HFF Inc (HF) Q4 2018 Earnings Conference Call Transcript

HF earnings call for the period ending December 31, 2018.

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HFF Inc  (NYSE:HF)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 6:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good evening, and welcome to HFF Incorporation Fourth Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded.

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

Myra F. Moren -- Managing Director, Investor Relations

Thank you and welcome to HFF Inc.'s earnings conference call to review the Company's operating performance and production results for the fourth quarter and full year 2018. Earlier today, we issued a press release, announcing our financial results. The release is available on our Investor Relations website and hfflp.com. This call is being webcast and is available on the Investor Relations section of our website, along with a 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 a more detailed discussion of risks and other factors that could cause results to differ, please refer to our fourth quarter 2018 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 will refer to a non-GAAP financial measure and we have provided a reconciliation of this measure to GAAP figures in the earnings release.

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

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

Mark D. Gibson -- Director, Vice Chairman and Chief Executive Officer

Thank you, Myra. Good evening, everyone, and welcome to the call. As outlined in our earnings release, revenue totaled $215.3 million in the fourth quarter 2018 and $662 million for the full year 2018, representing increases of 16.2% and 8.6%, respectively, when compared to the same periods in the previous year. Net income totaled $45 million in the fourth quarter 2018 and approximately $116 million for the full year 2018, representing increases of 31.3% and 22.1%, respectively, when compared to the same periods in the previous year. We remain constructive on the fundamental drivers of the business, are pleased with the performance of the platform and believe the results are a testament to the professional integrity and work ethic of the Firm's capital markets advisors and our collaborative team culture.

There continues to be some divergence in the investment sales, volume statistics across the US by property type and by geographic region or city. HFF believes this divergent performance is due to a number of factors, including uneven job growth by region and the resulting persistent bid-ask gap in certain markets, where demand fundamentals are slowing, increasing cost of capital, favorable liquidity of the US debt market, economic cycle risk, reinvestment risk and real estate being viewed as an excellent asset liability management tool for funds with long dated liabilities, which has to a degree elongated whole periods. These factors resulted in the institutional commercial real estate market experiencing period of price discovery beginning in 2016 and continuing through 2017, as evidenced by the 14% decline in investment sale transactions over those two calendar years as reported by Real Capital Analytics.

However, as stated in our three previous 2018 earnings calls, it would appear that bid-ask gap continues to narrow between buyers and sellers as evidenced by investment sale transaction volume increasing to $562 billion in 2018 or 14.9% higher than the previous year as reported by Real Capital Analytics and only 1.4% below the post great financial crisis peak set in 2015 as seen on slide 14.

The majority of the 14.9% increase was obtained through portfolio and entity level transactions, which increased $50.7 billion or 40.9% over the previous year, while individual property transactions increased by $22.1 billion or 6.1% over the previous year. The aforementioned increases in portfolio and entity level transactions was primarily driven by changing business models for operators and institutional investors as well as persistent NAV discounts in the public REIT market for certain companies or property sectors. 12 M&A transactions were announced in 2018, totaling approximately $84 billion in gross value, the second highest volume figure in more than 10 years.

As we have stated on previous earnings calls, we believe the institutional investor market remains quite disciplined in its underwriting of commercial real estate since the Great Recession. The majority of investors have adjusted underwriting to take into consideration moderating rent growth or increases in concessions and, of course, perceived increased risk, given economic cycle concerns. The previously mentioned bid-ask gap, which has persisted for two years in certain geographies, is an example of investor discipline, given that discretionary capital and closed-end funds alone currently now totals $190 billion, the largest amount of discretionary capital available to deploy in the industry's history and more than double the amount that existed in 2007.

This restraint in deployment of equity capital is being bolstered by three additional factors. Those being reinvestment risk, liquidity of the US debt market and the attractiveness of commercial real estate assets as an excellent ALM strategy among pension plans, sovereign wealth plans and corporate plans.

In terms of reinvestment risk, some institutional investors are enjoying excellent cash on cash returns with their existing real estate investments and believe it would be quite difficult to replicate same in the current environment. Additionally, they believe commercial real estate is an excellent long-term store value, as per the metrics provided on slide 15 showing an excellent risk adjusted return offered by private real estate investments and therefore represents an ideal match for long-dated liabilities, thereby helping a given plan's asset liability management strategies. These factors have resulted in the elongation of holding periods for some operators and institutional investors.

