Bgc Group Inc (BGC) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter BGC Partners financial results conference call. My name is Andrea and I will be your coordinator for today.

At this time all participants are in a listen-only mode. And we will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions).

I will now turn the presentation over to your host for today's conference, Mr. Jason McGruder, Head of Investor Relations, please proceed, sir.

Good morning.

Our third quarter 2011 financial results press release was issued this morning. During this call, we will also be referring to a presentation that summarizes our results and which includes other useful information. Both of these documents can be found in the Investor Relations section of our website.

Throughout today's call, we will be referring mainly to our quarterly results on a distributable earnings basis. Please see today's press release for GAAP results. Please also see the section of today's press release entitled, "Distributable Earnings," also the section entitled, "Distributable Earnings Results Compared with GAAP Results," and "Reconciliation of GAAP Income to Distributable Earnings" for definition of distributable earnings and how, when and why management uses it.

Unless otherwise stated, whenever we refer to income statement items such as revenues, expenses, pre-tax earnings, or post-tax earnings, we are doing so on a distributable earnings basis. Unless otherwise stated, all those financial comparisons we are making today will be for the third quarter of 2011 versus the third quarter of 2010.

I also remind you that the information on this call contains forward-looking statements within the meaning of Section 27a of the Securities Act of 1933 as amended and Section 21e of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include statements about the outlook and prospects for BGC and for its industry, as well as statements about our future financial and operating performance. Such statements are based upon current expectations and involve risks and uncertainties. Actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied because of a number of risks and uncertainties that include, but are not limit to, the risks and uncertainties identified with BGC's filings with the US Securities and Exchange Commission.

We believe that all forward-looking statements are based upon reasonable assumptions when made. However, we caution that it's impossible to predict the accurate results or outcomes or the effects of risks, uncertainties, or other factors on anticipated results or outcomes and that, accordingly, you should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made and we undertake no obligation to update these statements in light of subsequent events or developments.

Please refer to our complete disclaimer with respect to forward-looking statements and risk factors set forth in our public filings on Form 8-K, 10-K, and 10-Q, which we incorporate today by reference.

I would now like to turn the call over to our host, Howard Lutnik, Chairman and CEO of BGC Partners.

Good morning, everyone, and thank you for joining us today for our third quarter conference call. With me today are BGC's President Shaun Lynn, our Chief Operating Officer Sean Windeatt, and our Chief Financial Officer Graham Sadler.

I am pleased to report that BGC generated double-digit percentage gains across all four of our brokerage asset classes. In addition, our quarterly revenues related to fully electronic trading grew by 28.5%. I'm also happy to report that our pre-tax earnings improved by 32.2% to $62.6 million, or $0.24 per fully diluted share, while post-tax earnings were up by 32.6% to $52.3 million, or $0.20 per fully diluted share.

On October 14, 2011, BGC closed the acquisition of Newmark, a leading US commercial real estate brokerage and advisory firm that has approximately 425 brokers. Newmark operates as Newmark Knight Frank in the US and is associated with London-based Knight Frank. We expect the transaction to be accretive to BGC in its first year. Going forward, we will report revenues for a fifth asset class. We'll have real estate, along with rates, credit, foreign exchange and equity and other asset class.

Before I turn the call over to Shaun, I'm also pleased to announce that BGC's board has declared a quarterly dividend of $0.17 per share, an increase of 21.4% compared to last year. We expect to maintain this consistent dividend in the fourth quarter.

I will now turn the call over to Shaun.

Thanks, Howard, and good day to everyone.

Unless otherwise stated, the comparisons I will discuss are for the third quarter 2011 versus the year earlier.

During the quarter, BGC benefited from ongoing market volatility related to concerns about sovereign debt and economic uncertainty. This drove activity across our desks in rates, equities, foreign exchange, and credit.

BGC's overall quarterly brokerage revenues increased by 22%. Rates revenues increased by 12%. This included particularly strong growth in our fully electronic rates business. Where revenues were up by almost 40%.

