HFF, Inc. Reports Second Quarter of 2013 Financial and Transaction Production Results

HFF, Inc. Reports Second Quarter of 2013 Financial and Transaction Production Results

PITTSBURGH--(BUSINESS WIRE)-- HFF, Inc. (NYS: HF) reported today its financial and production volume results for the second quarter of 2013. Based on transaction volume, HFF, Inc. (the Company), through its Operating Partnerships, Holliday Fenoglio Fowler, L.P. (HFF LP) and HFF Securities L.P. (HFF Securities and, collectively with HFF LP, the Operating Partnerships), is one of the leading and largest full-service commercial real estate financial intermediaries in the U.S. providing commercial real estate and capital markets services to both the users and providers of capital in the commercial real estate sector.

Consolidated Earnings


Second Quarter Results

The Company reported revenues of $81.0 million for the second quarter of 2013, an increase of $14.3 million, or 21.4%, compared to the second quarter of 2012 revenues of $66.8 million. The Company generated operating income of $15.4 million compared to $13.5 million for the second quarter of 2012, representing an increase of $1.9 million, or 14.4%, from the second quarter of 2012 results. This increase in operating income is primarily attributable to the 21.4% increase in revenues and was partially offset by (a) increases in the Company's compensation-related costs and expenses associated with, in part, (i) the net growth in headcount of 66 new associates from July 1, 2012 through June 30, 2013, (ii) an increase in incentive compensation including firm and office profit participation expenses directly tied to performance-based metrics, and (iii) increased stock compensation expense primarily related to the non-cash mark-to-market adjustments on liability-based stock awards revalued each quarter, (b) increased travel and entertainment expenses related to increased capital markets services revenues, and (c) increased depreciation and amortization costs.

Interest and other income, net, totaled $6.4 million in the second quarter of 2013, an increase of $1.1 million, or 21.2%, as compared to $5.3 million in the second quarter of 2012. This increase is primarily a result of increased other income earned in connection with the Company's Freddie Mac Program Plus® Seller Servicer business.

The Company recorded income tax expense of $8.4 million in the second quarter of 2013, compared to $7.8 million in the second quarter of 2012, an increase of $0.6 million, or 7.2%, which is primarily due to the higher income before income taxes earned in the second quarter of 2013 compared to the second quarter of 2012.

The Company reported net income attributable to controlling interest for the quarter ended June 30, 2013 of $13.1 million, compared with net income attributable to controlling interest of $10.9 million for the quarter ended June 30, 2012 (after a downwards adjustment to net income of approximately $0.1 million to reflect the impact of the noncontrolling interest of HFF Holdings LLC (Holdings) in the Operating Partnerships). Net income attributable to controlling interest for the quarter ended June 30, 2013 was $0.35 per diluted share compared to $0.29 per diluted share for the second quarter of 2012, an increase of 20.7%.

Adjusted EBITDA (a non-GAAP measure whose reconciliation to net income can be found within this release) for the second quarter of 2013 was $23.1 million, which represents an increase of $4.6 million, or 24.9%, as compared to $18.5million in the second quarter of 2012. This increase in Adjusted EBITDA is primarily attributable to the increase in operating income and interest and other income, net as discussed above.

Six Month Results

The Company reported revenues of $135.2 million for the six months ended June 30, 2013, an increase of $16.6 million, or 14.0%, compared to revenues of $118.6 million during the same period in 2012. Operating income for the six months ended June 30, 2013 was $15.3 million compared to $16.2 million for the six months ended June 30, 2012, representing a decrease of $0.9 million, or 5.8%. This decrease in operating income was the result of higher operating costs which offset the increase in operating income from the 14% increase in revenues. The higher operating costs were primarily attributed to (a) increases in the Company's compensation-related costs and expenses associated with, in part, (i) the net growth in headcount of 66 new associates from July 1, 2012 through June 30, 2013, (ii) an increase in incentive compensation including firm and office profit participation expenses directly tied to performance-based metrics, and (iii) increased stock compensation expense primarily related to non-cash mark-to-market adjustments on liability-based stock awards revalued each quarter, (b) increased other operating costs related, in part, to the Company's headcount growth, such as office expansion-related occupancy costs and travel and entertainment expenses related to increased capital markets services revenues, and (c) increased depreciation and amortization costs.

Interest and other income, net, totaled $10.6 million for the six months ending June 30, 2013, an increase of $2.5 million, or 30.4%, as compared to $8.1 million for the six months ending June 30, 2012. This increase is primarily a result of increased other income earned in connection with the Company's Freddie Mac Program Plus® Seller Servicer business.