Finally, given the liquidity of the US debt market for commercial real estate, if current pricing does not meet a given owner's view of value, an excellent alternative is to recapitalize, refinance the asset in lieu of sale. However, in some cases, markets that have previously experienced declines in transaction volumes have rebounded in velocity as the bid-ask gap has narrowed due to greater confidence in market and asset level performance. Such markets include New York City, San Francisco and Chicago, which collectively increased transaction volumes by approximately 37% in 2018 according to Real Capital Analytics, contributing to the aforementioned increases in volumes year-to-date. In cities where rent growth is accelerating, the buy side investor base is reflecting those facts in its underwriting and therefore a bid-ask gap is unlikely to exist in those markets and generally speaking transaction velocity is increasing.

Relating to price differentiation among property sectors, asset types requiring lower levels of capital expenditures, such as industrial, multi-housing and self-storage remain in favor as does any property cycle positively influenced by non-economic factors, such as demographic shifts, which would favorably impact healthcare-related assets, such as medical, office, life science and biotech along with student housing and some components of the senior housing industry. Additionally, assets that are generally termed alternatives, such as data centers, manufactured housing, cold storage are also in favor for a variety of reasons. HFF views these conditions to be constructive for the industry in general as the commentary suggests that commercial real estate remains in favor with institutional investors due to their willingness to hold assets for longer durations and underwriting continues to be measured.

Additionally, HFF believes the following factors are important foundational or structural components of the commercial real estate industry, which would seem to be positive drivers for transaction volumes. The composition of ownership is increasingly institutional, which we believe is and will continue to positively impact transaction volumes for select intermediaries as investors continue to consolidate service providers. Effective in the third quarter, 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, indicating commercial real estate's enhanced standing among global investors and has resulted in an increase in the flow of capital in the commercial real estate.

However, while capital flows have increased as a result of the GICS designation, volatility has also increased due to the emergence of a relative new shareholder base in the shares of public real estate companies utilizing quantitative algorithmic trading methodologies. As a result, some public pension plans and other long-dated capital sources have begun to reduce the percentage of real estate investing via the public markets.

HFF believes the recognition of commercial real estate is 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 and 17, showing an approximate 86% increase in allocations to commercial real estate since 2010 and approximately a $190 billion of discretionary capital raised in closed-end funds alone to deploy into commercial real estate, a historical high watermark for the industry. Additionally, actual investment in the asset class is approximately 90 basis points below target, as a percentage of AUM. As previously mentioned, HFF has believes the record amount of discretionary capital awaiting deployment, combined with the persistent bid-ask gap is empirical evidence of a high level of discipline within the institutional investor set.

As previously noted and as illustrated on slide 18, capital managed by institutional investors in commercial real estate measured by assets held within closed-end open-end funds has increased approximately 105% net of the market's price appreciation, as noted on slide 19, suggesting both increased demand for the asset class and a larger denominator of assets to potentially drive future transaction volume. The statement is further highlighted by the fact that transaction volume in 2018 was down 1.2% from the 2007 transaction market peak of $469.1 billion, despite the almost doubling of AUM during that same timeframe.

Regarding near-term future transaction volume for US commercial real estate assets, please note the size of the closed-end fund market on slide 18. As stated on previous earnings calls, the closed-end fund market in US is generally defined as 10-year finite life funds with a preferred return promote based compensation structure. Given the limited life of these funds, the compensation structure and the fact that investment managers will have great difficulty raising capital for future funds without realized returns, meaning the sale of assets within the fund. The largest investment managers of institutional commercial real estate assets in the US generally liquidate their portfolios every five to seven years on average, as reflected on slide 20. Stated differently, the closed-end fund market is structured to transact in order to recognize value and retain personnel.

Aside from the domestic institutional capital referenced previously, an important source of capital for US commercial real estate industry is the participation of the retail investor, which in the past has invested via private non-listed REITs. Given reforms implemented by government regulators of this industry, a significant number of low-load real estate investment funds from private best-in-class real estate operators and investment management firms have emerged. 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. In addition to the traditional retail investor, large family offices have also begun to significantly increase their commercial real estate holdings. Many of these investors have the capacity of institutional investors and are therefore able to transact trades of significant size and complexity. As illustrated on slide 21, the aggregate net worth of billionaires across the globe has more than doubled since 2007 to $8.9 trillion and have significant allocations to hard assets. Of note, both the traditional retail investor and large family office investors offer a non-correlated source of capital compared to the traditional institutional fund flows.

