CBRE Group Inc - Class A (CBRE) — Q4 2017 Earnings Call Transcript

Thank you and welcome to CBRE's fourth quarter 2017 earnings conference call. Earlier today, we issued a press release announcing our financial results, and it is posted on our website, cbre.com. On the Investor Relations page of our website, you will find a presentation slide deck that you can use to follow along with our prepared remarks. This presentation contains forward-looking statements. These include statements regarding CBRE's future growth momentum, operations, market share, business outlook, and financial performance expectations. These statements should be considered estimates only, and actual results may ultimately differ from these estimates. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to our fourth quarter 2017 earnings report furnished on Form 8-K and our most recent Annual Report on Form 10-K. During our remarks, we may refer to certain non-GAAP financial measures, as defined by SEC regulations. Where required by these regulations, we have provided reconciliations to what we believe are the most directly comparable GAAP measures. These reconciliations, together with expectations of these measures, can be found within the Appendix of this presentation. Additionally, all growth rate percentages cited in our remarks are in local currency, unless otherwise stated. Please turn to Slide 3. Participating on our call today are Bob Sulentic, our President and Chief Executive Officer; and Jim Groch, our Chief Financial Officer and Head of Corporate Development. Now please turn to Slide 4, as I turn the call over to Bob.

Thank you, Brad, and good morning, everyone. Our fourth quarter results capped another excellent year for CBRE, with fee revenue up 9% in local currency and adjusted EPS up 6%. Our performance significantly exceeded the expectations we discussed on our third quarter earnings call. Our fourth quarter growth was led by occupier outsourcing which produced its strongest rate of fee revenue growth since we acquired Global Workplace Solutions over two years ago, and leasing which also posted a double-digit revenue increase. For the year, revenue and earnings reached all-time highs; our full-year adjusted EPS of $2.71 represented an 18% increase over 2016. This makes 2017 our eighth consecutive year of double-digit adjusted earnings growth, and as I'll discuss in a few minutes, we expect double-digit earnings growth again in 2018. Please turn to Slide 5. We made important strategic gains across the company in 2017. I'll highlight a few. First, our Americas property sales and leasing businesses both meaningfully outperformed the broader market in 2017. These market share gains were driven by focused efforts to build the global capabilities of our capital markets business and to drive the connectivity between our outsourcing and leasing businesses. On Data & Technology, we added significantly to our digital talent base through recruitment and M&A. We have developed and are executing digital roadmaps for each of our lines of business, allowing them to continue introducing commercially focused technologies that are enhancing client outcomes. One example is our recently announced workplace experience service, CBRE 360, which is supported by a variety of digital tools to meet the rapidly rising demand for occupancy strategies that boost employee morale and productivity. Through our client care program, we quantify the quality of the outcomes we're delivering for clients. We're making a significant investment in this effort across the globe and it has resulted in measurably higher client satisfaction, most notably, in our Global Occupier Outsourcing and Americas leasing business, and in our EMEA and Asia-Pacific businesses. We believe these efforts are now clearly contributing to our financial results. We also executed a highly targeted M&A strategy with a focus on adding capabilities rather than scale to drive client outcomes. Jim will provide some detail on these efforts. Finally, we added significantly to our talent base, both market-facing producers and leaders who are responsible for driving the business. We had one of our best years ever for producer recruiting adding hundreds of producers globally, net of departures. These gains and others would not be possible without the efforts of our more than 80,000 people around the world. Their determination to deliver excellent outcomes for our clients helps to drive the kind of robust performance you've seen from CBRE consistently over the past several years. Now, Jim, will take you through some highlights of our financial performance for the year and the quarter.

