HFF, Inc. Reports Fourth Quarter and Full Year 2012 Financial and Transaction Production Results

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HFF, Inc. Reports Fourth Quarter and Full Year 2012 Financial and Transaction Production Results

PITTSBURGH--(BUSINESS WIRE)-- HFF, Inc. (NYS: HF) reported today its financial and production volume results for the fourth quarter and full year of 2012. 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


Fourth Quarter Results

Since going public in 2007, the Company recorded its highest quarterly revenue of $97.3 million for the fourth quarter of 2012, an increase of $21.4 million, or approximately 28.1%, compared to $75.9 million in the fourth quarter of 2011. The Company generated operating income of $21.6 million for the fourth quarter of 2012, which was also a new high-watermark for any quarter and represents an increase of $3.2 million, or approximately 17.4%, compared to $18.4 million for the fourth quarter of 2011. This increase in operating income is primarily attributable to the $21.4 million increase in revenue which 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 76 new associates over the past twelve months, (ii) an increase in our incentive compensation including firm and office profit participation expenses directly tied to performance-based metrics and (iii) an increase in compensation expenses directly tied to transaction professionals recruited in 2009 and 2010 who have successfully achieved contractual performance-based metrics, and (b) increased operating, administrative and other costs related, in part, to the Company's headcount growth and production volume, such as office expansion-related occupancy costs and travel and entertainment expenses.

Interest and other income, net, totaled $7.5 million in the fourth quarter of 2012, an increase of $3.8 million, or approximately 102.6%, compared to $3.7 million in the fourth quarter of 2011. This was primarily a result of increased income recognized on the Company's initial recording of mortgage servicing rights as well as increased other income earned in connection with the Company's Freddie Mac Program Plus® Seller Servicer business.

The Company recorded an income tax benefit of $6.7 million in the fourth quarter of 2012, compared to income tax expense of $8.6 million in the fourth quarter of 2011, a decrease of $15.3 million, or approximately 178.5%. This decrease in income tax expense is primarily due to the reversal of the remaining valuation allowance on our deferred tax assets of $19.5 million during the fourth quarter of 2012.

The impact of the Company's adjustment to reverse the valuation allowance was to increase the deferred tax asset by $19.5 million and to correspondingly decrease income tax expense by $18.8 million. The reversal of the valuation allowance and its impact on net income was partially offset by a decrease in other income related to the increase in the payable under the tax receivable agreement of $16.0 million.

The Company reported net income attributable to controlling interest of $19.6 million for the quarter ended December 31, 2012, an increase of $7.0 million, or 55.2%, compared with net income attributable to controlling interest of $12.7 million for the same period in the prior year (after a downwards adjustment to net income of approximately $0.6 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 December 31, 2012 was $0.52 per diluted share compared to $0.35 per diluted share for the fourth quarter of 2011, an increase of $0.17 per diluted share, or 48.6%. The effect of the adjustments for the reversal of the deferred tax asset valuation allowance and the related impact on the payable under the tax receivable agreement resulted in an overall net increase to net income of approximately $2.8 million, or $0.07 per share on a fully diluted basis, for the quarter ended December 31, 2012.

Adjusted EBITDA (non-GAAP measure whose reconciliation to net income attributable to controlling interest can be found within this release) for the fourth quarter of 2012 was a record $27.8million, which represents an increase of $5.7 million, or 25.6%, as compared to $22.1 million in the fourth quarter of 2011. The increase in Adjusted EBITDA is primarily due to the increases in operating income and interest and other income, net, as previously noted above.

Full Year Results

The Company reported record full year revenues of $285.0 million for the year ended December 31, 2012, an increase of $30.3 million, or approximately 11.9%, compared to revenues of $254.7 million during the same period in 2011. Operating income for the year ended December 31, 2012 was $50.1 million compared to operating income of $53.4 million for the year ended December 31, 2011, representing a decrease of $3.3 million, or 6.1%. This decline in operating income is primarily attributable to (a) increases in the Company's compensation-related costs and expenses associated with, in part, (i) the net growth in headcount of 76 new associates over the past twelve months, (ii) an increase in our incentive compensation including firm and office profit participation expenses directly tied to performance-based metrics, and (iii) an increase in compensation expenses directly tied to transaction professionals recruited in 2009 and 2010 who have successfully achieved contractual performance-based metrics, (b) increased operating, administrative and other costs related, in part, to the Company's headcount growth, such as office expansion-related occupancy costs, supplies, research and printing, and travel and entertainment expenses, and (c) an increase in stock compensation expense primarily related to mark-to-market adjustments on outstanding liability-based stock awards which are required to be revalued each quarter.