Foreign capital flows into the US totaled $89 billion in 2018, a 65% increase over the previous year according to Real Capital Analytics and is seen on slide 22. The behavior and preferences of overseas capital generally reflect the same characteristics as those previously mentioned among domestic institutions. Additionally, in 2018, HFF witnessed considerable diversity among overseas investors contributing capital to US market with significant contributions emanating from Canada, Continental Europe, Japan, Singapore, South Korea and Australia. Finally, an important factor impacting foreign investment in the US commercial real estate industry is currency risk and the cost of hedging same as interest rates diverge from those of other developed countries.

Another significant factor affecting the overall health of US commercial real estate industry is the supply of new assets being developed. As shown on slides 23 and 24, supply remains largely in balance with demand relative to previous economic cycles. There are specific sub-markets wherein completions of certain property types have exceeded demand, resulting in increased rent concessions. However, HFF believes an environment of sustained job growth over the next two to three years can afford landlords additional pricing power, given the relatively modest scale of new construction, the lending community's conservative approach to additional construction, the economic cycle risk negatively impacting build-to-core strategies and the compression and return on cost metrics, given the significant increases in the cost to build new product, which have occurred over the past 24 months.

Given these facts and our views of the industry in general, we continue to invest in our core business as illustrated by the following points. We continue to add headcount to our Firm, evidenced by a 9.4% increase in headcount over the past 12 months, resulting in 92 net associates, including 21 net new capital markets advisors. As we have mentioned on previous calls, our headcount growth is the result of both our organic and external recruiting efforts. We also continue to expand our presence in London. The HFF Corporate M&A Transaction Group has continued to expand its headcount, now totaling 11 individuals and has successfully integrated into the HFF platform.

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, the Firm continues to make a significant investment in expanding our infrastructure to allow our capital markets advisors to more efficiently and effectively originate and conduct their business. HFF has a long history of embracing information technology, fostering an innovative reputation by leveraging the full breadth of our technology resources for the benefit of our clients and capital markets advisors. As a prime example as outlined on slide 25, CapTrack is a proprietary transaction and client relationship management workflow software developed internally by HFF. The Firm is able to form insights from our pipeline of transactions and gain invaluable market intelligence derived from the more than 60,000 client relationships, which are housed in CapTrack. In an era where real-time intelligence provides a significant competitive advantage, HFF will continue to develop unique and differentiated technology-driven solutions for our associates and clients.

As mentioned on our earnings call on July 2, 2018, HFF entered into a risk transfer agreement with M&T Realty Capital Corporation, whereby HFF has agreed to indemnify M&T Realty Capital Corporation for all its credit risk associated with certain loans originated by HFF through M&T Realty Capital Corporation's Fannie Mae delegated underwriting servicing loan platform. HFF has since hired Gary Pool, formerly Chief Credit Officer of M&T Realty Capital Corporation as its Internal Credit Officer who will work with HFF's capital markets advisors and the structuring of loans with M&T Realty Capital. The goal of the risk transfer agreement structure is to significantly grow our market share of Fannie Mae in the US business.

On September 17, 2018, a direct wholly owned subsidiary of HFF acquired a 50% interest in Kensington Capital Advisors. Kensington is headquartered in Charlotte, North Carolina, was established in 2004 to provide professional advice to clients facing financial risks associated with changing -- changes in interest rate, currency and commodity markets. Kensington's expertise lies in the analysis, structuring, valuation, execution of over-the-counter derivative instruments and the seasons transactions. In HFF's experience, these products are frequently used by HFF clients and Kensington's insight and expertise will add another valuable resource for HFF. HFF views these expenditures as investments to support the future growth of the Firm. 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 2019 and we'll continue to invest in strategically beneficial business endeavors, subject to the overall performance of the US economy.

In order to put this commentary in perspective relative to the performance of HFF, we believe it is important to reiterate a few key themes from previous earnings calls. First, it's important to note that HFF is not in the equity real estate investment business, but rather the real estate transaction business. Additionally, HFF is not in the leasing, property, management, tenant or landlord representation, corporate outsourcing or appraisal businesses. Therefore, all HFF resources, strategic planning are singularly focused on enhancing our capital markets advisors' capabilities and ability to service their clients. We believe this is a significant differentiator for HFF in the retention and recruitment of talent.