The Company reported net income attributable to controlling interest for the six month period ended June 30, 2013 of $15.4 million, compared with $14.1 million for the six month period ended June 30, 2012 (after a downwards adjustment to net income of $0.2 million to reflect the impact of the noncontrolling ownership interest of Holdings in the Operating Partnerships). Net income attributable to controlling interest for the six month period ended June 30, 2013 was $0.41 per diluted share, as compared to net income attributable to controlling interest of $0.38 per diluted share for the same period in 2012, an increase of 7.9%.

Adjusted EBITDA for the first six months of 2013 was $30.0 million, which represents an increase of $4.2 million, or 16.3%, as compared to $25.8 millionfor the first six months of 2012. This increase in Adjusted EBITDA is primarily attributable to the increase in operating income (after adjusting for depreciation and amortization and non-cash stock-based compensation expense) and interest and other income, net as discussed above.

             

HFF, Inc.

Consolidated Operating Results
(dollars in thousands, except per share data)
(Unaudited)
 
 
For the Three Months Ended June 30,   For the Six Months Ended June 30,
2013 2012 2013 2012
 
Revenue $ 81,008 $ 66,754 $ 135,223 $ 118,632
 
Operating expenses:
Cost of services 46,592 37,487 81,434 69,854
Operating, administrative and other 16,998 14,483 34,904 29,722
Depreciation and amortization   2,008     1,318     3,596     2,834  
Total expenses 65,598 53,288 119,934 102,410
 
Operating income 15,410 13,466 15,289 16,222
 
Interest and other income, net 6,424 5,300 10,611 8,136
Interest expense (9 ) (12 ) (18 ) (21 )
(Increase) decrease in payable under the tax receivable agreement   (339 )   -     (339 )   (9 )
Income before income taxes 21,486 18,754 25,543 24,328
 
Income tax expense 8,386 7,824 10,127 10,001
       
Net income 13,100 10,930 15,416 14,327
 
Net income attributable to noncontrolling interest (1)   -     75     -     196  
Net income attributable to controlling interest $ 13,100   $ 10,855   $ 15,416   $ 14,131  
 
Earnings per share - basic $ 0.35 $ 0.29 $ 0.41 $ 0.38
Earnings per share - diluted $ 0.35 $ 0.29 $ 0.41 $ 0.38
Weighted average shares outstanding - basic 37,369,753 37,015,153 37,312,994 36,706,390
Weighted average shares outstanding - diluted 37,743,679 37,219,360 37,612,733 36,861,561
       
Adjusted EBITDA $ 23,097   $ 18,489   $ 29,957   $ 25,765  
 

Note:

(1)

 

The noncontrolling interest adjustment on the consolidated financial statements of HFF, Inc. relates to the ownership interest of Holdings in the Operating Partnerships as a result of the Company's 2007 initial public offering and after giving effect to the Operating Partnerships units held by Holdings that have been subsequently exchanged for shares of Class A common stock of HFF, Inc. As the sole stockholder of Holliday GP (the sole general partner of the Operating Partnerships), the Company has since its initial public offering, operated and controlled all of the business and affairs of the Operating Partnerships. The Company consolidates the financial results of the Operating Partnerships, and the ownership interest of Holdings in the Operating Partnerships is reflected as a noncontrolling interest in HFF, Inc.'s consolidated financial statements. The noncontrolling interest presented in the Company's Consolidated Operating Results is calculated based on the income from the Operating Partnerships. As of August 31, 2012, Holdings exchanged all of its remaining interests in the Operating Partnerships and the Company, through its wholly-owned subsidiaries, became, and continues to be, the only equity holder of the Operating Partnerships.

 

Production Volume and Loan Servicing Summary

The reported volume data presented below (provided for informational purposes only) is unaudited and is estimated based on the Company's internal database.

Second Quarter Production Volume Results

 
Unaudited Production Volume by Platform
(dollars in thousands)
For the Three Months Ended June 30,
By Platform   2013     2012
Production Volume    

# of
Transactions

Production Volume    

# of
Transactions

Debt Placement $ 6,631,471 209 $ 5,865,010 206
Investment Sales 5,341,700 119 2,764,152 90
Structured Finance 258,146 13 600,217 25
Loan Sales   68,432     4   428,749     13
Total Transaction Volume $ 12,299,749     345 $ 9,658,128     334
Average Transaction Size $ 35,651 $ 28,917
 
Fund/Loan Balance # of Loans Fund/Loan Balance # of Loans
Private Equity Discretionary Funds $ 2,139,500 $ 1,644,000
Loan Servicing Portfolio Balance $ 32,253,081 2,313 $ 28,815,314 2,162
 

Production volumes for the second quarter of 2013 totaled $12.3 billion on approximately 345 transactions, representing an increase in production volumes of approximately $2.6 billion, or 27.4%, and an increase of 3.3% in the number of transactions when compared to second quarter of 2012 production of approximately $9.7 billion on 334 transactions. The average transaction size for the second quarter of 2013 was $35.7 million, approximately 23.3% higher than the comparable figure of approximately $28.9 million for the second quarter of 2012.