Interest and other income, net, totaled $20.0 million for the year ended December 31, 2012, an increase of $5.1 million, or approximately 33.9%, compared to $15.0 million for the comparable period in 2011. This was primarily a result of increased income recognized on the Company's initial recording of mortgage servicing rights as well as increased other income earned in connection with the Company's Freddie Mac Program Plus® Seller Servicer business.

Income tax expense for the year ended December 31, 2012 was approximately $8.7 million, a decrease of $13.7 million, or approximately 61.3%, compared to approximately $22.4 million of income tax expense for the same period in 2011. This decrease in income tax expense is primarily due to the reversal of the valuation allowance on our deferred tax assets of $21.9 million during the year ended December 31, 2012.

The impact of reversal of the valuation allowance and the effect of changes in the rates used to measure the deferred tax assets on income tax expense for the years ended December 31, 2012 and 2011 was a decrease of $20.7 million and $4.6 million, respectively. The adjustment to the Company's deferred tax asset and its impact on the Company's tax expense was partially offset by a corresponding decrease in other income related to the increase in the liability "payable under the tax receivable agreement" which reduced income before income taxes by $17.4 million and $3.9 million during the years ended December 31, 2012 and 2011, respectively, as reflected in the "(Increase) decrease in payable under tax receivable agreement" (as shown on the consolidated operating results before the line item "Income before income taxes").

The Company reported net income attributable to controlling interest for the year ended December 31, 2012 of $43.9 million (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), an increase of $3.8 million, or 9.6%, compared with $40.0 million for the year ended December 31, 2011 (after a downwards adjustment to net income of $2.0 million to reflect the impact of the noncontrolling ownership interest of Holdings in the Operating Partnerships). Net income attributable to controlling interest for the year ended December 31, 2012 was $1.18 per diluted share, as compared to net income attributable to controlling interest of $1.11 per diluted share for the same period in 2011, an increase of $0.07 per diluted share, or 6.3%. The effect of the adjustments for the reversal of the deferred tax asset valuation allowance and the changes in the tax rates used to measure the deferred tax assets and the related impact on the payable under the tax receivable agreement resulted in an overall net increase to net income of approximately $3.3 million, or $0.09 per share on a fully diluted basis, for the year ended December 31, 2012 and an overall net increase to net income of approximately $0.7 million, or an estimated $0.02 per share on a fully diluted basis, for the year ended December 31, 2011.

Adjusted EBITDA for the year ended December 31, 2012 was $70.0million, which represents an increase of $1.0 million, or 1.5%, as compared $69.0 million for the year ended December 31, 2011. The increase in Adjusted EBITDA is primarily attributable to the previously-noted changes in operating income and interest and other income, net. Adjusted EBITDA for 2012 represented a new high-watermark for the Company.

       
HFF, Inc.
Consolidated Operating Results
(dollars in thousands, except per share data)
(Unaudited)
 
 
For the Three Months Ended Dec. 31,For the Year Ended Dec. 31,
2012201120122011
 
Revenue$97,303$75,939$284,974$254,679
 
Operating expenses:
Cost of services53,89642,199163,937143,979
Operating, administrative and other20,32913,92165,15352,701
Depreciation and amortization 1,514  1,449  5,767  4,627 
Total expenses75,73957,569234,857201,307
 
Operating income21,56418,37050,11753,372
 
Interest and other income, net7,5063,70420,04914,968
Interest expense(10)(7)(42)(29)
(Increase) decrease in payable under the tax receivable agreement (16,145) (210) (17,358) (3,890)
Income before income taxes12,91521,85752,76664,421
 
Income tax (benefit) expense(6,732)8,5818,66122,371
    
Net income19,64713,27644,10542,050
 
Net income attributable to noncontrolling interest (1) -  614  243  2,031 
Net income attributable to controlling interest$19,647 $12,662 $43,862 $40,019 
 
Earnings per share - basic$0.53$0.35$1.19$1.12
Earnings per share - diluted$0.52$0.35$1.18$1.11
Weighted average shares outstanding - basic37,171,21436,066,22436,917,09635,867,610
Weighted average shares outstanding - diluted37,531,40736,334,08737,151,79236,125,173
    
Adjusted EBITDA$27,823 $22,145 $70,002 $68,995 
 

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.

