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HFF, Inc. Reports Third Quarter 2010 Financial and Transaction Production Results

^{Published on 2010-11-02 11:10:22 - Market Wire}
 

PITTSBURGH--([ BUSINESS WIRE ])--HFF, Inc. (NYSE: HF) reported today its financial and production volume results for the third quarter 2010. HFF, Inc. (the Company), through its Operating Partnerships, Holliday Fenoglio Fowler, L.P. (HFF LP) and HFF Securities L.P. (HFF Securities), is one of the leading providers of commercial real estate and capital markets services to the U.S. commercial real estate industry based on transaction volume and is one of the largest full-service commercial real estate financial intermediaries in the country.

"Management's Discussion and Analysis of Financial Condition and Results of Operations"

Consolidated Earnings

Third Quarter Results

The Company reported revenues of $37.5 million for the third quarter of 2010, an increase of $16.9 million, or approximately 82% compared to the third quarter of 2009 revenues of $20.6 million. The Company had operating income of $5.9 million compared to $0.8 million for the third quarter of 2009, representing an increase of $5.1 million, or approximately 604%, over the third quarter of 2009 comparable results. This improvement in operating income is primarily attributable to the increase in production volumes and related revenue in nearly all of the Companya™s capital markets services platforms, offset by an increase in the Companya™s costs of services that are directly attributable to the higher capital markets services revenues, and an increase in operating, administrative and other costs.

Interest and other income, net, totaled $1.6 million in the third quarter of 2010, an increase of $0.7 million, or approximately 78%, compared to $0.9 million in the third quarter of 2009. This was a result of increased income recognized on the Companya™s initial recording of mortgage servicing rights as well as other income earned primarily in connection with the Companya™s Freddie Mac Program Plus® Seller Servicer business.

The Company recorded income tax expense of $3.9 million in the third quarter of 2010, compared to $2.1 million in the third quarter of 2009. The increase in income tax expense in the third quarter of 2010 is primarily due to the higher income before income taxes earned in the third quarter of 2010 compared to the third quarter of 2009. The income tax expense in the third quarter of 2009 was primarily the result of a change in the tax rate used to measure the deferred tax assets.

The Company reported net income attributable to controlling interest of $4.0 million for the quarter ended September 30, 2010 (after adjustments to the third quarter results of approximately $0.5 million to reflect the impact of the noncontrolling interest of HFF Holdings LLC (Holdings) in the Operating Partnerships), compared with a net loss attributable to controlling interest of $39,000 for the same period last year (after adjustments to the results for the quarter ended September30, 2009 of approximately $1.3 million to reflect the impact of the noncontrolling interest of Holdings in the Operating Partnerships). Net income for the quarter ended September 30, 2010 was $0.11 per diluted share compared to a net loss of less than $0.01 per diluted share for the third quarter of 2009.

EBITDA (a non-GAAP measure whose reconciliation to net income (loss) can be found within this release) was $9.3 million for the quarter ended September 30, 2010, an increase of approximately $4.9 million, or approximately 114%, as compared to EBITDA in the amount of $4.3 million in the third quarter of 2009.

Nine Month Results

The Company reported revenues of $91.0 million for the nine months ended September 30, 2010, an increase of $40.8 million, or approximately 81%, compared to revenues of $50.3 million during the same period in 2009. Operating income for the nine months ended September 30, 2010 was $10.1 million compared to an operating loss of $7.1 million for the nine months ended September 30, 2009, representing an increase of $17.2 million. This increase in operating income is attributable to the increase in production volumes and related capital markets services revenues in nearly all of the Companya™s capital markets services platforms from the prior year. Partially offsetting this increase in revenue of approximately $40.8 million is an increase in total operating expenses of approximately $23.6 million during the first nine months of 2010 compared to the same period in 2009. This increase in operating expenses is primarily a result of an increase in the Companya™s cost of services of approximately $19.0 million that are directly attributable to the higher capital markets services revenues, and an increase in operating, administrative and other expenses (including depreciation and amortization) of $4.6 million, which is primarily related to an increase in other performance-based accruals.

Income tax expense for the nine months ended September 30, 2010 was approximately $5.9 million, compared to approximately $1.1 million of income tax expense for the same period in 2009. This increase is primarily attributable to higher pre-tax book income. Income tax expense is also impacted by the effect of changes in the rates used to measure the deferred tax assets. The largest component of the deferred tax assets relates to the tax basis step-up resulting from the reorganization transactions completed in 2007 in connection with the Companya™s initial public offering, and the various exchange transactions with members of Holdings executed in the fourth quarter of 2009 and in the first and second quarters of 2010. The effect of changes in the rates used to measure the deferred tax assets on income tax expense for the nine months ended September 30, 2010 and 2009 was approximately $0.9 million and $2.0 million, respectively. This additional tax expense due to the remeasurement of the deferred tax assets resulted in a higher effective tax rate. During the nine month periods ended September 30, 2010 and 2009, this tax expense and its impact on net income was partially offset by a decrease of $0.8 million and $1.7 million, respectively, in the payable under the tax receivable agreement (as shown on the consolidated operating results before the line item aincome (loss) before income taxesa).