Thanks Bob. Please turn to Slide 6. I'd like to highlight a handful of takeaways from our results. Performance for the fourth quarter exceeded our expectations led by occupier outsourcing and leasing. Our occupier outsourcing business achieved 17% growth; our leasing business had an outstanding December, resulting in 11% revenue growth for the quarter. We were pleased with our margins for the quarter and the year in our regional services businesses. The fee revenue margins increased by 28 basis points for the full year, despite a decline in Q4. The shift in our business mix to more contractual services accelerated in Q4, as we experienced a 17% fee revenue growth in our occupier outsourcing business. In Q4, our consolidated fee revenue margin was 19.7%. The margin in our regional services business stood at 18.7%, which despite a decline from an exceptional Q4 2016 remained well above our historical average for the fourth quarter. As Bob mentioned, we increased our pace in M&A activity this year, as more rational deal terms returned to the market. We acquired 11 companies globally including those operating in investment management, project management, retail advisory, tech-focused brokerage, as well as two real estate software-as-a-service companies. These capabilities enhanced our strategic position and long-term organic growth rate. In 2017, organic fee revenue grew 7%. CBRE ends the year in the strongest financial position in the company's history. With low leverage, high liquidity, and considerable free cash flow, CBRE is well-positioned to make opportunistic investments when available, while weathering any market turbulence. Please turn to Slide 7, which summarizes our financial performance in Q4 by line of business. I'll highlight a few points about the quarter and the year. First, our performance in leasing in the quarter was driven by our occupier outsourcing clients. While our leasing business can fluctuate quarter-to-quarter, the combination of our traditional leasing advisory business with our occupier outsourcing business is a real differentiator for CBRE and is expected to support continued market share gains over the long-term. Second, as Bob noted, our Americas property sales business gained meaningful market share for the full-year, despite an 8% revenue decline in the fourth quarter, it was more in line with the broader market. In 2017, our market share increased by 80 basis points to 17%, almost double the market share of our closest competitor according to Real Capital Analytics. Our EMEA business continued its strong growth with sales up 20% supported by foreign capital inflows. In Asia-Pacific, we posted a healthy quarter for property sales as the 8% decline followed a 35% increase in the fourth quarter of the prior year. Commercial mortgage origination revenue rose 5% for the quarter, on top of the 36% growth posted in Q4 of the prior year. Loan volume growth remained healthy in Q4 with conduit lenders leading the way on higher CMBS activity. Finally, I'd highlight the 30% increase in Q4 revenue generated from our $174 billion loan servicing portfolio. This business has annuity-like revenues and we have been focused on supporting its growth. Slide 8 highlights our occupier outsourcing business which saw fee revenue increase 17% for the quarter and 12% for the full-year. New business activity also remained robust in Q4 with a record number of new and expanded contracts. We were particularly active in the healthcare sector with 10 total contracts, and in Asia-Pac and EMEA with 21 and 28 contracts respectively. We also signed our largest full-service outsourcing contract in Europe since 2014. Klein is a Global Financial Services Company and we will be providing them integrated facility management, project management, and transaction management services. Our pipeline in the outsourcing business has never been larger and we are expecting solid mid-teens growth in fee revenues in 2018. Slide 9 summarizes our Global Investment Management segment. We saw excellent sequential growth in assets under management, up over $4.3 billion in the quarter in local currency to $103 billion on strong inflows and positive adjustments in portfolio valuations. We are benefiting from our efforts launched a year ago to streamline our offerings with greater focus on fewer more strategic investment strategies. Capital-raising continues to be strong reflecting the solid performance of our investment programs. Total new equity commitments rose 19% in USD in 2017 to $9.9 billion, our most ever in a single year. Adjusted EBITDA for the full-year grew by 15% and we expect continued growth in 2018. Carried interest contributed a modest $15 million of revenue in 2017. Slide 10 summarizes our Development Services segment. This business achieved a $120 million EBITDA for the full-year, up 5% over prior year. The $13 million EBITDA decline in the quarter was due to the timing of asset sales which were significantly higher in Q4 of 2016. Our in-process portfolio increased by almost $1 billion and our pipeline declined by $1.6 billion sequentially with both changes driven primarily by higher than normal level of transfers from our pipeline to in-process portfolio. This business is well-positioned with an excellent portfolio of projects and an extremely strong team, and we expect additional growth in 2018. Please turn to Slide 11. As I'm sure you're aware, our revenue recognition accounting will change beginning in the first quarter of 2018, due to our implementation of ASC Topic 606. We anticipate little effect on our annual fee revenue, EBITDA, fee revenue margins, EPS, or related adjusted results. However, under the new rules, the cost of certain services provided by third-parties primarily to our occupier outsourcing clients will be included in our cost of services and reimbursement revenue. This change is expected to increase both gross revenues and cost of services by approximately $5 billion in 2018. Beginning in Q1 2018 prior period results will be restated to conform to the new accounting rule, providing comparability in year-over-year reporting. I'm sure you're also aware that we stand to benefit from changes in the U.S. tax code and we expect our adjusted tax rate for 2018 to be in the range of 23% to 24% as compared with 28.3% for 2017. However, in the fourth quarter we recorded a provisional net charge of $143 million or $0.42 per share. This charge includes the transition tax on accumulated foreign earnings and the re-measurement of certain deferred tax assets and liabilities. We have excluded this non-recurring item from our adjusted tax rate and adjusted earnings per share. Finally, we plan to call our $800 million of 5% bonds due in 2023 in March of 2018. This will be funded with a combination of cash and available credit. Now please turn to Slide 12 for Bob's closing remarks.