Fourth Quarter Production Volume Results

  Unaudited Production Volume by Platform
(dollars in thousands)
For the Three Months Ended December 31,
By Platform  2012 2011
Production Volume 

# of
Transactions

 Production Volume 

# of
Transactions

Debt Placement$7,915,564309$4,565,431168
Investment Sales5,008,8311384,500,939122
Structured Finance1,440,247221,048,18824
Loan Sales 184,255 6 207,734 12
Total Transaction Volume$14,548,897 475$10,322,292 326
Average Transaction Size$30,629$31,663
 
Fund/Loan Balance# of LoansFund/Loan Balance# of Loans
Private Equity Discretionary Funds$2,039,500$1,853,000
Loan Servicing Portfolio Balance$31,332,3922,281$27,200,0192,125
 

The Company reported production volumes for the fourth quarter of 2012 totaling approximately $14.5 billion on 475 separate transactions, representing an increase in production volumes of approximately $4.2 billion, or 40.9%, and an increase of 149 separate transactions or approximately 45.7% in the number of transactions when compared to fourth quarter of 2011 production of approximately $10.3 billion on 326 transactions. The average transaction size for the fourth quarter of 2012 was $30.6 million, approximately 3.3% lower than the comparable figure of approximately $31.7 million for the fourth quarter of 2011.

  • Debt Placement production volume was approximately $7.9 billion in the fourth quarter of 2012, representing an increase of 73.4% over fourth quarter of 2011 volume of approximately $4.6 billion.
  • Investment Sales production volume was approximately $5.0 billion in the fourth quarter of 2012, representing an increase of 11.3% over fourth quarter of 2011 volume of approximately $4.5 billion.
  • Structured Finance production volume was approximately $1.4 billion in the fourth quarter of 2012, an increase of 37.4% over the fourth quarter of 2011 volume of approximately $1.0 billion.
  • Loan Sales production volume was approximately $184.3 million for the fourth quarter of 2012, a decrease of 11.3% from the fourth quarter of 2011 volume of $207.7 million.
  • At the end of the fourth quarter of 2012, the amount of active private equity discretionary fund transactions on which HFF Securities has been engaged and may result in additional future revenue was approximately $2.0 billion compared to approximately $1.9 billion at the end of the fourth quarter of 2011, representing a 10.1% increase.
  • The principal balance of HFF's Loan Servicing portfolio increased $4.1 billion to more than $31.3 billion, a new high-watermark, at the end of the fourth quarter of 2012 from $27.2 billion at the end of the fourth quarter of 2011, representing an increase of approximately 15.2%.

Full Year Production Volume Results

  Unaudited Production Volume by Platform
(dollars in thousands)
For the Twelve Months Ended December 31,
By Platform  2012 2011
Production Volume 

# of
Transactions

Production Volume 

# of
Transactions

Debt Placement$23,353,562861$18,671,548644
Investment Sales15,113,03739312,637,607344
Structured Finance2,487,811711,956,47866
Loan Sales 919,787 33 2,343,277 47
Total Transaction Volume$41,874,197 1,358$35,608,910 1,101
Average Transaction Size$30,835$32,342
 
Fund/Loan Balance# of LoansFund/Loan Balance# of Loans
Private Equity Discretionary Funds$2,039,500$1,853,000
Loan Servicing Portfolio Balance$31,332,3922,281$27,200,0192,125
 

Production volumes for the year ended December 31, 2012 totaled approximately $41.9 billion on 1,358 transactions, which was a new high-watermark for the number of transactions and represents a 17.6% increase in production volume and a 23.3% increase in the number of transactions when compared to the production volumes of approximately $35.6 billion on 1,101 transactions for the comparable period in 2011. The average transaction size for the year ended December 31, 2012 was $30.8 million, representing a 4.7% decrease from the comparable figure of $32.3 million in the year ended December 31, 2011. It should be noted that there was one unusually large loan sale during 2011. If we would adjust the 2011 production volumes to exclude this one unusually large loan sale transaction, the Company's 2012 production volume would have increased by approximately 21.4% as compared to the adjusted 2011 production volumes of $34.5 billion and the Company's average transaction size for 2012 would have only decreased by 1.6% as compared to the adjusted 2011 average transaction size of approximately $31.3 million.

  • Debt Placement production volume was approximately $23.4 billion in 2012, representing an increase of 25.1% over 2011 volume of approximately $18.7 billion.
  • Investment Sales production volume was approximately $15.1 billion in 2012, representing an increase of 19.6% over 2011 volume of approximately $12.6 billion.
  • Structured Finance production volume was approximately $2.5 billion in 2012 (a new high-watermark), an increase of 27.2% over 2011 volume of approximately $2.0 billion.
  • Loan Sales production volume was approximately $0.9 billion in 2012, a decrease of 60.7% from 2011 volume of $2.3 billion. It should be noted that there was one unusually large loan sale during 2011. If we would adjust the production volumes to exclude this transaction, the loan sales production volume would have decreased by 24.6%.
  • At the end of 2012, the amount of active private equity discretionary fund transactions on which HFF Securities has been engaged and may result in additional future revenue was approximately $2.0 billion compared to approximately $1.9 billion at the end of 2011, representing a 10.1% increase.
  • The principal balance of HFF's Loan Servicing portfolio increased $4.1 billion to more than $31.3 billion, a new high-watermark, at the end of 2012 from $27.2 billion at the end of 2011, representing an increase of approximately 15.2%.