High levels of government debt around the world continue to drive secondary volumes in our voice and electronic rates business and certain of our credit [desks]. BGC continues to gain market share in credit during the quarter. As our earnings presentation shows, TRACE corporate bond volumes were down year-on-year. And figures reported by a competitor and the BGCP suggested that credit derivative activity was up only slightly. Nonetheless, our overall credit revenues were up by 13%. This included strong growth from both our cash and derivatives desks, including better than 50% growth from e-brokered credit products and approximately 11% increase in voice/hybrid brokerage revenues.

Our presentation also illustrates how BGC's growth in foreign exchange continues to outpace the industry. Our FX revenues increased by 37.5%. Revenues from equities and other asset classes increased by 56.6%, which again was much better than the overall market.

One of the main reasons for our market share gain has been the strength of BGC's hybrid platform. In very volatile times, fully electronic trading generally thrives for established products such as the US Treasury business. Many of you remember that during a previous call, I told you that March of this year was a record month for eSpeed in terms of both notional volume and number of transaction. Since then, we broke US Treasury volume records in June and then again in August.

Through periods of market turbulence, our customers value the insight BGC focused to provide across a range of asset classes. Therefore, during the extreme market turbulence, voice brokerage tends to recapture market share from newer e-brokered products. BGC has made significant investments in our hybrid brokerage model precisely so our brokers can service their clients using whichever execution method our customers prefer, including voice, hybrid, electronic auction and fully electronic trading regardless of market condition.

To maintain our industry-leading hybrid platform, we've continued to add talented voice brokers over the past few years. Even as we expand fully electronic trading across different asset classes and geography, BGC now offers e-brokering for more than 80 out of our 220 desks compared with approximately 60 out of 200 a year ago. This expansion enabled us to grow BGC's overall revenues related to fully electronic trading by 28.5% year-over-year to $38.9 million or 10.2% of total revenues. A year ago, these figures were $30.3 million or 9.3% of total revenues.

BGC's strong e-broker results included our continued success from fully electronic trading of interest rate derivatives. Since the first launch in late August 2010 through the end of September 2011, BGC e-brokered more than 10,300 interest rate derivative transactions with a notional volume of over $940 billion.

This was the 10th quarter in a row in which our year-on-year fully electronic revenue growth significantly outpaced our overall top-line improvement. E-brokering has been a key factor in the expansion of our profit margins over the past two years. An ongoing investment in proprietary technology, along with robust industry volumes and our brokers' strong relationships with their customers enabled us to increase revenue per front office broker by 14.4% year-over-year. It's approximately $209,000 versus $183,000 a year earlier.

As of September 30, 2011, BGC's front office headcount was up by 3.1% year-over-year to 1,774 brokers and sales people.

With that, I would now like to turn the call over to Graham.

Thank you, Shaun, and good morning, everyone.

Unless otherwise stated, all the comparisons I am making compare the third quarter 2011 to the third quarter 2010.

BGC generated revenues of $380.5 million, up 16.4% compared with $327 million. Brokerage revenues were $356.5 million, up 22% versus $292.3 million. Our revenues from Europe, Middle East and Africa increased by 23.4% to $204.5 million, Asia-Pacific revenues increased by 30.3% to $63.8 million, while the Americas were flat at $112.2 million. Europe represented 53.7% of revenues, the Americas 29.5%, and Asia 16.8%. A year ago, Europe represented 50.7% of revenues, the Americas, 34.3%, and Asia 15%.

In terms of monthly revenues, July 2011 was up by approximately 17% to $114 million; August was up by approximately 25% to $134 million; and September was up by approximately 8% to $132 million. In August of 2010, BGC received $11.6 million related to the Refco ruling, which was recorded in other revenues.

Looking at brokerage revenues by product, BGC's rates revenues were $151.8 million; credit revenues were $83.5 million; foreign exchange revenues were $61.1 million; and equities and other asset classes revenues were $60.1 million. In comparison for the third quarter 2010, rates revenues were $135.6 million; credit revenues were $73.9 million; foreign exchange revenues were $44.4 million; and equities and other asset classes revenues were $38.3 million.