Thanks Jim. Before I address our business outlook for 2018, I want to take a moment to comment on the macro environment. The global economy looks to be in solid shape. U.S. tax reform and lighter financial regulation appear to be catalysts for business investment. Domestic job growth is expected to remain strong though tempered somewhat by the tightening labor market. In 2018, we expect global leasing and investment markets to remain relatively consistent with the levels seen in 2017. An environment where rates are steadily increasing in response to improving economic conditions is a net positive scenario for our service business. However, if rates were to increase more quickly than expected, there may be some short-term dislocation in the sales market until price discovery becomes clear. Overall, we regard this as a supportive backdrop for our business in 2018, and we continue to operate with an industry poised for long-term growth. This is due to the three enduring trends we have discussed previously: the growing acceptance of outsourced commercial real estate services; the increasing capital allocation to commercial real estate as an institutional asset class; and the continuing consolidation of activity within our industry to the highest quality globally diversified firms. For 2018, we expect our leasing revenue to increase by mid-single-digits reflecting modest increases in rents and gains in market share. Capital markets, which includes our sales and mortgage origination business, combined should achieve revenue growth of low-to-mid-single-digits as we expect additional share gains. Occupier outsourcing should realize solid mid-teens fee revenue growth. As Jim noted earlier, our pipeline in this business is stronger than it's ever been. We expect low-double-digit adjusted EBITDA growth from our real estate investment businesses in 2018, with positive contributions from both Development Services and Investment Management. We also expect a reduction in our net interest expense of approximately $27 million, more than offset by approximately $35 million of additional expected depreciation and amortization expense. As Jim mentioned, CBRE will benefit from a lower effective tax rate in 2018. These tax savings have created a great opportunity for us to invest back into our business and we intend to take advantage of that opportunity. We will make growth-oriented investments in commercially sound technology tools as well as sales initiatives aimed at areas of our business that are well-suited to benefit from those efforts. We will also pursue a host of efficiency initiatives supported by technology to take advantage of our scale. And very importantly, we will make incremental investments to provide ongoing benefits for our people, such as an enhanced 401(K) match and paid parental leave. We expect adjusted EBITDA margins for the full-year of approximately 17.5%. Our margins reflect the elevated level of investment noted above and a mix shift reflecting stronger expected growth in our outsourcing and our non-U.S. businesses. At the same time, you can expect our intense focus on costs to continue in 2018. We expect to achieve adjusted earnings per share for 2018 in the range of $3 to $3.15 per share, which represents a 13% increase from 2017 at the mid-point, with an 8% increase attributable to adjusted EBITDA growth, and 5% to the combined effect of lower tax rate, interest savings, and higher depreciation and amortization. Without the effect of tax reform and the incremental investments we discussed, we would have expected approximately 10% adjusted EBITDA growth and double-digit growth in adjusted EPS in 2018. With that operator, we'll open the lines for questions.