  • Debt Placement production volume was approximately $6.6 billion in the second quarter of 2013, representing an increase of 13.1% from second quarter of 2012 volume of approximately $5.9 billion.
  • Investment Sales production volume was approximately $5.3 billion in the second quarter of 2013, representing an increase of 93.2% over second quarter of 2012 volume of approximately $2.8 billion.
  • Structured Finance production volume was approximately $258.1 million in the second quarter of 2013, a decrease of 57.0% from the second quarter of 2012 volume of approximately $600.2 million.
  • Loan Sales production volume was approximately $68.4 million for the second quarter of 2013, a decrease of 84.0% from the second quarter of 2012 volume of $428.7 million.
  • At the end of the second quarter of 2013, the amount of active private equity discretionary fund transactions on which HFF Securities has been engaged and may recognize additional future revenue was approximately $2.1 billion compared to approximately $1.6 billion at the end of the second quarter of 2012, representing a 30.1% increase.
  • The principal balance of the Company's Loan Servicing portfolio increased by approximately $3.4 billion, or 11.9%, to approximately $32.3 billion at the end of the second quarter of 2013 from $28.8 billion at the end of the second quarter of 2012.

Six Month Production Volume Results

             
Unaudited Production Volume by Platform
(dollars in thousands)
For the Six Months Ended June 30,
By Platform   2013 2012
Production Volume

# of
Transactions

Production Volume

# of
Transactions

Debt Placement $ 11,166,694 395 $ 10,584,235 367
Investment Sales 8,079,901 186 5,559,015 161
Structured Finance 542,848 33 760,290 34
Loan Sales   95,392     8   564,932     21
Total Transaction Volume $ 19,884,835     622 $ 17,468,472     583
Average Transaction Size $ 31,969 $ 29,963
 
Fund/Loan Balance # of Loans Fund/Loan Balance # of Loans
Private Equity Discretionary Funds $ 2,139,500 $ 1,644,000
Loan Servicing Portfolio Balance $ 32,253,081 2,313 $ 28,815,314 2,162
 

Production volumes for the six months ended June 30, 2013 totaled approximately $19.9 billion on 622 transactions, representing a 13.8% increase in production volume and a 6.7% increase in the number of transactions when compared to the production volumes of approximately $17.5 billion on 583 transactions for the comparable period in 2012. The average transaction size for the six months ended June 30, 2013 was $32.0 million, representing a 6.7% increase from the comparable figure of $30.0 million in the first six months of 2012.

Business Comments

Pursuant to its strategic growth initiatives, the Company continued to expand its total employment and production ranks to their respective highest levels since the Company went public in January 2007. The Company's total employment reached 607 associates as of June 30, 2013, which represents a net increase of 66, or 12.2%, over the comparable total of 541 associates as of June 30, 2012. HFF's total number of transaction professionals reached 244 as of June 30, 2013, which represents a net increase of 30, or 14.0% over the comparable total of 214 transaction professionals as of June 30, 2012. Over the past twelve months, we continued to add transaction professionals to our existing lines of business and product specialties through the promotion and recruitment of associates in 16 of our 21 offices. Our significant growth in both the associate and transaction professional ranks illustrates the Company's continued investment and commitment to strategically grow its business by taking advantage of all appropriate opportunities in an effort to better serve our clients and grow our market share.