In the third quarter 2011, rates represented 39.9% to total revenues; credits 21.9%; foreign exchange 16.1%; and equities and other asset classes 15.8%. A year earlier, rates represented 41.5% of total revenues; credits 22.6%; foreign exchange 13.6%; and equities and other asset classes 11.7%.

Turning to expenses, total expenses were $317.9 million versus $279.6 million last year. So lower by approximately 190 basis points as a percentage of revenue. Compensation and employee benefits were $203.2 million or 53.4% of revenues. This compares with $177.3 million or 54.2% of revenues. Non-compensation expenses were $114.7 million or 30.2% of revenues. This compares with $102.3 million or 31.3% of revenues.

While the non-compensation expenses were lower as a percentage of revenues, they increased in absolute terms both sequentially and year-over-year. These increases were driven largely by high professional expenses associated with our FSA remediation program. We anticipate these expenses to remain in the fourth quarter, but to decline over the course of next year.

In addition, third quarter 2011 non-compensation expenses also reflected higher expenses associated with the opening of five additional offices, while certain items like commissions and floor brokerage and selling and promotion tend to move in line with brokerage revenues.

BGC's pre-tax earnings were up 32.2% to $62.6 million, or $0.24 per fully diluted share, compared with $47.3 million, or $0.20. Our pre-tax distributable earnings margin was 16.4% versus 14.5%. This margin expansion was driven by higher overall revenues and higher fully electronic revenues. BGC's post-tax distributable earnings grew by 32.6% to $52.3 million, or $0.20 per fully diluted share, compared with $39.5 million or $0.17.

Our effective tax rate for distributable earnings remained 15% in the third quarter of 2011, unchanged compared with to the year earlier. Our post-tax earnings margin was 13.7% compared with 12.1%.

Our fully diluted weighted average share count was 281.6 million for the third quarter of 2011. This included a weighted average of 33.5 million shares associated with our convertible senior notes, of which 22.2 million related to our 8.75% convertible senior notes due 2015 and 11.3 million related to our recently issued 4.5% convertible senior notes due 2016, pro-rated for the periods since issued.

In the third quarter of 2010, our fully diluted weighted average share count was 249.9 million, including 21.6 million shares relating to the 8.75% convertible senior notes due 2015. At the end of the third quarter, our fully diluted share count per earnings was 288.6 million, including the full effect of the 38.5 million shares underlying both convertible senior notes.

The third quarter 2011 and third quarter 2010 GAAP fully diluted weighted average share counts were lower than those for distributable earnings because certain instruments, including the convertible senior notes, were diluted for distributable earnings, but not for GAAP.

Our fourth quarter 2011 calculation of post-tax distributable earnings per fully diluted share will include the shares related to the company's convertible notes, but exclude the associated interest expense net of tax, [because] the impact would be diluted. Therefore, we expect to add approximately $5.2 million to post-tax earnings and include the shares underlying the convertible notes.

Regarding the balance sheet, we have simplified our definition of overall cash to include cash and cash equivalents, plus unencumbered securities which we hold for liquidity purposes, currently US treasuries, and which are part of the securities-owned line item. Additionally, we now no longer include cash segregated under regulatory requirements.

As of September 30, 2011, our cash position was $448.7 million. Notes payable and collateralized borrowings were $336.7 million. And our book value per common share was $2.40. Our total capital, which we define as redeemable partnership interest, Cantor's non-controlling interest in subsidiaries, and total stockholders' equity, was $465.2 million. In comparison, as of December 31, 2010, the company's cash position was $374.1 million; notes payable and collateralized borrowings were $189.3 million; book value per common share was $2.47; and total capital was $425.0 million.

The increase in cash from yearend 2010 was due primarily to the net proceeds from the July 2011 notes issuance, an option exercise by Howard for cash, and proceeds from the issuance of Class A common stock as part of BGC's controlled equity offering, these items partially offset by the timing of both the securities clearance process and the settlement of receivables and payables, as well as cash used with respect to acquisitions, dispositions and/or resolutions of litigation, and for the redemption of units.