The Company reported net income attributable to controlling interest of $6.6 million (after adjustments to the nine months results of $5.6 million to reflect the impact of the noncontrolling ownership interest of Holdings in the Operating Partnerships) for the nine month period ended September30, 2010, compared with a net loss attributable to controlling interest of $2.3 million (after adjustments to the results for the nine month period ended September 30, 2009 of $1.2 million to reflect the impact of the noncontrolling ownership interest of Holdings in the Operating Partnerships) for the same period last year. Net income for the nine month period ended September 30, 2010 was $0.27 per diluted share, as compared to a net loss of $0.14 per diluted share for the same period in 2009. The effect of changes in the rates used to measure the deferred tax assets and the corresponding effect of the related remeasurement of the payable under the tax receivable agreement resulted in an overall net decrease to net income of approximately $0.1 million, or an estimated $0.01 per share on a fully diluted basis, for the nine month period ended September 30, 2010 and approximately $0.3 million, or an estimated $0.02 per share on a fully diluted basis, for the nine month period ended September 30, 2009.

EBITDA was $20.9 million for the nine months ended September 30, 2010, an increase of $20.4 million, or approximately 3,799%, compared to EBITDA of $0.5 million in the same period in 2009.

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 Companya™s internal database.

Third Quarter Production Volume Results

Beginning in 2008 and continuing into the third quarter of 2010, the U.S. commercial real estate sector has experienced a significant downturn in the number of transactions relative to prior periods from 2001 through 2007 due to adverse conditions in the global capital markets and economies, especially in the U.S. While the Company experienced a significant increase in transaction volumes during the third quarter and the first nine months of 2010 compared to the same periods in 2009, these adverse conditions negatively impacted the Companya™s production volumes relative to its historic production volumes in periods prior to 2008, before these adverse conditions began to unfold.

The Company reported production volumes for the third quarter of 2010 totaling approximately $5.1 billion on 175 transactions, representing an increase in production volumes of approximately 106% and an increase of approximately 55% in the number of transactions when compared to third quarter of 2009 production of approximately $2.5 billion on 113 transactions. The average transaction size for the third quarter of 2010 was $29.3 million, approximately 33% higher than the comparable figure of approximately $22.0 million for the third quarter of 2009. It should be noted that a portion of the 106% increase in production volume was achieved due to one unusually large investment sale and related debt placement transaction which closed during the third quarter. If this transaction was excluded, the Companya™s production volume would have still increased by approximately 66% and the Companya™s average transaction size for the quarter would have been approximately $23.5 million, or approximately 7%, higher than the third quarter of 2009 average transaction size.

• Debt Placement production volume was approximately $2.9 billion in the third quarter of 2010, representing an increase of 87% from third quarter of 2009 volume of approximately $1.5 billion.
• Investment Sales production volume was approximately $1.9 billion in the third quarter of 2010, representing an increase of 134% from third quarter of 2009 volume of approximately $824.8 million.
• Structured Finance production volume was approximately $110.4 million in the third quarter of 2010, an increase of 121% from the third quarter of 2009 volume of approximately $49.9 million.
• Loan Sales production volume was approximately $206.4 million for the third quarter 2010, an increase of 209% over the third quarter of 2009 volume of $66.8 million.
• At the end of the third quarter of 2010, the amount of active private equity discretionary fund transactions on which HFF Securities has been engaged and may recognize additional future revenue was approximately $1.5 billion compared to approximately $1.9 billion at the end of the third quarter of 2009, representing a 21% decrease.
• The principal balance of HFFa™s Loan Servicing portfolio increased to more than $25.0 billion at the end of the third quarter of 2010 from $24.7 billion at the end of the third quarter of 2009, representing an increase of approximately 1%.

Nine Month Production Volume Results

Production volumes for the nine months ended September 30, 2010 totaled approximately $13.3 billion on 428 transactions, representing a 154% increase in production volume and a 67% increase in the number of transactions when compared to the production volumes of approximately $5.2 billion on 256 transactions for the comparable period in 2009. The average transaction size for the nine months ended September30, 2010 was $31.0 million, representing a 52% increase from the comparable figure of $20.4 million in the first nine months of 2009. It should be noted that a portion of the 154% increase in production volume was achieved due to one unusually large investment sales portfolio, and the related debt placement for the buyer of the portfolio, and one unusually large investment sale and related debt placement transaction which closed during the first nine months of 2010. If these large transactions were excluded, the Companya™s production volume would have still increased by 95% and the Companya™s average transaction size for the first nine months would have been approximately $23.7 million, or approximately 16% higher than the first nine months of 2009 average transaction size.