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 574 associates as of December 31, 2012, which represents a net increase of 76, or 15.3%, over the comparable total of 498 associates as of December 31, 2011. HFF's total number of transaction professionals reached 229 as of December 31, 2012, which represents a net increase of 38, or 19.9%, over the comparable total of 191 as of December 31, 2011. Over the past twelve months, we strategically opened new offices in Denver, CO and Orlando, FL and continued to add transaction professionals to our existing lines of business and product specialties through the promotion and recruitment of associates in our Atlanta, GA, Austin, TX, Boston, MA, Chicago, IL, Dallas, TX, Denver, CO, Los Angeles, CA, Miami, FL, New York City, NY, Orange County, CA, Pittsburgh, PA, Portland, OR, San Diego, CA, and Washington, DC offices. Our significant growth in both our associate and transaction professional ranks illustrates the Company's investment and commitment to strategically grow its business by taking advantage of all appropriate opportunities in an effort to better serve its clients and grow its market share.

"Due primarily to the ongoing and unprecedented quantitative easing by the U.S. Federal Reserve, whose balance sheet has now grown to more than $3 trillion, as well as continued quantitative easing by other global central banks, we continued to see improvement in the public and private sectors of the U.S. commercial real estate capital markets. These improved conditions coupled with an economy that continues to slowly improve continue to benefit certain sectors of the U.S. commercial real estate market, especially core and core plus properties in the major tier-one markets and distressed assets in select major markets," said John H. Pelusi, Jr., the Company's chief executive officer.

"As we have noted in previous quarters, there are a number of macro headwinds which have the potential to negatively impact these improving conditions in the global economy as well as transaction volumes in the U.S. capital and commercial real estate markets. 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, the continued tensions in the Middle East as well as in North Korea, the future reversal of the quantitative easing of all of the global central banks, especially the U.S. Federal Reserve whose balance sheet has increased by more than $2 trillion since 2008, the continuing and growing deficits and the unresolved budget and sequestration issues in the U.S. coupled with serious budget choices at the state and local levels and combined with still stubbornly high unemployment levels, have the potential to derail the improving economic and capital market conditions in the U.S. Generally speaking, the U.S. commercial real estate property level fundamentals, while continuing to improve modestly in select property types in most major markets, especially in the multi-housing sector which has significantly outperformed other property types, remain vulnerable to any changes in the macro conditions noted above. Given that property level fundamentals have historically lagged the U.S. economy, with the exception of multi-housing fundamentals, which we believe will continue to outperform other asset classes, we expect flat to modest improvement in property level fundamentals for most property types, especially in secondary and tertiary markets through the remainder of 2013," said Mr. Pelusi.

"As we reported in past quarters, since January 1, 2010, we have continuously invested in our business and aggressively pursued our strategic growth initiatives through both organic promotions and recruitment, even in the face of the above-mentioned macro headwinds which we have successfully navigated since 2008. Since January 1, 2010, we have grown our headcount by nearly 53% with the addition of a net total of 198 highly talented associates, including a 44% increase in our production ranks with the addition of 70 net transaction professionals. As a result of our continued strategic growth initiatives coupled with our Leadership Team's strong discipline of managing our business and our strong balance sheet to support our growth initiatives, we are very pleased to report that we were able to continue to successfully build upon our past achievements as we had a record fourth quarter and full year 2012 in many aspects of our business," said Mr. Pelusi.

"During 2012, we grew our head count by slightly more than 15% with the addition of a net total of 76 high-quality, talented associates, including a nearly 20% increase in our production ranks with the addition of 38 net transaction professionals. We also added a senior housing team to the Company and during the fourth quarter of 2012 we organized a group of our existing transaction professionals with expertise in healthcare properties to strategically formalize our national healthcare practice group to better serve clients who are attempting to take advantage of the strong macro demographics in this area, as well as assist institutions who are facing significant challenges related to how healthcare will be delivered and funded in the future. Our current headcount of 574 associates, including 229 transaction professionals, are both new high-watermarks for the Company," said Mr. Pelusi.

"Our record number of 1,358 separate transactions produced full year transaction volume of nearly $42 billion, which nearly equaled the Compan

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