Second, HFF has virtually no corporate debt, a relatively low fixed cost structure and minimal working capital needs, allowing the Firm significant flexibility in terms of adjusting to any market environment and to take full advantage of potential growth opportunities. Third, the Firm is highly diversified relative to its client base. In the 12-month period ending fourth quarter 2018, no one client accounted for more than 1.8% of our capital market services revenue and our top 10 clients combined represented 8.3% of our capital market services revenue. HFF's investment advisory transaction volumes totaled $12.7 billion in the fourth quarter 2018 and $37.4 billion for the full year 2018, marking increases of 23.4% and 8.4%, respectively, compared to the same periods in the prior year. As reported by Real Capital Analytics, the industry experienced increases of 20.2% and 14.9% in the fourth quarter 2018, for the full year 2018, respectively, when compared to the same periods in the previous year.

As illustrated on slide 26, HFF's investment advisory volume for the full year 2018 increased 119% from 2007 as compared to a decrease of 1.2% for the industry. HFF's debt originations totaled $18.3 billion in the fourth quarter 2018 and $54.5 billion for the full year 2018, representing increases of 9.7% and 5.3%, respectively, when compared to the same periods of the previous year. As reported by the Mortgage Bankers Association, as seen on slide 27, the industry experienced mortgage origination increases of 14% and 3.5% in the fourth quarter 2018 and full year 2018, respectively, when compared to the same periods in the previous year. As illustrated on slide 28, HFF's debt volume for the full year 2018 increased 132% from 2007 as compared to an increase of 8% for the industry.

In summary, we believe there is ample availability of capital in both the debt and equity markets to sustain current real estate transaction volumes, absent a precipitous decline in global economic activity. As we have stated on previous earnings calls, moderate volatility can result in an increasing demand for HFF's capital markets knowledge, advisory service and execution capabilities as investors see clarity in asset valuations and in determining the most suitable strategy for their commercial real estate holdings.

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

Gregory R. Conley -- Chief Financial Officer

Thank you, Mark. The information I will discuss today is also set forth on slides 30 through 40.

Beginning on slides 30 and 31. During the fourth quarter, our revenue was $215.3 million as compared to a $185.3 million in the fourth quarter of 2017, an increase of 16.2% year-over-year. Total transaction volumes increased 7.4% in the fourth quarter, led by an increase in investment advisory and debt originations transaction volumes. Operating income was $44.5 million for the fourth quarter of 2018, up $4 million from last year, while operating margins contracted a 120 basis points. The change in operating margins for the quarter is primarily attributable to the increase in the Company's compensation-related costs, including stock-based compensation, interest on the warehouse line of credit, depreciation and amortization and other operating expenses.

We continued to strategically invest in our platform during 2017 and 2018, including the continued investments related to the start-up of our London operations. We maintain healthy levels of liquidity and operate a highly diversified and fully integrated capital markets services platform, as it relates to both consumers and providers of capital, as no one borrower or seller client represented more than 1.8% of our capital markets services revenue for the year ending December 31, 2018.

Continuing on slide 32. Revenue for the full year 2018 was $662 million, which represents a year-over-year increase of 8.6% or $52.6 million. For the full year of 2018, operating income was $94.7 million compared to a $105.3 million, a decrease of $10.6 million, while operating margins were down 300 basis points. The decline in operating income and margins for both the quarter and full year of 2018 is attributable to the increase in the Company's compensation-related costs and other operating expenses, primarily related to the strategic investments we are making in our business through growth in headcount and expansion of offices, such as the start-up and continued integration of our London operation as well as an increase in amortization of mortgage servicing rights and interest associated with the warehouse line of credit. For the full year, the margins were also impacted by the non-recurring cash payments related to the additional compensation award made in the first quarter. These cost increases were partially offset by the income contribution from the 8.6% growth in revenue.

The Company's adjusted EBITDA for the fourth quarter of 2018 was $64.6 million, an increase of $5 million or 8.5% compared to adjusted EBITDA of $59.5 million in the fourth quarter of 2017 due primarily to the growth in operating income. For the full year of 2018, adjusted EBITDA was a $168.9 million compared to a $163.5 million for the same period in 2017, an increase of 3.3%. This increase in adjusted EBITDA for the year was driven primarily by an increase in operating income before consideration of the increases in stock-based compensation and depreciation and amortization and the increase in interest and other income. Adjusted EBITDA margin for the fourth quarter contracted 210 basis points to 30% compared to 32.1% for the fourth quarter of 2017, while the adjusted EBITDA margin for the year ending December 31, 2018 was 25.5% compared to 26.8% in the same period of last year. Cost of services as a percentage of revenue was 55.3% in the full year of 2018 compared to 56.1% in the same period of 2017, which is an improvement of 80 basis points.