With respect to our dividend and taxes, we now expect that at least 70% of dividends paid for full year 2011 will be treated as a non-taxable return of capital for common stockholders. This will be a significant improvement from 18% in 2010 and up from the 50% we have previously expected for this year.

The balance of our distribution to common stockholders will be treated as a qualified dividend. Based upon an annualized dividend of $0.68 per share and yesterday's closing stock price of $6.83, BGC's pre-tax dividend yield is 10%. For New York City resident in the 35% federal tax bracket and the 12.85% state and local tax bracket, the current taxable equivalent yield would be 16.3% when compared to a distribution, dividend, or interest payment that is fully taxable at ordinary rates and 12.1% when compared to a fully taxable qualified dividend.

I would also like to discuss some of the accounting details of the Newmark acquisition and their impacts on distributable earnings for the next year or so. Under GAAP acquisition accounting, certain receivables and associated compensation, which ordinarily would be GAAP revenues and expenses, are deemed purchased assets and liabilities and are therefore not recognized as revenues and expenses. In order to provide a consistent view of our distributable earnings, we will include in revenues the collection of receivables which would have been recognized for GAAP other than for the effect of acquisition accounting together with the associated compensation expenses. We expect this difference to diminish throughout 2012.

With that, I'm happy to turn the call back over to Howard.

Thank you, Graham.

Our revenues for the first 17 trading days of October 2011 were up by 7% to approximately $98 million compared with the first 17 trading days of October 2010. We expect to generate revenues of between $350 million and $380 million in the fourth quarter of 2011, an increase of approximately 9% to 18% compared with $322.5 million in last year's fourth quarter. This includes approximately $35 million to $45 million from Newmark.

We expect pre-tax distributable earnings to be between $48 million and $54 million, an increase of approximately 6% to 19% compared with $45.4 million last year. We expect the effective tax rate for distributable earnings to be approximately 15%, which compares to 10.9% in the fourth quarter of 2010. And in order to provide more information, we plan to provide an update to our fourth quarter outlook before the end of the year.

So, operator, we would now like to open the call for questions please.

Thank you very much. (Operator Instructions). And the first question is coming from the line of Rich Repetto. Please proceed.

Yes, good morning, guys.

I guess my first question, Howard, is actually on the expense side. So I guess on the expense side, I know you talked about the professional expenses for the FSA remediation. But I'm seeing a lot of the other lines move around dramatically as well. And I'm just trying to see when you look at the other line as well as -- well the other line in professional going up a lot and you see something like OCC and EQ, or occupancy and equipment come down, can you give us a little guidance on the run rates of the individual expenses?

Right. So it's Graham here.

So in -- if you're looking from quarter to quarter, right, in other expenses business in this quarter, we have the Charity Day expense. So that's one reason we don't -- this happens every quarter -- sorry, every third quarter. It's not included in the June quarter. We also had in occupancy and equipment in June. We had a one-off item relating to--

London.

-- yes, some space in London. (Inaudible) referred to it last time. Obviously, this has not recurred.

Okay. So can you quantify the Charity expenses in, I guess, the other line this quarter, ballpark?

Around $10 million.

Okay. The other line was $7.6 million -- is that all -- well, could you show -- tell us which lines that fell in because $7.6 million in the other expenses?

For other expense -- sorry, I'm not quite sure I follow the question. In other -- the Charity Day expense is in other expenses.

Okay. The entire other expense total is $7.6 million. (Multiple Speakers)

It's $23.4 million--

$23.365 million.

Yes.

Interest expense is $7 million. Other expense is $23.365 million.

Okay. So you're talking on a GAAP basis versus [first] distributable earnings basis.

Yes. I'm referring to Page 14 part of our press release that's on a GAAP basis.

Okay. We can go over more of the details afterwards. I understand the difference here now.

Next question, Howard, so as you look at what's gone on in the quarter, all the volatility overseas -- and I guess two parts of question. One, it looks like the US was flat quarter-to-quarter. And you may see a lot of activity in Asia as well as Europe go up quarter-to-quarter. I was wondering, is there an explanation for that?

And then also, I guess the outlook for this quarter, I know it's a little bit confusing with Newmark. But you're modeling the typical, I don't know, 10%, 11% down for November-December seasonality when you back all that stuff out.

