Bgc Group Inc (BGC) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 BGC Partners, Incorporated earnings conference call. (Operator Instructions).

And now, I have the pleasure in turning the conference over to Mr. Howard Lutnick, Chairman and CEO. Please proceed.

Actually, first it's Jason McGruder, Head of Investor Relations. Good morning. Our second quarter 2012 Financial Results Press Release was issued this morning. This can be found either at the News Center or Investor Relations sections of our website at www.bgcpartners.com. During today's call, we will also be referring to a presentation that summarizes our results and which includes other useful information. This too can be found at our IR website.

On today's call, we will be referring to results only 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, Distributable Earnings Compared with GAAP Results, and Reconciliation of GAAP Net Income to Distributable Earnings for a definition of these terms, and how, when, and why management uses them. Unless otherwise stated, whenever we refer to income statement items such as revenues, expenses, pretax earnings or post-tax earnings, we are doing so only on a distributable earnings basis. Unless otherwise stated, all the financial comparisons we will be making today will contrast the second quarter of 2012 with the second quarter of 2011.

I also remind you that the information on today's 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 and 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 that 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 limited to, the risks and uncertainties identified in 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 is impossible to predict actual results or outcomes due to 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 the complete disclaimer with respect to forward-looking statements and risk factors set forth in our most recent public filings on Form 8-K, 10-K and 10-Q, which we incorporate today by reference.

Now I am happy to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners.

Good morning and thank you for joining us on our second 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.

BGC's second-quarter revenues were up 27.5% year-over-year driven by the success of our real estate business, which generated $144.1 million in revenue and $14 million in pretax earnings. Newmark Grubb Knight Frank has become both a powerful force in commercial real estate and a very valuable part of BGC.

We are very proud of Newmark's CEO, Barry Gosin; BGC's global head of real estate, Michael Lehrman; and our entire Newmark Grubb Knight Frank team. We have in front of us tremendous opportunities to grow and expand this asset class. Newmark has become a leader in many markets nationally and continues to expand its market share and attract key professionals across the country.

I am pleased to report that BGC's dividend per common share will again be $0.17 for the second quarter.

I would now like to turn the call over to Shaun.

Thank you, Howard. And good morning everyone. Unless otherwise stated, the comparisons I will discuss are for the second quarter of 2012 versus a year earlier.

Our overall brokerage revenues increased by 18.6%, driven by the performance of our real estate asset class. Lower activity from our large bank customers, however, has contributed to the decline in market activity industry wide across the financial services asset classes.

Against this changing market environment, BGC's rates and foreign exchange business have held up well. Global volumes in rates have been muted due to quantitative easing undertaken by the US Federal Reserve and other central banks.

BGC's rates revenues decreased by 7.8%, which compares favorably to volume declines of between 9% and 23% from Federal Reserve US Treasuries and for the fixed income and interest rate products of Eurex, the CME, BrokerTec, and Euronext.

When quantitative easing dissipates, we believe the rate volumes will dramatically rise as historically high levels of government debt issuance around the world will drive business across our voice and electronic platforms.

Our FX revenues decreased by 4.3%. In comparison, FX volumes were down by 10% for Reuters and by 27% at EBS this quarter.

Our overall credit revenues decreased by 10.3%, which was generally in line with credit market metrics reported by TRACE, the DTCC, and our competitors.

Revenues from equities and other asset classes declined by 32.3%, which was unfavorable compared to declines in industry volumes.

European commissions for equity cash and derivative products are generally based on stock prices. Thus double-digit price declines at indices like the Euro STOXX 50, coupled with lower industry volumes substantially impacted our European equity desks.

We remain confident in our future growth prospects. BGC's well positioned to benefit from new regulations which are designed to drive markets toward central clearing, open access for a broader client base and higher margin full electronic trading.

BGC now offers e-broking on 100 out of approximately 230 desks compared with approximately 80 of 200 a year ago.

Revenues related to full electronic trading were 12.3% of financial services revenues compared to 11.5% a year ago.

Our e-broking performance was driven by a 49% increase from FX products, offset by a slight decrease in credit products and a modest decline in rates products. BGC's overall fully electronic performance was generally better than most comparable industry metrics.

Our real estate asset class generated revenues of $144.1 million and $14 million of pretax earnings. And its pretax earnings margin was 9.7%. Graham will give you more details on our new segments later.