Operating, administrative and other expenses were up by approximately $12.3 million or 29.7% for the fourth quarter and up by approximately $32.2 million or 22.2% for the full year of 2018 when compared to the same periods in 2017. These increases were primarily due to additional compensation-related expenses, including salaries and payroll taxes, stock-based compensation, the non-recurring payment related to the additional compensation award in the first quarter of 2018, an increase in the interest in our warehouse lines of credit and increases in other discretionary operating expenses due in part to the growth in headcount. In addition, other operating expenses have increased as the Company continues to make strategic investments in technology, which we expect will result in increased productivity over the longer-term.

Also, as shown on slides 31 and 32, interest and other income decreased $2.4 million in the fourth quarter, primarily as a result of a decrease in income from lower securitization compensation, partially offset by an increase in interest and other related income. For the full year 2018, interest and other income increased $2.8 million when compared to the same period in 2017, which is primarily attributable to higher interest and other related income as well as higher mortgage servicing rights, partially offset by a decrease in other agency related income and a decrease in securitization compensation. The Company's Freddie Mac business has been very strong in the past three years, with a record level of originations in 2018 of $7 billion and originations of $6.8 billion and $4.6 billion in 2017 and 2016, respectively.

Earnings per share on a fully diluted basis increased $0.26 to $1.11 compared to $0.85 for the fourth quarter of 2017. Earnings per diluted share for the fourth quarter benefited by approximately $0.22 from the reduction in the statutory corporate federal tax rates from the 2017 Tax Reform Act. Earnings per diluted share for the full year was $2.88 compared to $2.39 for the full year of 2017. Earnings per diluted share benefited by approximately $0.53 from the reduction in the statutory corporate federal tax rates and benefited by approximately $0.11 from the additional tax deductions from the windfall adjustment that occurred in the first quarter related to equity compensation. The Company's effective tax rate for the year ended December 31, 2018 before consideration of the impacts from the additional tax deduction from the first quarter windfall adjustment and the effect of the deferred rate change was 28.1% for 2018 as compared to 39% for the same period in 2017. This rate differential is primarily due to the impact of the 2017 Tax Reform Act.

Slides 34 through 36 relate to the balance sheet and liquidity. Our cash balance, net of client advances at December 31, 2018, was $301 million compared to $265.7 million at December 31, 2017. As shown on slide 34, during the full year of 2018, the Company generated a $144 million in cash from operating activities, net of a $4.8 million decrease in client advances. The Company's use of cash is typically related to the limited working capital needs during the year and the payment of taxes. As stated on our previous earnings call on July 2, 2018, we invested $25 million to purchase a preferred stock interest in M&T Realty Capital Corporation to facilitate the risk transfer agreement. The Company has virtually no corporate level debt to service other than that related to our Freddie Mac business, which is offset with the mortgage notes receivable.

As shown on slide 35, our balance sheet as of December 31, 2018 included $348.4 million of outstanding borrowings on 19 loans under our warehouse credit facilities to support our Freddie Mac multifamily business and we also had a corresponding asset recorded for the related mortgage notes receivable. To-date, all of these loans have been purchased by Freddie Mac. Also, subsequent to the year-end, the Company announced that it will pay a special cash dividend of a $1.75 per share on February 27, 2019. The aggregate amount of the dividend payment expected to be paid is $68.7 million. Including the upcoming dividend payment since 2012, the Company will have returned capital to our shareholders in the form of seven special cash dividends totaling $457.2 million or $12.02 per share.

I would like to make a few comments regarding our production volume and operational measurements, which can be found on slides 37 to 40. As noted on slides 37 and 38, on a year-over-year basis, our production volume increased by 7.4% or approximately $2.3 billion for the fourth quarter of 2018 and increased $3.6 billion or 3.8% for the full year 2018. The total number of transactions increased by 17.1% or a 116 in the fourth quarter of 2018 and increased by 9.7% or 229 for the full year of 2018. The Company's loan servicing portfolio grew by $11.3 billion or 16.2% when compared to the portfolio size in the fourth quarter of 2017. The loan servicing portfolio balance is $81.2 billion as of December 31, 2018. Slide 39 provides a historical summary of our headcount and also shows the fourth quarter comparison to the same period in 2017. Total headcount in capital markets advisors as of December 31, 2018 were up 9.4% and 5.7%, respectively, year-over-year.