Right. So we have -- so let's talk to your first question which was, look, the volatility in the world was centered in Europe. And fortunately, we have a very large business in Europe to catch that opportunity when it comes. Obviously, the growth of the world thinks about Asia as an opportunity for growth. And because of our big investment in our Asian operations, we were able to capture significant growth there.

It was more muted period in the United States, just the way of the world. So we -- the benefit we have is we have a global business and a global franchise. And we would love it if all cylinders hit on the same time. But when two out of the three areas of the world are rocking, that's okay. That's why we're in all three. So that's Number 1.

With respect to seasonality, absolutely, we had such a big and busy third quarter that you would expect some breathing in the fourth quarter. That's expected. Plus you've got November and December, of course, with their seasonality. And we showed you the first days of October. Now we only closed Newmark on the 14th, so not much of that obviously is Newmark, just a little bit of it.

So, clearly, we can guide what we see. And what we've seen is that we expect November-December to have sort of traditional seasonality associated with them. And that mutes our fourth quarter as we have come all to expect.

Okay. Thanks very much, guys.

Thank you very much for that question. The next question is coming from the line of Patrick O'Shaughnessy. Please proceed.

Hey, good morning, guys.

Good morning.

Patrick.

So if I can kind of dig into some of your quarterly brokerage results for the third quarter, certainly at some segments, that did really well sequentially, at least, and others that might not have done as well. If we look at the equities segment, and maybe this comes down to US equities, but kind of across the board we saw record equity options volumes in the US -- equity volumes were up in the US. They're up in Europe. And your business was down a little bit sequentially. What sort of dynamics were taking place that led to that result?

It's Shaun here. Well [the dynamics], we were busy. But the rest of the businesses with regards to rates and credit was where the real focus for us was. We've continued to grow and expand in that business. And in the US, certainly, we're looking to continue to grow and build that business. But for us, the dominant asset classes was in credit and rate. So--

Okay, fair enough. And I think to be fair, you guys had an outsized second quarter. So that probably had an impact on your sequential growth in equities, too.

If I can move onto rates then, certainly I think there's been a big push by you guys as well as some European-based inter-dealer brokers to launch interest rates swap trading platforms, electronic trading platforms. With another three months in your belt since we last talked about this last quarterly call, again how do you see guys progressing with your interest rates swap electronic trading platform versus the competition?

I think we are very well positioned. The extreme volatility of the third quarter I think took -- that's why Shaun said that that the newer e-brokered products tend to lose market share to voice brokers in periods of extreme volatility. Strong and stabilized e-brokerage products like our US Treasury business obviously thrive in that kind of marketplace.

So I think what you've seen is those that have launched newer product categories like the new interest rates swap products lost market share to the voice brokers. And obviously, we have a strong voice brokerage business which picked up that business. But our electronic derivatives business, and that's why I think Shaun laid out the statistics of what we've done, you can see we continue to go forward. We continue to be well, well positioned. And we are doing it around the world.

So it's not just dollars or euro, but we're in Australia, we're in Asia, we're in so many -- more than a dozen markets in interest rates swaps electronically that our opportunity to electronically broker interest rate swaps will be well positioned as these become more -- considered more traditional and less new. And we would expect, again, with respect to interest rates swaps, it is not a matter of if, but a matter of when for the more liquid, more vanilla products. Those that are more complex, we expect to remain in the voice realm for many years to come.

Okay, that's very helpful. And one more if I could, certainly we're hearing stories about some of the big dealers out there having to do layoffs, UBS and a bunch of those guys. So they're obviously some of your bigger clients. How do you see business shaping up over the next year, so the next four, maybe six quarters if we do see widespread layoffs at the big investment banks?

Well, the -- well, there's a couple of things. Number 1, we get uncertainty in some of the bank's employees gives us opportunity to hire tremendously talented individuals, which we take advantage of.