With respect to overall commercial real estate markets, industry metrics remain positive compared to last year. For example, the most recent data from CoStar indicates that commercial property resale prices grew by double digits year-over-year in May. On the leasing side, vacancy rates, asking rents, and net absorption rates also improved year-over-year in most of our markets.

Our strong performance in real estate has helped offset some of the recent industry-wide declines in activity across the financial markets globally. Regardless of market conditions, we remain focused on profitability expanding our market share across our asset class by selectively hiring and accretively acquiring and investing in technology.

The addition of Newmark Grubb Knight Frank drove our 46.3% increase in front-office headcount to 2,605 brokers and salespeople as of June 30, 2012. This included 1,757 in financial services and 848 in real estate. Average revenue per front-office employee was approximately $159,000. In financial services, this figure was $177,000. While in real estate services, it was approximately $123,000. In comparison, BGC had 1,780 brokers and salespeople and generated approximately $200,000 per front-office employee in the second quarter of last year.

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

Thank you, Shaun, and good morning, everyone.

Today, I would like to touch on just a few key items. Unless otherwise stated, all the comparisons I am making compare the second quarter 2012 with the second quarter of 2011. BGC generated revenues of $465.1 million, up 27.5% compared with $364.8 million. Our revenues from the Americas were up 138.4% to $245.3 million due to the addition of real estate. Europe, Middle East, and Africa decreased by 16.5% to $167.8 million, and Asia Pacific revenues decreased by 14.3% to $52 million.

Our European revenues would have been approximately $9 million higher in the second quarter 2012 but for the impact of the US Dollar strengthening versus the Euro year-on-year.

Excluding the real estate services segment, our global April 2012 revenues were down by approximately 7% to $100 million. May was down by approximately 9% to $118 million, while June was down by approximately 19% to $104 million all when compared with the year earlier.

We now report two business segments, financial services, which includes revenues from rates, credit, foreign exchange, equities, and other asset classes, market data, software solutions, and certain other items related to BGC's financial products. And real estate services which includes real estate brokerage, property and facilities management, and certain other items related to Newmark Grubb Knight Frank.

Our financial services segment generated revenues of $309.2 million and $58.5 million of pretax earnings. A year earlier, these figures were $352.5 million and $71.9 million respectively. The segment's pretax margin was 18.9% versus 20.4%. Given the difficult revenue environment, our pretax earnings were higher than would have been expected because of our work in compensation, headcount, and other expense control initiatives.

In addition to the financial services and real estate services segments, we will also now report a corporate items category to reconcile the business segment results to our consolidated results. The corporate items category includes certain related party revenues and their associated costs, together with items managed at the corporate level, such as interest expense, executive compensation, and certain professional and consulting fees.

Turning to expenses, compensation and employee benefits were $276.9 million or 59.5% of revenues. This compares with $194.9 million or 53.4% of revenues. Our compensation ratio increased mainly due to the addition of real estate, since the commercial real estate services industry generally has higher compensation ratios but lower non-compensation expenses as a percentage of revenue.

Non-compensation expenses were $132.2 million or 28.4% of revenues. This compares with $107.6 million or 29.5% of revenues. The increase in expenses was due largely to the addition of real estate. We also incurred higher expenses in the corporate items category related to BGC's ongoing FSA program and higher interest expense as a result of the July 2011 convertible senior note offering.

While we expect an additional $1.5 million more per quarter in pretax interest expense due to our June 2012 issued senior notes, we expect this to be offset by the beginning of our other non-compensation expense reduction initiatives. Over time, we are working to drive our non-compensation expenses down to 25% of revenues, which at current revenue levels amounts to an improvement of approximately $50 annually.

BGC's pretax earnings were $55.9 million or $0.20 per fully diluted share compared with $62.4 million or $0.25. Our pretax distributable earnings margin was 12%, compared with 17.1%. Our effective tax rate for distributable earnings improved to 14.5% in the second quarter of 2012, compared with 15%. We expect it to remain around 14% for the rest of 2012.

BGC's post-tax distributable earnings were $46.5 million or $0.17 per fully diluted share compared with $52 million or $0.21. Our post-tax earnings margin was 10%, compared with 14.3%. Our fully diluted weighted average share count was 313.8 million for the second quarter of 2012. This included a weighted average of 39.1 million shares associated with our convertible senior notes. A year earlier, our fully diluted weighted average share count was 266.1 million.

