hard to beat at present.
I believe, most investors, as I stated in the commentary, would comment that they believe the majority ---+ I know it's a very generalized statement ---+ of cap rate compression and multiple expansion has occurred and so most price appreciation and others will come from property level fundamentals, which is going to be driven by job growth.
In terms of what might happen in interest rate environment, we don't have to really guess about that.
If you look back to May of 2013 through August of 2013, the bond went from 1.6 to approximately 3.03 in a very short period of time and I do not believe any of us witnessed any diminution in transaction volume or interest in this space.
So, on the one hand, when you look at the risks that could occur in terms of capital continuing to flow, there are really three things to think about.
One is, you do have spreads that are quite outsized, relatively speaking.
Number two, you are highly competitive from a risk adjusted return which are competing high asset classes.
Number three, you have a, what we think is a history of pricing and volumes and not being affected by an approximate 140 basis point increase in the 10-year bond in a very short period of time.
And then, when you look at allocations and where large state plans and that would just say the largest owners of capital and how they're thinking about diversification, as I mentioned, I believe that real estate has earned its way into the diversifier segment of a well constructed portfolio.
So, while risk adjusted return is extraordinarily important and I do not mean in any form or fashion to suggest otherwise, there is also something else at play, which again has emerged over the last 25 years and that is this diversifier effect across the board.
So all in all, I think you would find that most large investors would say let's see how fundamentals perform.
We have probably reached the bottom or close to a bottom, there could be more, you never know, unlevered returns, which is how we look at it on an unlevered basis and so it really is going to come down do performance from this point forth.
Again, on a very general statement and it changes by market, as you know, and it changes by property type in general regions.
Well, let me correct you just a little bit and that is we do not have a London presence.
Our view and, again, I'm going to state this in a way that hopefully will make sense to you.
We see a tremendous opportunity before us in the United States.
And so, from a risk adjusted return perspective, and remember that we are significant owners of this firm, we see opportunities here from a market share perspective and as we stated in our commentary, our strategy really hasn't changed which is a unwavering commitment to complete and build out our existing offices with a full complement of our business lines and property sector verticals.
We have attacked the foreign side of this, definitely, and if you just think about our thesis for North America and what we stated, the vast majority of our clients in North America, what they really want is access to foreign capital and knowledge of the foreign capital market place.
So, we have been sending people overseas for many, many years, every quarter, senior transaction professionals to inform foreign capital of what's happening in the United States, which they are very appreciative of doing and if we're reasonably correct, over a long period of time, you develop mutuality of trust.
So, that is how we are focusing on that.
But that is not to say, <UNK>, that we would not be open minded or one quarter, you may see us open an office in London.
But at present, we don't have any and we're very focused as we have been for the last 15 years of North America and continue to grow our market share here.
Repeat the first part of your question, <UNK>.
<UNK>, first, we have been calling that out over the last number of years.
It goes back to the downturn.
When we were coming out of the downturn in 2009, we began recruiting in a big way.
I think we were going long before a lot of people were and we were bringing in some different groups from the outside and created some incentive-based opportunities for them that would be measured over time based on performance and I believe, 2012 is when it began impacting the P&L.
So, to the extent that there is a difference quarter-to-quarter as when we've been calling it out ---+
And, [at the end] of last year, we actually called it out as well, the difference.
So, that's the real issue behind it and these things evolve ---+ take time to come to fruition and these arrangements are over a number of years of performance.
So, again, like I said, I think it was in 2012 is when you begin seeing that impact the P&L and we'll continue to call it out if it's a material number ---+
I'll take that <UNK>.
It really is not changing.
It depends on the situation and it depends on the market and it depends on the business line and/or the property sector.
So, in terms of changing our views and how we approach it, there is no wholesale [advantage] there, <UNK>.
We have always had quite a significant tool box in that regard.
So, it just depends on the situation.
So, it's quite individual-specific.
That's absolutely correct.
That'll flow through in the second quarter.
But as you recall, when we were talking about this issue for just the opposite effect (multiple speakers).
There is a lag effect, as it relates to the securitization comp and gain on sale of service of the portion of the servicing that we sell off.
So while on the one hand that the originations and Freddie purchasing loans from us do affect in that quarter the MSR amount and that's a non-cash item in the other income line in that we do adjust that for EBITDA purposes.
The other income, the cash-oriented other income has a lag effect.
So, some of that we may not see coming through the P&L for a few more quarters after the second quarter.
So it's a mixed bag, if you will, as to the timing of when that would impact the P&L.
Thank you, everyone for attending and we hope to see you in our second quarter call.