Slide 40 provides a summary of select production and operational measures. The revenue per capital markets advisors increased 1% for the full year 2018 to 1.606 -- $1.706 million from $1.686 million for the same period in 2017 and is up sequentially from the trailing 12 months as of September 31, 2018, where that number was $1.651 million.

In summary, we are pleased with the Company's operating and financial performance for the fourth quarter of 2018 with revenue growth of 16.2%, an increase in operating income of 9.9% and an increase in adjusted EBITDA of 8.5%. While the Company's earnings were impacted in the first quarter of 2018 due primarily to the continued investments we made in our platform, which include the London start-up and the additional compensation award as previously discussed, we saw a continued improvement in our operating performance throughout the remainder of 2018 with the revenue growth of 8.6% and adjusted EBITDA growth of 3.3% for the full year. As we have stated consistently, we view our business on a long-term basis and much of the increases in our current year expenses relate to strategic investments that have a longer-term benefit to the Company. We have maintained a consistent approach since 2009 in how we manage our business for strategic growth.

This can be illustrated on slides 33 and 39. First, slide 39 shows the Company's growth in headcount from 376 associates in 2009 to 1,074 associates in 2018 for a compound annual growth rate of 12.3%. Correspondingly, slide 33 provides a summary of the Company's growth in revenue and adjusted EBITDA with compound annual growth rates of 26.8% and 55.9%, respectively for the same period. We have and will 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 would now like to turn the call back over to Mark. Mark?

Mark D. Gibson -- Director, Vice Chairman and Chief Executive Officer

Thank you, Greg. As we look into 2019, we think it's important to convey that 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 the real estate industry. These core guiding principles are briefly described as follows.

First is our client-centric business model, which avoids business lines or 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 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 78 individuals who run the Firm's 26 offices, its business lines and its property verticals. This approach to governance reinforces our team partnership culture and significantly differentiates the Firm from the industry at large. Third is our player coach leadership style, whereby the Firm's Leadership mentors are capital markets advisors through the origination and execution of real estate transactions. Stated differently, the leaders of HFF are all active and prolific originators of the capital markets transactions and therefore lead by actions versus traditional management hierarchies.

Fourth is our pay-for-performance compensation structure works aligns the interest of HFF's Leadership with the performance of the Firm through our profit participation and omnibus compensation plans. Fifth is maintaining an owner mentality versus an employee mentality, which is illustrated by the fact that HFF capital markets advisors own approximately 11% 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 approximately 2,075,000 shares since January 2014, which vest over five years to our Leadership Team and capital markets advisors based on value-add metrics.

Our sixth 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 its capital. This has been illustrated by returning capital to shareholders over the past seven years in the form of special dividends totaling $457.2 million or $12.02 per share.

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, executive appointments are based on long-held value-add principles, which were developed internally and are consistently used to educate all employees. HFF's ability to differentiate, 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 2012, the Company has increased its headcount by 500, representing an approximate 87% increase and we have grown our total capital markets advisors by 163, representing an increase of approximately 71% We have accomplished this profitably and at a sustainable measured pace. HFF remains committed to protecting its culture, be in unwavering adherence to its deliberate hiring practices.

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


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Questions and Answers:

Operator

(Operator Instructions) First question comes from the line of Jade Rahmani from KBW. Your line is open.

Jade Rahmani -- KBW -- Analyst

Thanks very much. Can you provide the Freddie Mac volumes in the -- origination volumes in the fourth quarter of 2018, I think last year you did about $2 billion in 4Q '17, not sure if you mentioned it earlier?

Gregory R. Conley -- Chief Financial Officer

Yeah. Jade, I didn't mention the quarterly volume, we did just about $7 billion for the year, we did about $2.9 billion approximately in the fourth quarter of this year.

Jade Rahmani -- KBW -- Analyst

What are you seeing in the outlook there that's extremely strong growth on the Freddie side? We've also seen that in other players. Do you anticipate 2019 multifamily originations with the GSEs to be on par with 2018?