Thank you and good quarter. My first question is on the EBITDA margin, you talked about the mixed shift and then also investing in the business. Do you see some of those investments continuing into 2019 and acting as any sort of drag on margins on a multi-year basis or is this a kind of add this to the cost structure, step it up, and then that's kind of a new level?

Hey Anthony, this is Jim. I would say majority of these investments are more occurring in nature. We would still anticipate getting operating leverage by line of business hopefully in 2019 over 2018.

Could you provide more details on the increase in outsourcing revenue growth and the specific industries, regions, or business functions where this is happening? It appears to be a significant rise as you move into 2018.

Hey, Tony, this is Bob. Well we're going to see a lot of that in Europe. We think we're really well-positioned there to grow the business, and we've got the GWS work behind us next year, an integration work which was long and hard, but very fruitful. And we're expecting to see it in various verticals that we work in. So we talked earlier about healthcare. We're seeing additional work with some financial services firms, a lot of work with the technology firms that ask us to do multiple services around the globe. That's become a big driver in our growth. And then one of the things we're really starting to see now is a lot of leasing work for these clients. So we're very encouraged about the picture; it came through in our numbers for 2017; it's going to come through again in 2018.

Was some of this increase visible due to the time it takes from winning a contract to its actual implementation? A lot of what we will see in 2018 was developed in 2017, or at least that's what I'm considering.

These are big complicated contracts. And so there is a ramp-up of effort before you land and actually start to work. But another thing that's going on there is we have hundreds of contracts with big global companies now, and where a lot of our growth, Bill Concannon, talks about this all the time, a bunch of our growth comes from new accounts, but an awful lot of it comes from adding services to the accounts we have. And we talked in our comments earlier about this client care effort we have underway within our outsourcing business or occupier outsourcing business, we call that our Dark Green initiative. When you're working with these large clients and you do great work for them on one line of business or on what they've already given you, the odds of expanding that account are really, really good. We are doing increasingly good work for these clients; it's very measurable and it's definitively coming through in our growth rates. That's an absolutely important part of what you're seeing.

Okay, got it. And then just last question, it looks like you'll save money on interest in 2018 net of cash but then you get some offset with D&A like what's the expectation for CapEx just kind of get to cash flow picture?

Anthony, it's Jim. We're going to provide some details in our upcoming 10-K, but you can expect a slight increase from 2017.

Good morning. Just a question on the leasing environment. I'm wondering obviously a very strong quarter, if you're seeing any hesitation in terms of doing long-term leasing deals or people are kind of aggressive in leasing environments thinking about doing long deals versus short deals?

Jason, we think the leasing environment is going to be pretty stable between 2017 and 2018. One of the factors that's just very real out there is that employment growth causes leasing growth and we expect or we're seeing a circumstance where we're getting pretty close to full employment. So that's a factor in our outlook for the amount of leasing growth we see next year or one of the reasons we think it's flat. But the market kind of is approaching leasing going forward in our view the way it did this past year.

Okay. And then just one more question in regard to the debt, the bonds you guys are calling, is there any prepayment penalty associated with those, anything we should be thinking about going forward?

Jason, there's a $20 million call premium.

Hi good morning. This is Greg on for Nick Yulico. Sort of couple of questions on M&A, curious with some of these specific capabilities that you guys added via M&A this year were?

Yes, this is Jim. I'm glad to share some details. We've done a variety of acquisitions across different regions and sectors, primarily aimed at enhancing the capabilities we offer to our clients and our teams. For instance, in our Investment Management division, we brought in Caledon, which specializes in infrastructure management, and we also have a fund related to public securities in that area. Additionally, we acquired Mainstream, a global software-as-a-service platform for work orders, where we were their largest client. They launched a new product that we found promising, so we decided to acquire the company. In Australia, we took over Aurora, a project management firm focused on healthcare, and in France, we acquired a retail consultancy named Convergence. Overall, we completed 11 acquisitions and made equity investments in three other companies.