In both the second quarter 2012 and 2011, our GAAP fully diluted weighted average share counts were lower than those for distributable earnings because certain share equivalents were diluted for distributable earnings but not for GAAP.

As of June 30, 2012, our fully diluted share count was 316.4 million assuming conversion of 39.2 million shares underlying the convertible senior notes.

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

Thank you, Graham.

Excluding real estate services, our revenues for the first 14 trading days of July 2012 were $67 million, which was down approximately 18% compared to last year. We therefore expect to generate revenues of between $415 million and $450 million in the third quarter of 2012, an increase of approximately 9% to 18% compared to $380.5 million in last year's third quarter. This revenue outlook includes between $110 million and $125 million from Newmark Grubb Knight Frank.

We expect pretax distributable earnings to be between $41 million and $52 million, which compares with $62.6 million last year. We expect the effective tax rate for distributable earnings to be 14.5%, as compared to 15%.

We also plan to update this outlook before the end of the quarter.

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

(Operator Instructions). And your first question comes from the line of Rich Repetto with Sandler O'Neill.

Operator, why don't you move to the next one and then, you can go back to Rich after.

Patrick O'Shaughnessy, Raymond James.

Given your outlook for next quarter and I guess just the very tepid overall environment at this point, I asked this last quarter and I'm going to ask it again, how comfortable are you that you can maintain a $0.17 per quarter dividend I think given your outlook for next quarter probably implies something closer to $0.15 in distributable earnings? I know that on occasion, you kind of look at your dividend as being the full year amount that you want to pay out rather than on a quarterly basis, but I think it does seem like it might come under some pressure here. So, can you comment on that, please?

Sure. The company remains comfortable, if one or two quarters are challenging, maintaining a stable dividend. However, in the longer term, we expect to align the Company's dividend with our then current distributable earnings outlook.

So, it sounds like you don't have any near term plans to change your dividend, but if your outlook for the longer term is perhaps a little bit more muted, you might then reassess your dividend? Is that maybe a fair way to reflect it?

Very fair.

If I can turn to your comp ratio now, I guess over time you kind of said you think you can move your comp ratio down as things become more electronic and as you renegotiate contracts. Now obviously, you had a step function up with the real estate folks coming on. Where do you think we should be modeling that going to over time at this point?

I think what happens is the -- you saw across the financial services, we've gotten down to the 53%, 54% range and that was -- we had expected that to be relatively stable. Adding real estate, I think what's going to happen is real estate will add that higher percentage and keep us around this 60% level, plus or minus a little bit, as we continue to grow the real estate business.

Once the real estate business is more mature with us, we think, because of the partnership structure and as we run off the upfront payments we make to these brokers, which are part of our compensation expense, we feel we'll be able to drive our expense ratio down.

So, the near term, I would expect it to remain generally in these ranges. And then, over the longer term, I think, as we did in financial services, I think we can drive the comp ratio down, but that would not be something that would be in the near term or even maybe next year. I think that's a longer term outlook.

And then, lastly, if I could -- so, kind of moving to the non-comp expenses, again, you guys reiterated your 25% target. Do you have a sense for the time to implement that cost reduction? $50 annually, it's a pretty big number. Almost 10% of your non-comp base. So, is that something over the next 6 quarters or is that going to be a multiyear process?

Yes, I mentioned in my comments, right, that we're expecting a little bump up in interest cost next quarter versus the start of the reduction in our non-comp expense as part of this ongoing program.

I think it is a long-term program. I'm not sure I'd really want to put a timeline on it at this point, but it's a strong commitment.

We do expect to see substantial progress happen. Whether we'll be complete or not, I can't say, but we do expect to see substantial progress toward those numbers across 2013.

(Operator Instructions). Jillian Miller, BMO Capital Markets.

On the real estate piece, it was very strong in the quarter and came in well above your original guidance. I was just wondering how much of that was related to the fact that you were able to retain more brokers than you might have originally anticipated and how much was the fact that broker productivity came in higher than you were expecting?

Well, I think we're doing very well with respect to retaining brokers. The transaction with Grubb and Ellis, of course, had -- there was substantial turnover in Grubb and Ellis. That was part of why we were able to buy the company so well priced.

With respect to the talented people there, I think we are very happy with how we've done in retaining them and having them become partners of the Company and understand our compensation model and methods of doing business. So, I think we have done better than we had expected in that category. We continue to do well in recruiting really talented individuals to join the Company.