Gregory R. Conley -- Chief Financial Officer

Well, Jade as you know, we don't give guidance, but you do know obviously that the agencies have both kept their caps similar for 2019 as they were for 2018. So we'll just have to see how that transpires, but that -- the activity will go along with the multi-housing sector and just the debt platform in general.

Jade Rahmani -- KBW -- Analyst

In terms of 4Q production volumes, did they come in stronger than you had anticipated either at the end of the third quarter or as the quarter played out, I think, Marcus & Millichap mentioned that on their earnings call, they were somewhat surprised by the strength?

Mark D. Gibson -- Director, Vice Chairman and Chief Executive Officer

Jade, this is Mark. No, we weren't surprised. We plan -- we don't control timing of when things happen, but we have very accurate processes that we follow that have been trying true for over 25 years. So we weren't surprised. Of course, things can change as you know quarter-to-quarter based upon closings and any abnormalities in the macroeconomic climate. But generally speaking, no, we weren't surprised. And I would also take you back a little bit to what we've been saying for a while in terms of the drivers of volumes in the marketplace. And when you look at the doubling of AUM since '07 and we're literally 1% down or 1.4% down in transaction volume during that timeframe. The math there would seem to support higher transaction volumes over time. We're going to have blips year-to-year. And then when you add on to that, the commentary regarding the closed-end fund environment, which is very significant in the US and it's structure in terms of mandated transactions for a number of reasons. One can look at that denominator that has significantly grown as real estate has grown into more than an alternative asset class with large owners of capital and just see what might happen over the next few years. I would also say, Jade, just on that point while we're on it, the industry is consolidating in terms of service providers relative to the largest owners of real estate and that has been beneficial as well.

Jade Rahmani -- KBW -- Analyst

In your estimation in the fourth quarter, did you detect any pull forward of transaction volumes? Do you think that the volatility in the capital markets caused people to try to lock-in pricing, try to lock-in rate on the financing side to close transactions?

Mark D. Gibson -- Director, Vice Chairman and Chief Executive Officer

No, we didn't see that, Jade, in our book. If anything, generally when you have significant volatility, the markets tend to pause. So we didn't witness any acceleration.

Jade Rahmani -- KBW -- Analyst

And then can you make any comments, a year ago in the first quarter, HF's stock price was extremely volatile post earnings as people were surprised by lower average transaction sizes and negative operating leverage driven by increased fixed cost based on some of the investments you had made. Can you give any commentary about how things look in terms of pipeline in the first quarter, since we now are halfway through the quarter? Should we anticipate a tough comp with a year ago on the volume side? Or are there any other comments you can give about current transaction flow?

Mark D. Gibson -- Director, Vice Chairman and Chief Executive Officer

Jade, we don't give guidance, so I can't comment on the pipeline. But I will tell you -- I will address the first quarter of last year. So as you know, over the last two years, we have invested quite significantly in various businesses. We mentioned Kensington, we mentioned Fannie Mae, we mentioned London. And I think it is important to highlight again that we use the tax savings that occur corporately to reinvest in the platform into our people and that is a non-recurring event. So, again, sticking with our statements we've made several times over the past earnings calls, if we decided to quit investing and growing the business and growing revenue, we could expand margins quickly. So the way our business is structured when we make an investment either with London or other similar investments, it's a direct expense to the P&L. And we have fairly consistently stated that our margins will reflect it as a result in over the last several years, we've been somewhere in the 25% margin, those are very high margins relative to the industry at large. And if we compress it, which we have stated it would as we make these investments, we're hopeful that we're making solid investments that will benefit the Firm and our shareholders in the future. But that should give you some idea of how we view the future. If we stop making investments, that would be one metric to look at. And I think the fact that we have been fairly active for us relative to our history over the last couple of years in terms of investing in the various businesses that we've outlined in the script is demonstrative of how we see the market in general over the next few years.

Jade Rahmani -- KBW -- Analyst

Thanks for taking the questions.

Mark D. Gibson -- Director, Vice Chairman and Chief Executive Officer

You bet.

Operator

Thank you. Our next question comes from the line of Stephen Sheldon with William Blair. Your line is open.

Stephen Sheldon -- William Blair -- Analyst

Hi, good evening. So just looking back over the last three quarters, it appears there has been year-over-year acceleration in productivity. And I'm looking at it in terms of transaction revenue per average producer. So what do you attribute that to, if you had to break it down in the strong, underlying market fundamentals and your execution? And has there been anything that's changed or maybe started to have a bigger impact from your go-to-market strategy that's helped drive productivity higher recently or, again, do you think that mostly just reflects positive market dynamics?