And I think I really appreciate the color there. And have you started to see any sort of rationalization in M&A pricing that may make maybe a bigger deal with your liquidity that may make a bigger deal potentially possible in 2018, 2019?

Yes. We don't give any real guidance or color around large deals when they might or might not occur, but you can see from our history, we're really selective on the large deals. So of the dozen or so large deals in the last dozen or so years, more of them, more than that, we've chased five, we've won five, we went after, we didn't bid on any of the others. So they kind of break loose when they do and we're always prepared for the deals that we think are particularly strategic to achieving what we’re trying to accomplish.

All right, thanks. And just one more question from me, now you spoke on additional market share gains in 2018, I'm just curious what you considered your market share gains in 2017 in the leasing and sales businesses to have been?

Well, I'll hit the capital markets business. If you look at Real Capital Analytics, they have a survey basis points for the year at about 17% market share which is almost double our next closest competitor. On leasing, we think that its market share gains are evident, getting more detailed data is pretty hard to do in the marketplace.

Thanks for taking my question. I want to ask Tony's question a different way with regard to tech and obviously it's constantly evolving, but if you were going to place a target of where you want to be versus where you are now, how much more progress has to be made to kind of hit those goals?

Well, first of all Mitch, I want to create some context for how we think about technology. We're investing in it really heavily, but we are extremely focused on doing things that are commercial and enabling our real estate services capability. We've studied this closely in 2016, we studied it closely again in 2017, we've got a very clear view across our lines of business as to what we need to do and the tools we need to bring on board. And we're implementing that. We've ramped up the capabilities of our digital and technology leadership team and development teams that work for them. And we think that it's going to be important across all of our lines of business, but it's going to be important that we enable ourselves with technology; we aren't thinking that we're going to be disintermediated. We're watching that risk very closely as it relates to small trades in some other parts of our business, but in general, it's about enabling ourselves with technology and we expect to continue to ramp up our expenses there. I will tell you that if you were to dissect our income statement in our budget for 2018, you would find that one of the biggest areas of growth is in the whole digital and technology area.

Great, that's helpful. I know you are talking about low-to-mid-single-digit growth capital markets. Obviously there are two real big streams there right. One is investment sales, one is your commercial financing side, how should we think about each one of those respective segments as you roll up into that guidance?

Sales is going to grow a little more slowly than debt. There's some concern in the sales market obviously about what might happen with interest rates. The other thing is buyers are underwriting assets; they're having a little bit of trouble underwriting growth and value. So we think sales will grow a little more slowly than debt. And as a result of the slower growth in sales, some people will refinance which will cause the debt side of things to grow more rapidly. But we look for that low-to-mid-single-digit type growth next year, significant amount of it to come from taking market share.

Got it. Smart move to pay down the debt. Is the thought to maybe refinance the portion that will sit on the line for kind of longer-term or likely just kind of sit on the line for a little time now?

In October, we refinanced our line and also refinanced $750 million of term loans. We only drew $250 million of that amount and negotiated a delayed draw feature on the remaining $550 million, which will be utilized around the same time we call the bonds. This means that very little, if any, will remain on the line of credit. The term loans have a five-year term and can be prepaid at any time without any penalties.

Thanks very much. Just a follow-up on the debt repurchase. What is the allocation between cash and the term loans? Should we assume that you'll utilize the full capacity on the term loans?

Yes, we'll drawdown the capacity at the time we take it down, but it's somewhat fungible. Our first two quarters are seasonal periods where we use a little more cash. So we'll take down the full term loans; like I said, there are no pre-penalties, so we may decide to pay that down a bit as early as the end of the year, we'll see how things evolve throughout the year.

You mentioned interest rates, and I wanted to know if you could share any early trends from 2018. Are you hearing any concerns from your salesforce or clients regarding the interest rate outlook, especially in light of the recent stock market volatility?