But I guess the best example would be in the month of October 2011, both the Bank of Montreal and the Bank of Nova Scotia became primary dealers of US government securities. So what you're going to see is those participants in the market who fly just below the, what we'd call the bulge bracket radar, are going to have the opportunity also to hire talented individuals. They have strong balance sheets. And they're going to put those balance sheets to work. And what you're going to see is a diversification of our client base, right?

So the big giants may trade a little less. UBS may choose to trade a little less, although they did not say they were going to trade less in the most liquid commodity-based products. So I doubt they will, but we will see. But what you would expect is the Bank of Montreal or the Bank of Nova Scotia -- SOCGEN became a primary dealer. I mean you have all of these players. '

There are lots and lots of banks in the world. Lots of people focus on the Top 10. Try taking a look at the next 20 in the world. You have Asian banks. You have Chinese banks. These opportunities for diversification of our client base amongst the world's banks is out there. And I think it will strengthen our business over the long run. It makes for interesting talking in the short run. But it does make for a better business for BGC over the intermediate and longer.

All right. That's very helpful. Thank you.

Thank you very much for that question. (Operator Instructions). We have another question. It's coming from the line of Niamh Alexander. Please proceed.

Hi. Thanks for taking my questions. Good morning.

Good morning.

And can I just -- sorry to ask you again, but the dividend, I just want to understand your position because I see, typically, you do pay 60%, 75% out. I think at the beginning of the year, you'd said you were going to pay $0.70 every quarter irrespective of maybe whether or not you earned it. Are you still in that mode of $0.17? And is that what we should look towards or should we kind of look towards reverting back to the 75% payout?

We -- you should expect since -- that's why I tried to make it clear that we expect to pay $0.17 -- we currently expect to pay $0.17 in the fourth quarter. Obviously, that's up to our board at that time. But that is currently the expectation of the firm. We set our dividend earlier in the year understanding that the fourth quarter tends to be the weakest quarter. And that seasonality has always been there. If you look back to last year, it was pretty consistent.

Yes.

So I think we've set the dividends so that we would have it through the whole year and keep it consistent. So that is our expectation.

That's helpful. Thanks, Howard.

And is it kind of -- how should we think about next year? I mean, just looking at your customers, and I know that the opportunity -- the customer is kind of shrinking their balance sheets. There's nothing you control about that. But is the opportunity real right now to kind of extend the group of dealer clients? Or is there a risk that maybe some of those big dealer clients aren't quite ready to kind of open up the dealer-to-dealer activity to those new guys you talked about?

No. The banks of the world are already our clients. The question is as they get bigger. So, obviously, the Bank of Montreal and the Bank of Nova Scotia becoming primary dealers in the month of October 2011 bodes very well for volumes in US Treasuries from Bank of Montreal, from the Bank of Nova Scotia. I mean those are sort of solid and plain and obvious truths.

So I think the banks of the world, the Chinese bank, Fortis's business, you're going to see more business from these players. When banks don't pay talented proprietary traders who have historically made money, those talented proprietary traders find capital in other places. They'll find it in hedge funds. They may find it in asset managers. And then that volume will continue again.

There is of course a period of time where there's that, I guess, the moment of time as people change their jobs. But when they reemerge -- there's always change and there's always people reemerging. You would see great business from these people, which produces superb volume and new high-frequency traders, a new opportunity, Dodd-Frank opening up clearing. And having central clearing means high-frequency traders who are in our top -- in those electronic markets, the high-frequency traders are in our Top 10 around the world. They are not currently in interest rate swaps. As soon as central clearing happens in interest rate swaps, we are going to add Top 10 clients.

So I think the opportunities are there for us to expand the scale of our client base because some of the, let's say the Number 11 through Number 20, if they hire the talented people who leave the bigger banks, will rise up. And I think that is entirely what is expected in part of the regulations, which is they have -- that they have pushed the model to be more distributed and more diversified. And I think overall, there is no issue with the Canadian banks, the Asian banks, the European banks. So we're going to add more capital. These are all things that bode well for our long-term future with those clients.

Okay, fair enough. Thank you, Howard.