The real estate business, as you know, can be lumpy. The announcement of big transactions that actually close in a particular quarter might move things in substantial sizes if it's a big deal from one -- move the number higher at the very end of the quarter, if that comes in.

So, this business will always have the possibility of something better happening to us at the very end of the quarter if a particular transaction closes sooner than otherwise expected. So, I think the good part about the real estate business as it tends to come with -- just the end of the quarter tends to be the more busy time for closing transactions, just that's how it is.

So, I think we had positive results. We've had positive people join the Company. I think you will continue to see us adding talented people and growing our headcount in real estate. I think that bodes very well for our long term.

I know it's very lumpy. So, maybe this isn't something that's easy to quantify, but in the past, I think you guys had said that the first quarter tends to be the seasonally the weakest for real estate. The fourth quarter tends to be seasonally the strongest. How do Q2 and Q3 generally on a normal year kind of play into that in terms of seasonality?

Generally, over time, what we've studied so far is they seem about the same. That doesn't mean that one quarter isn't a little better than the other, one year to the next, but generally speaking, over the very long term, which is where we've looked at, they tend to be relatively consistent.

On season related parties line, that was up quite a bit in the quarter. I was just wondering what drove that and what you see as a good run rate going forward. Is it this $22 million figure?

Yes, that's really driven by our administrative cost to an affiliate and it just depends on how that moves quarter-on-quarter. That is what makes up the revenue item in corporate and the costs against that are also in the corporate cost center.

Nick [Voss], Sandler O'Neill.

Hello, this is Rich. When you look at the revenue guidance and you back out the guidance for the real estate part, if we use the midpoints, but it looks like again if you use the midpoints, you come up with $315 million of non-real estate revenue. And then, that's only down a couple percent from 2Q. I just am wondering, is my math right, and is that a big enough sequential decrease given where volumes are at?

We only guide what we see. We showed you how exactly the second quarter went. And where we are 14 days into the third quarter, we know that the summer tends to be slower and we know that, in this quarter, September tends to be the kick at the end of the race. It's always the most exciting quarter for us because we have July, then we have August, and then, Labor Day comes and off we go.

So, that's our history. I think we are comfortable with that guidance and you've covered us for a long time. We tell you what we think. We tell you what we see.

I would suspect it to be down a bit more given where industry-wide volumes are, but anyway. I get it. And then, another question on the expense reduction, if you take the midpoint of the guidance, you had $23 million down. That's just commensurate with -- is there any actually expense cutting going on other than just variable expenses dropping with revenues?

Yes, what Graham said is he's able to do expense cutting in a way that will sort of knock out, if you will, the increase in interest expense we have from our new -- our just recently issued bond issue. So, those two will cover themselves.

And then, he expects to start to show net lower numbers going into the fourth quarter and through 2013.

Any update on the status of ELX? I know you were looking at restructuring there and doing some things. Any update?

Nothing particular. We think ELX is an excellent asset with respect to the changing regulatory environment. We think as that regulatory environment works its way through to its final conclusion. I think people will realize having a fully improved futures exchange deeply connected with BGC will be a great opportunity for our clients to transact business in various ways and we are spending lots of time with our clients talking about the kind of things they would like and designing an exchange to be very client friendly as opposed to macro exchanges that exist today which tend to be singular in their product category.

So, I would expect us to have a different approach to a futures exchange, one that's much more client centric, client friendly, and one much more consistent with the way BGC operates its business. And I think that will be successful over the long run and we think it's an excellent asset to have as part of our company. We expect to just work hard on it going forward, but it is as you correctly pointed out, an asset for the future in this regulatory environment that's coming as opposed to one that's consequential today.

Niamh Alexander, KBW.

Can I talk about the balance sheet and the stock? Why did you raise that debt during the quarter? It seems like your balance sheets you're showing and that $50 million of additional debt, but it's all kind of sitting up there in cash. I don't think of you as a capital intensive business typically. You need a certain amount just based on operating expenses, not activity. So, help me understand why you're adding leverage and what you need that for.

Dry powder for acquisitions.

You're already sitting on quite a lot of cash for the size of the company that you are. So, you seem kind of -- is it more real estate acquisitions we should be thinking about? It's nothing to do with kind of the current operations or capital (multiple speakers) or FSA?