Mark D. Gibson -- Director, Vice Chairman and Chief Executive Officer

Well, thank you for the question because it's a good one. We're very pleased with the productivity number, frankly, given the headcount increase is almost all of whom have been young, organic growth that we've trained, you would expect that number to decrease for some period of time rather than increase. And we're very pleased that it has actually increased and I would credit that to our team orientation, culture across all of our businesses. We mentor and train through deal flow, not the traditional management style. And an important factor here has also been technology improvement. So making the business much more efficient has helped demonstrably as well. So it's a combination of all of it, but we're very pleased with it just given how much we have invested in the growth for the Firm over the long-term with respect to hiring directly out of college and mentoring and training people over time that are much younger than our average producer over the last five years. Another important note, again, I'll just bring it up is the average tenure here is 17.5 years. And when you start adding the headcount that we've added and maintain that, it's interesting to us. So those would be the three drivers of the question.

Stephen Sheldon -- William Blair -- Analyst

Got it. And then, yeah , I guess, on the technology side, you've talked over the last year or so about investing in technology like CapTrack and, yeah, you just mentioned kind of the positive impact that that's had on productivity. So as we think about 2019 and beyond, how are you thinking about additional technology initiatives both in terms of adding functionality to platforms like CapTrack and any other kind of strategically important tech initiatives that you might highlight?

Mark D. Gibson -- Director, Vice Chairman and Chief Executive Officer

We don't really make public comments about it in general, but I -- let me just answer it the best I can. I would say that our technology initiative is driven primarily by a quest to enhance the ability of our transaction professionals to be the best they can possibly be in the industry. We don't -- our focus isn't beyond it. So again, focused strongly on culture and strongly on growth of our individual transaction producers to give them the tools they need to be as efficient as they possibly can and therefore be as successful as they possibly can. So the vast majority of our focus is, I would call, practical from a technology standpoint and that is just making people better, faster, smarter than they have been in the past.

Stephen Sheldon -- William Blair -- Analyst

Okay, got it. And then, I guess, just would be curious to hear your thoughts on ramping potentially your M&A activity, given that you've paid out the special dividend, still have likely $240 million of cash is still on the balance sheet based on where it stood at the end of the year. I guess, could that become more of a focus here over the next year or two?

Mark D. Gibson -- Director, Vice Chairman and Chief Executive Officer

One would never say never, but it is difficult for us to maintain our culture, which we talk a lot about as you know and we think it's a significant differentiator in the industry. It would be difficult for us to maintain that, if we made any significant acquisition in scale of individuals. Rather we have built this Company over many, many years one brick at a time, one team at a time and assimilate them into the culture and then grow from there, both organic and from a recruiting standpoint, but generally at a measured pace.

Stephen Sheldon -- William Blair -- Analyst

Okay, that's helpful. Last one from me. I know you don't give guidance, but can you maybe just help frame what tax rate we should expect at this point for 2019?

Gregory R. Conley -- Chief Financial Officer

We -- as I mentioned, the -- when you adjust out for the noise of the windfall adjustment that we settled in at about a 28.1% tax rate for the year and we've kind of completed our analysis relative to the impact that the Tax Reform Act will have on our tax positions. And as you know, prior to that, we settled in somewhere in that vicinity of 40%. So we think we're probably still going to be in that 28% range. It may tweak a 1% here or there on either side when you set aside any of this windfall adjustment issues that occur from whenever we pay out our equity compensation, but having -- setting that aside in a normal basis, all things being equal, we should settle in about 28% give or take a 1% here or there.

Stephen Sheldon -- William Blair -- Analyst

Great, thank you.

Operator

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Mark Gibson for his closing remarks.

Mark D. Gibson -- Director, Vice Chairman and Chief Executive Officer

Thank you, everyone, for joining the call. We appreciate you doing so. We hope you can join us again for our first quarter 2019 call. Have a good evening.

Operator

Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.

Duration: 54 minutes

Call participants:

Myra F. Moren -- Managing Director, Investor Relations

Mark D. Gibson -- Director, Vice Chairman and Chief Executive Officer

Gregory R. Conley -- Chief Financial Officer

Jade Rahmani -- KBW -- Analyst

Stephen Sheldon -- William Blair -- Analyst

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