And if I could, Graham, let me just understand the non-GAAP charge. I know you said it's non-cash non-dilutive. The $50 million, like what was that, I mean, in terms of it was senior partners or limited partner holders converting their limited partner share for kind of their ownership in the Company and then in turn getting $50 million in cash? So they -- I guess, was it maybe indirectly kind of cashing out some of the ownership of the Company? Is that how -- the right way to think about that?

It's -- yes, it's just the equity is held in a very, very, very broad way in this company. When a partner converts their stock to -- converts their partnership to equity, it is considered a compensation charge. So the conversion of their partnership to regular equity produces a compensation charge for the Company.

And so just the conversion, whether they sell the stock or not is up to them. But just moving from partnership to stock, which we do on a consistent basis, produces a non-cash. We can pay them any change of money, non-dilutive. We didn't issue a new share; it was already in our share count, and non-economic, because it was already in our share count and already in our numbers, and already in our EPS, it has no economic effect on the company. We just had a partner convert from partnership to shares of public stock. And that conversion is a non-cash, non-dilutive, non-economic compensation charge. But it does give us a tax deduction. And so while it has no other effects, it does have the effect -- this significant effect of having us have only 15% charge with respect to our distributable earnings for tax.

So our tax rate is lower because of this structure. And that of course allows us to have a dividend payout with a high return of capital component because of this particular tax structure.

Another way to think about it would be when most companies give RSUs when they are vested, when they appreciate, the employee gets capital gains and the company gets no deduction. In this particular case, because it's partnership, that appreciation while it costs the company no money, right, the company gets the tax deduction and the employee, rather than paying capital gains rates, pays ordinary income.

So our partners are paying ordinary income on the appreciation of our stock and our public shareholders get the benefit of that tax deduction, which keeps our tax rate low, right, and therefore our distributions higher. And since our employees own 37% of this company, we have aligned the interests of all participants together and it is creating something very special, which we are very proud.

Thank you, Howard. I appreciate the explanation. I guess, the tax benefit, we do get at hand and we can kind of see how that relates to your cash tax outlay as well. But just in terms of they converted that partner, I was just curious, like did they end up selling that stock or cashing out?

So in the prior quarter, we did say that there were 7.3 million shares sold. So with respect to that amount, those shares have been sold in the prior quarter.

Okay. So that was the part for what they cashed out.

And then, if I could go onto the Newmark, it's closed now. I know it's not closed in the quarter, you just reported. But it's closed now. Can you just give me a sense of are you taking on any debt on the balance sheet? And then just help me understand -- I understand that Newmark itself -- some of the partners there have in their own personal -- some of their own personal investments in the properties that the company manages. But also the company owns some stakes and some buildings. Is that correct, like the company you acquired has maybe a small but some kind of ownership in real estate as well? Is that correct?

No. So -- well, some things of what you said are correct. But the last thing was no.

They don't have any small ownership stake in the real estate.

Right, right. We're not -- no, we don't have any -- we did not buy any real estate in the transaction. You are correct; some of the partners do own their own real estate if they'd made an investment. And in many of those cases, they assigned the management of the company. Newmark does manage buildings because in managing buildings, you often have the arrangement where you get to lease the building when there are vacancies. So that's a sole benefit for the company. And that is common.

So no, we don't own any real estate. And we do not intend to buy real estate with respect to Newmark. We do intent to broker real estate however. And that will continue. As far as debt, the Company did have a small amount of debt which we paid off when it came across.

And what else did you ask me?

I think it was -- that was mainly it. It was the balance sheet, was there any debt taken on board and was there any ownership position, because I thought Newmark had some small ownership in some buildings. And then it's just kind of understanding maybe the dependence of those contracts or those relationships on those partners, kind of I'm assuming they're kind of locked in somehow with some equity?

Well the partners of Newmark both sign long-term contracts and have equity exposure to the company. Of course, our objective is over time to teach those in real estate that -- and the Newmark and others that we hire, the aligned interest model that we have been successful with at BGC. It is hard work. It is a lot of talking. But to align the shareholders' and the employees' interest together is something very much worthy of lots of conversation. I think one of the great benefits of this company is that because our employees own so much stock, that they understand, right, that the dividend matters to our public shareholders because they see that value of that stock as their long-term value.