We stay very close to the buyers of institutional real estate assets and what we're hearing from them is what we've seen in the stock market, we're hearing from them some level of concern; they're not overwhelmingly concerned, but they're watching it closely and they think there's more reason to watch it now than there has been for several years. So that's on their mind and that's, as I commented earlier, that's one of the reasons why we don't think there will be a real growth in sales volumes this year in an otherwise good economy, I might add.

And in terms of seasonality as a follow-up, do you think that those types of conversations could cause initial deal closings to slip beyond 1Q? So could you see the softness in capital markets play out perhaps stronger in the earlier part of the year on heightened concern, but then people maybe adapt to that?

Jade, this is Jim. I would say you can look back in the last couple of years and see periods where the 10-year treasuries have moved around a good bit between 2% and 3% and generally didn't have much impact on cap rates, generally didn't have much impact on volumes. If the rates move more quickly or are kind of a surprise than expected, then you can get a little bit of messiness in a quarter where people kind of wait for price discovery to clear up a little bit. But overall, I think our guidance is based on what we've seen in the last month or two including the last few days.

Yes, good morning and thanks for taking my questions. First, just given the guidance for momentum to continue in occupier outsourcing in 2018, is that more weighted towards the first half of the year just given the tougher comps as you progress through the year, and does the mid-teens guidance only include contracts currently in the pipeline or does it factor in kind of additional growth in the pipeline?

It's our guidance based on our expectations for the year, and many of those revenues are fairly certain at this point. However, some timing estimates are based on contracts that we’ve secured or are still in progress regarding when they will actually start contributing. We currently have the strongest pipeline we've ever had, which gives us confidence in our mid-teens guidance. Unlike 2017, we don't expect this guidance to be heavily weighted toward the second half of the year, when we had previously indicated a greater focus on that period and ultimately met and slightly exceeded those expectations.

Okay. And then, I think you noted a large occupier outsourcing win in EMEA in the fourth quarter, did you see any revenue flowing from that or is that going to be incremental as we look at EMEA occupier outsourcing in 2018?

Very little would have hit so far on that contract. There's usually a pretty good lead time to get these contracts up and running.

Okay. And then appreciate the color on the expected growth kind of by service line, I just wanted to make sure are the revenue growth rates you give generally kind of constant currency or do they factor in a potential boost from FX trends this year?

We have a little over 1% increase in our budget for foreign exchange. When we prepare the budget, we typically analyze four different exchange rate curves, and we've already incorporated some of that into our projections.

Thank you. Good morning. I wanted to ask about the impact of U.S. Tax Reform not on you, but on your own clients. I mean the 20% deduction on pass-through income would seem like a pretty meaningful benefit to CRE investments on through LLCs and the like, has that factored that into the psychology around buyers and potentially increased the activity levels or prospectively would?

Well, as has been broadly publicized the changes in the tax code were generally good for commercial real estate. As it relates to our clients, I think it's a good thing for them. I think other large corporates like ourselves are going to be more profitable as a result, they're going to have more dollars to invest as a result. I think their view of the economy and how long it's going to run in a positive way has been enhanced by the changes to the tax code, and as a result, they will be more inclined to do positive things add employees and so forth that benefit our business. And when you look at the size of our business on both sides, the occupier side and the investor side, I think we should get a positive benefit from both sides.

Understood. And then on the 2018 guidance the double-digit EBITDA growth that you're guiding for the principal businesses of Investment Management and Development, are you expecting an above-average year for asset sales and incentive fees or is this kind of driven by more core growth in the projects and assets under management?

I'd say kind of all the above really; both businesses are doing well. The Development Services business has a very strong set of projects in process and also a very strong pipeline. The Global Investment and I'd say not a particularly unusual year for asset sales in that business. The global investors business or Investment Management business is also doing quite well with a record year for capital raise, AUM, at a record level as well. So they’re both kind of solid fundamentals in both businesses, and we expect both to be up in low-double-digits.