Correct. It's not current operation driven. There are, we think, always opportunities globally, both in the US and Europe, in both real estate, across the financial markets in commodities. It's all about whether they are accretive. Whether the price is right and the timing's right. We work on them all the time and it's important to us if we are -- have spent a significant amount of liquidity on real estate to reload and have plenty of dry powder around so when the next opportunities arise, we are ready and available to them.

We thought the transaction of the retail notes was an excellent transaction. And so, we did it because it enables this company to do more things going forward. We're very excited about the opportunities going forward. Challenging market environments produce opportunity for those who are capable of seizing them. It produces opportunity.

Thanks, Howard. On the opportunity as well though, you are seeing in your core financial services business, it just feels like more and more of your customers are disappearing because not the entity, but traders off the fixed income desk seem to be shrinking and shrinking.

Are you seeing them relocate to other businesses yet or are we kind of stuck in this transition phase for a few more quarters you think?

I think the latter is true, which is I think there is this both transitional phase, if you will. Ultimately, the new regulatory environment will change how the end buy-side clients transact business with their service providers. Historically, those have been the large banks and as we discussed on our analyst day, the size of the inter-dealer broker market as a whole in financial services was about $12 billion taking all of the players into consideration. This was done by a variety of consultants and others. The market size of the banks doing business with their clients was about 15 times larger.

So, I think the long-term opportunity for the Company in service providing transactions across the financial market landscape is enormous. And how that exactly falls out, we will have to wait and see. But I think during these transitional times, it is important for us to stay focused on the long term and our opportunities going forward, investing in ELX, investing in our technology, being in the right place at the right time, talking to the right companies about possible acquisitions.

Yes, there's going to be a challenging couple of quarters it seems, but the net result is going to be that BGC and its management is very excited about our prospects and our position going forward.

Fair enough. I appreciate the color. The other one on the stock issue, you updated in the notes. I think it was about $47 million that you raised in equity, kind of issuing stock into the market. Was the majority of that used to redeem insider selling, as it were? Not necessarily just insiders and senior executives, but employees are kind of selling their partnership units. Is that how we should think about a run rate going forward?

The answer to the first question is yes. We tend to have a very small excess of issuance over redemptions, but it's pretty small.

Is this a good run rate then to think about?

It was a little bit higher, I think, this quarter than normal, but it's around this sort of level.

Robert Rutschow, CLSA.

Could you just remind us how long your service contract runs with ELX?

The service contract for -- we have agreed to provide services to ELX for the long run.

The question is then, if the volumes are pretty close to zero, at what point do the other owners shut it down or can they put it back to you? What happens to the revenues from that service contract?

My recollection is that there is quite a long runway. That in the recapitalization of the business, it was designed to have the company have sufficient resources to have that runway to get from where we are today through and well beyond the regulatory changes that are out there.

The owners and BGC understood that this is an asset that is very valuable as we go through that regulatory framework, maybe not a great asset for today, but an extraordinary asset for tomorrow. I think that is why it was designed in this way. The Company has plenty of runway to get through the regulatory frameworks that are out there and to remodel itself to take advantage of whatever those new rules and regulations are. And then, operate its business thereon.

Shifting gears a bit, is it possible for you to tell us how much cash outflows there were in terms of earnings distributions to non-controlling interests? I'm thinking of the line item that typically shows up in the financing portion of the cash flow statement.

Can we tell you that one offline?

Sure. The follow up was going to be, I think a majority of that line item goes to Howard and Shaun. And so, I'm wondering, if you guys are willing to reduce what you're getting to help support the common shareholder dividend, if needed.

I think the idea and the structure of the Company is we are a high-distribution company where the partners of the Company own -- the employees of the Company, the employees and partners of the Company own a substantial percentage of the Company. Cantor Fitzgerald owns something about 27% of the Company, I think, all in. And then, the public owns the balance.

So, I think the idea is to have a strong distribution to all of those categories. So, I wouldn't say that senior management is anything in particular as compared to those three very large categories. And I think our view is that treating them all consistently and logically by giving them a high percentage of distributable earnings seems to be a practical approach that we had from the beginning. We seem -- we are very comfortable with that model.

A couple housekeeping, if you have them handy. Otherwise, we can talk offline, but can you tell me how much the CapEx and capitalized software costs were this quarter and how much in dividends you actually paid out in terms of cash this quarter?

Are you talking about in the second quarter, Rob?

Yes, you can give me year-to-date if that's easier, too.

Yes, you will get all this information out of the Q when we file it.

Right. I thought if you had it handy, that would be helpful. Thank you.