"Due primarily to the ongoing and unprecedented quantitative easing by the U.S. Federal Reserve, whose balance sheet has now grown to approximately $3.6 trillion, as well as additional quantitative easing by most other global central banks, there was continued improvement in the public and private sectors of the U.S. commercial real estate capital markets in the second quarter of 2013. These improved conditions coupled with a slowly improving economy continued to benefit certain sectors of the U.S. commercial real estate market, especially core, core plus and certain valued-add properties in most of the major markets. Generally speaking, given the improving conditions in the U.S., we expect to see further modest improvement in property level fundamentals for most property types in the majority of the major markets with more stagnant conditions in some secondary and most tertiary markets. However, as previously reported, we believe improvements in property level fundamentals as well as transaction volumes in the U.S. commercial real estate capital markets will remain vulnerable to the global and domestic macro concerns, such as (a) the Eurozone's continued inability to resolve its sovereign debt problems and the inter-related tier-one capital issues in the majority of the European banks, (b) the ongoing tensions in the Middle East and North Korea, (c) potentially higher interest rates resulting from the future anticipated tapering and the ultimate reversal of the quantitative easing of the global central banks, especially the U.S. Federal Reserve whose balance sheet has increased by approximately $2.6 trillion since 2008, and (d) the Federal deficits and the unresolved budget and sequestration issues in the U.S. coupled with serious budget choices faced by state and local governments combined with stubbornly high unemployment levels, which have the potential to derail the improving economic and capital market conditions in the U.S.," said John H. Pelusi, Jr., the Company's chief executive officer.

"Just as we have since January 2010, during the quarter we continued to invest in our business and aggressively pursue our strategic growth initiatives through both organic promotions and recruitment, in the face of the above-mentioned macro-concerns which we have successfully navigated since 2008. Since January 2010, we have grown our headcount by more than 61% with the addition of a net total of 231 highly talented associates, including a nearly 54% increase in our production ranks with the addition of 85 net transaction professionals. In the past twelve months we have grown our head count by more than 12% with the addition of a net total of 66 high-quality, talented associates, including a 14% increase in our production ranks with the addition of a net total of 30 transaction professionals. Our current headcount of 607 associates and the 244 transaction professionals included therein are both new high-water marks for the Company," said Mr. Pelusi.

"As reported in March of this year, we believe that approximately 5% to 10% of our fourth quarter 2012 production revenues may have been attributable to tax-related transaction activity due to the legislative increases in capital gain tax rates, which became effective January 1, 2013, and, therefore, we believe our first six month production revenues and operating results were likely negatively impacted due to this tax-related transaction activity. Notwithstanding the anticipated headcount growth and the aforementioned tax-related transaction activity that may have been pushed up into the fourth quarter of 2012 from 2013, we believe we continued to grow our market share relative to the industry during the second quarter and first six months of 2013 as evidenced by our strong production and operating results. Our transaction volumes for the second quarter and first six months of 2013 were up 27.4% and nearly 14%, respectively, and our commercial loan servicing portfolio increased nearly 12% to $32.3 billion, which represents a new high-watermark. Our total revenues and Adjusted EBITDA were up 21.4% and 24.9%, respectively, for the second quarter of 2013 and were among the best quarterly results recorded by the Company since going public, and for the first six months of 2013, total revenues and Adjusted EBITDA were also up a strong 14% and 16%, respectively," said Mr. Pelusi.

"We believe our significant, prudent and continuing investments in our talented associates combined with the ongoing mentoring by our deep and experienced Leadership Team will continue to pay long-term dividends, as we believe they have since 2010 as evidenced by our significant growth in revenues and earnings over this period. We also believe our strong balance sheet, which includes more than $138 million in cash and cash equivalents, after the payment of the special dividend of approximately $56.3 million in December 2012, and the continued investment of money, time and experience has and will continue to enable us to better serve our clients, best position the Company to take advantage of future strategic opportunities as they arise, capture additional market share, and take advantage of the forecasted transaction volumes that are likely to arise from the nearly $1.7 trillion of commercial real estate loans that are set to mature between 2013 and 2017," said Mr. Pelusi.

"We believe our 244 transaction professionals, who have an average tenure of approximately 17.5 years in the commercial real estate industry, coupled with our enhanced disciplined management oversight from our deep and experienced Leadership Team, will enable us to continue to provide value-add winning solutions for our clients. We remain grateful to our clients who continue to show their confidence in our ability to create and execute winning strategies for them. We would also like to thank our associates who continue to demonstrate their ability to quickly adapt, innovate and share their collective knowledge from each transaction to provide superior value-added services to our clients," added Mr. Pelusi.

Non-GAAP Financial Measures

This earnings press release contains a non-GAAP measure, Adjusted EBITDA, which as calculated by the Company is not necessarily comparable to similarly-titled measures reported by other companies. Additionally, Adjusted EBITDA is not a measurement of financial performance or liquidity under GAAP and should not be considered as an alternative to the Company's other financial information determined under GAAP. For a description of the Company's use of Adjusted EBITDA and a reconciliation of Adjusted EBITDA with net income attributable to controlling interest, see the section of this press release titled "Adjusted EBITDA Reconciliation."

Earnings Conference Call


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