And so they're all working at it together. And we have begun the process with Newmark. We think Newmark is an excellent foundation company in which to build a superb real estate brokerage business. We are brokers, though; first and foremost brokers. We don't want to take principal risk. We are not going to take real estate risk. We're not going to be long real estate. That's just not what we're thinking. But we do plan to help other people do that. We'll help other people buy buildings. We'll help them sell buildings. We'll help them move into buildings. We'll help them do whatever they want with buildings. As long as they're going to pay us a fee, we're going to like them just fine.

Fair enough. Thanks, Howard. I'll get back in line.

Thank you very much for that question. We've got another question. It's coming from the line of Rob Rutschow. Please go ahead.

Hey. Good morning, everybody.

Good morning.

So first, I just wanted to understand the receivables and the purchase there. So can you help us understand how long, I guess, the cycle is for the receivables at Newmark from recognition to actual collection?

Well there's -- generally speaking, there's a portion -- for smaller deals, you get paid straight away. And for larger deals, on average, there's a percentage straight away, a percentage over the next six months or so and a percentage about 18 months later. So generally speaking -- of course, that's not 100%. But generally speaking, that's about on average.

Okay. And then of the receivables, then it's predominantly the larger deals that are getting paid over time, I guess.

Correct. So they'll get paid over time. And that's why Graham said it would basically diminish and dissipate over the course of 2012.

Okay. I'm sorry. Did you say how much the receivables amount was?

No. No, we didn't.

Okay. Another question, on the share count, I guess you're up about 15 million or 16 million sequentially from the second quarter in terms of the fully diluted average. And if I'm understanding you correctly, I guess 11 million of that was related to the convertible issuance?

That's right. Yes.

So then you had about, I guess, it was about 4 million in addition to that issue. What was that for?

Well that's just our general -- the issuance of new units to employees and so on. And so it's just our normal business.

Okay. And so, I guess with the employee count -- or the broker count, down a touch, is that the right way to think about it that it's sort of 6% annual growth rate ex- any growth in brokers for the share count?

Yes. Yes, I would say that you would expect the issuance to move in line with the increase in broker headcount.

Okay. Last question, I guess there's an FCM that may or may not have some problems right now. Is that a business you'd be interested in acquiring either part or in whole?

Well, I'm not going to buy -- no, no.

Look, there are businesses within that company that are consistent with our model. And there are many, many businesses that are inconsistent with our model. We plan to remain consistent with our model and relentlessly so. And so we are not a company that takes proprietary risk. We try not to. Our job is to broker and assist our clients in what they wish to do. So I would say while there are things that overlap with us, it's not something that we're going to be ringing their investment banker about it any time soon.

All right. Appreciate it. Thanks.

Thank you very much for that question. One last question is coming from the line of Jillian Miller. Please go ahead.

Thanks, guys.

So I was just wondering on the interest rate swap, ICAP recently announced it's going to have co-investors in its platform, which I assume means it's going to be selling equity stakes to some of the main dealers. And I was just wondering if you're kind of feeling any pressure to do the same in order to secure what would be necessary dealer supported liquidity for your platform.

Hi, there. It's Shaun here.

We, of course, we've had conversations with the current marketplace. It's something we wouldn't completely discount. And we're in general talks with the marketplace. So we understand other people's model. We have similar thinking in some respects. And it's something we wouldn't discount.

Okay, thanks.

Thank you very much for those questions.

Ladies and gentlemen, I would like to turn over the call now to Howard Lutnik, Chairman and CEO, for final remarks please.

Well, thank you all for joining us this morning. We look forward to speaking to you. As I said again, we'd be putting out an update to our guidance. While we won't be having a call, we'll try to put out an update before the end of the year.

And we look forward, going forward, to continue to add experienced brokers and sales people really across our entire business. We're going to continuously invest in a world class technology. And we think our partnership structure will drive further expansion of our market share and profitability.

So thanks, everyone, for joining us today. And we look forward to speaking to you again next quarter.

Thank you very much. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you very much for you joining. And have a very good rest of the day.

Thank you.