Justin Hughes, Philadelphia Financial.

I don't want to slice the numbers too much here, but with Fourth of July falling in the middle of the first week, I was just wondering your revenue per day in the non-real estate was I think $4.8 million per day. How's it kind of been first half of the month versus the second half of the month? How much was the Fourth of July holiday a drag? Is that part of maybe what's leading to your guidance for the quarter?

No, the first part of July, you're right. So, it was about $4.8 million, but it's been pretty consistent throughout. We're only 14 days in. Within those 14 days, it's been pretty consistent around the $4.8 million level.

And then, looking into August, is there any historical precedent that you can think of, how much of a drag is the Olympics going to be? I know a big part of your business is in London. A big part of your business is entertaining. I've got to imagine with the Olympics in London, a lot of traders aren't going to be at their desks for the next month.

I think the good thing is, of course, that, as you've seen, the business, our business is now actually bigger in the US than it is in Europe. But the holiday season in both the US and the UK is always last week of July and through into August. So, I don't think it'll be anything particularly exceptional due to the Olympics in the UK.

August is a seasonably quiet month and we, as Howard said earlier, once you get through Labor Day, then, September is clearly the busiest month of the quarter.

The Olympics obviously has assisted in our muting our expectations for the next month or so. It's just the way it goes and there'll be a lot of televisions on. What can we do?

I'm just trying to figure out which part of the business you're growing because if I look at forgivable loans, those were up about $20 million, year-over-year. I assume that's an indicator of aggressive hiring in your -- your amortized about $7 million a quarter. So, net it looks like you gave out in cash, new forgivable loans about $27 million. I know that doesn't impact your distributable earnings number, but what areas are you hiring in where we're seeing this growth in forgivable loans?

We're hiring in real estate obviously aggressively. We're also hiring across all of our businesses in the financial sector as we upgrade a lot of our staff that we've historically had. The market's changing. There are opportunities to acquire some amazing people and upgrade our market position, which we've been very fortunate enough to do.

We've been working very hard, as you know, and Barry Gosin and Mr. Lehrman work incredibly hard on the commercial real estate and attracted some world-class people on that part of our business in that segment.

So, it's across the board, to be honest. There's no one area that we've singled out.

So, you're still a net hirer in financial services or I know you said a lot about replacement. Are you net hiring in the core financials business even though things have --

We're always looking and we're always trying to attract, yes.

I think the headcount might turn to where, while the gross size may decline, we'll probably hire more high quality people. Maybe if we're changing, the headcount will drop in the lower end. Of course, forgivable loans are part of DE, distributable earnings. The amortization of loans is just part of our compensation. So, it's sort of in the mix anyway.

Patrick O'Shaughnessy, Raymond James.

On the commercial real estate business, obviously you guys are reporting revenues in two major buckets. One would be the brokerage. The second would be the management fees. As we think about the management fee component about that, how reoccurring is that? It would seem to me that it'd be pretty reoccurring in nature. Is kind of the level you did in the second quarter more or less a good run rate to think of that?

I'd like to just have a couple more quarters under our belt. The addition of Grubb and Ellis has added, obviously, substantially to that number. I think I'd rather just have a couple of quarters under our belt.

Conceptually, you're absolutely correct. I just want to make sure that all of our clients have signed long-term agreements and we know where things stand. And then, I agree with you. Thereafter, I would expect it to become very steady.

One of your competitors, and I think maybe others have talked about this as well, has argued that given the declined economics of the business in this environment, that competition for signing bonuses has really gone down. And that it's easier and cheaper to acquire talent. Is that a trend that you are seeing as well?

Yes, it's fair to say there has been some good turnaround. The change for us is we always make sure that any individual that we hire is a partner within our Company and that they are thinking alike with the shareholder. So, therefore, we have attracted some very, very good people. It is an easier marketplace, but then again, you've got to be diligent. You've got to make sure that you cut your costs accordingly as you've seen from our headcount, where we've been trimming back where we see fit for underperforming individuals. We're going to attract some very good ones in their stead.

So, yes, it is easier, but you've got to be diligent.

There are no further questions in queue. You may proceed with any closing remarks.

Well, thank you all for joining us today and spending time with us. We look forward to speaking to you again next quarter. So, thank you. Have a great day, everybody. Thanks.

Ladies and gentlemen, that concludes the conference. You may now disconnect. Have a wonderful day.