If I could ask one more question, I know you don't have a formal net debt-to-EBITDA leverage target and I understand you're aware of where we are in the cycle, but is there a level at which you would consider yourselves potentially under-levered? I mean, you are currently under 1x.

Yes, as we have mentioned before, we prefer to maintain a lower leverage as we progress later in the business cycle, while we are more open to higher leverage earlier on. We are comfortable operating within a range that significantly differs between the later and earlier stages of the cycle. We will not go below a net leverage of 20 in the late cycle, but I will reiterate our previous stance on this matter.

Good morning. Thank you for taking my question. I would like to ask about the guidance for EBITDA growth in general.

Hey Jason, can you move closer to your phone? We're having trouble hearing you.

Sorry guys. I was asking about the EBITDA guidance figures; does that include any pending or anticipated growth from acquisitions or is that all organic expectations?

It's mostly organic. Any infill M&A we pursue in a calendar year typically has a minimal impact on incremental earnings for that year because we do not adjust for deal costs, startup costs, and integration of the smaller transactions, which we consider standard operations. Therefore, while we may see some revenue contribution, the earnings impact will be limited.

And one more, Bob touched on this in his remarks but can you comment a little bit more granularly on the recruitment environment for producers both in the regions and if you think competition is intensifying at all?

We don't believe competition is getting tougher; in fact, it has improved somewhat positively over the past year. We are experiencing great success in recruiting globally, largely because producers recognize that our company offers them the chance to leverage our footprint, client base, and range of services to secure transactional business. They can achieve more with us than elsewhere. Consequently, our recruiting performance in 2017 exceeded our expectations, making it one of our strongest years. This trend contributes to our expectations of gaining market share next year, and we anticipate this opportunity will continue into 2018.

Sorry. Can you hear me?

Yes.

Oh, sorry. I was wondering if you could provide adjusted earnings and adjusted EBITDA excluding net MSR gains.

Sure. I will provide the net MSR impact. For those who may not be familiar, MSRs refer to the gains from mortgage servicing rights, which are offset by amortization of those gains. The impacts are all net headwinds. In Q4, the negative impact was about $6 million, or roughly a penny. For the full year, the negative headwind was around $33 million, which translates to about $0.07 for the year. For our 2018 budget, we anticipate approximately $20 million of headwind, with amortization exceeding the gains.

Is the headwind a year-over-year comparison or is the headwind?

Year-over-year.

Okay, but on an absolute basis mortgage servicing capitalization gains exceeds the amortization expense.

That's correct.

Do you have the impact of the gain on the sale for mortgage servicing rights and the amortization expense so that we can calculate cash earnings and adjusted EBITDA excluding those factors?

Sure, we’ll give the full detail in the K but the net in 2017 was about $50 million.

And do what it was in the fourth quarter?

I don't have that information readily available.

Hey, good morning. So when we see some sales dislocation because of a spike of rates like it sounds like we might be seeing in the very near term, do you typically see that leading to the permanent loss in that sales activity that might have otherwise taken place or does it just kind of push it back and then when rates normalize or the environment comes down there's a little bit of a catch-up that takes place?

It largely depends on how significant the spike in interest rates is. A small spike probably won't affect the market much. However, if rates increase significantly, people may hold back to assess the situation. There is a substantial amount of debt and equity capital available in the commercial real estate market. We believe that the potential developments with interest rates will not have a major effect on the market in 2018.

Thanks. And I think you're kind of letting my next question which is that there's a lot of private equity dry powder out there geared towards real estate investments, how patient is your sense of that dry powder can really be?

I believe institutional investors in real estate have become quite disciplined, more so than in any previous cycle during my over 30 years in the industry. They tend to hold on to their assets if they believe they won't obtain favorable pricing and are willing to keep their capital reserved if they aren't satisfied with potential purchases. Our investment management team is approaching the market in this manner.

Okay, well thanks everyone for your questions. We'll talk to you again in 90 days. And in the meantime, I want to remind everybody that we have our Investor Day here in New York on March 8.