Business Comments

HFFa™s total employment was 420 as of September 30, 2010, which represents a net increase of 30, or approximately 8%, from the total employment of 390 as of September 30, 2009 and a net increase of 44, or approximately 12%, from the December 31, 2009 employment total of 376. The employment level increase from December 31, 2009 is partially due to the strategic addition of two new investment sales teams located in New Jersey and Orange County, California, as the Company continued to take advantage of strategic opportunities to serve its clients and grow its market share. The total number of producers as of September 30, 2010 was 170 compared to 167 as of September 30, 2009.

aDue to the unprecedented and continuing liquidity and monetary easing by the global central banks during the past two years, especially by the U.S. Federal Reserve, we continue to see improvements in certain sectors of the U.S. commercial real estate capital markets, especially in the public equity and debt markets. The continuing improved conditions in the public markets have created further improvements in certain sectors of the private debt and equity markets that serve the U.S. commercial real estate markets for select transactions, especially in the major tier one markets, when compared to 2009. These improved capital markets conditions, coupled with a slowly improving economic climate in the U.S. economy when compared to 2008 and 2009, continue to create a more conducive environment for certain types of commercial real estate transactions to occur with more frequency in select markets throughout the U.S. when compared to 2009. As evidenced by our performance in the third quarter and the first nine months of 2010, especially when they are compared to the reported national market transaction statistics, we have been able to take advantage of this more conducive environment and grow our market share while maintaining strong EBITDA margins,a said John H. Pelusi, Jr., HFF, Inc.a™s chief executive officer.

aThat said, there continue to be a number of possible headwinds that can potentially negatively impact the improving conditions in the economy, the capital markets and the commercial real estate markets, especially in the U.S. The recently-enacted financial reform legislation and the stubbornly high unemployment levels, and the resulting negative impact on property level fundamentals as evidenced by the continuing rise in delinquency levels in the commercial banking and CMBS markets, have the potential to dampen the continuation of the improving economic and capital market conditions we have witnessed over the past three quarters. Generally speaking, the U.S. commercial real estate property level fundamentals, while somewhat improved in certain property types and select markets, remain challenged. Given that property level fundamentals have historically lagged the U.S. economy, we expect to see them remain challenged throughout 2010, into 2011 and possibly beyond. The depth and duration of these property level and potential capital markets challenges, which could continue to adversely impact transaction volumes relative to historical norms, are directly related to how quickly the economy and the employment situation improve,a said Mr. Pelusi.

aWith 170 transaction professionals with an average tenure of 17 years in the commercial real estate industry, we believe we are strongly positioned to assist our clients in navigating these challenging market conditions and to take advantage of all opportunities created by the resulting inefficient capital markets regardless of the direction in which they move. As we have over the past two years, utilizing our strong balance sheet, we are also prepared to continue to invest capital to take advantage of all opportunities to strategically grow our business platforms in existing and new markets, as well as to invest in our current and future associates to ensure we meet the needs of our clients. We remain grateful to our clients who continue to show their confidence in our ability to create and execute winning solutions for them, especially in these very inefficient and challenging market conditions. We would also like to thank our associates who continue to demonstrate their ability to continue to quickly adapt and innovate through sharing their collective knowledge from each transaction to provide superior value-added services to our clients,a added Mr. Pelusi.

Non-GAAP Financial Measures

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

Earnings Conference Call

The Companya™s management will hold a conference call to discuss third quarter of 2010 financial results on Tuesday, November 2nd, at 8:30 a.m. Eastern Time. To listen, participants should dial 800-591-6923 in the U.S. and 617-614-4907 for international callers approximately 10 minutes prior to the start of the call and enter participant code 20599479. A replay will become available after 11:30 a.m. Eastern Time on November 2nd and will continue through December 2, 2010, by dialing 888-286-8010 (U.S. callers) and 617-801-6888 (international callers) and entering participant code 22087797.

The live broadcast of the Companya™s quarterly conference call will be available online on its website at [ www.hfflp.com ] on Tuesday, November 2nd, beginning at 8:30 a.m. Eastern Time. The broadcast will be available on the Companya™s website for one month. Related presentation materials will be posted to the aInvestor Relationsa section of the Companya™s website prior to the call. The presentation materials will be available in Adobe Acrobat format.

About HFF, Inc.

Through its subsidiaries, Holliday Fenoglio Fowler, L.P. and HFF Securities L.P., the Company operates out of 17 offices nationwide and is one of the leading providers of commercial real estate and capital markets services, by transaction volume, to the U.S. commercial real estate industry. The Company offers clients a fully integrated national capital markets platform including debt placement, investment sales, structured finance, private equity, investment banking and advisory services, loan sales and commercial loan servicing.

Certain statements in this earnings press release are aforward-looking statementsa within the meaning of the federal securities laws. Statements about the Companya™s beliefs and expectations and statements containing the words amay,a acould,a awould,a ashould,a abelieve,a aexpect,a aanticipate,a aplan,a aestimate,a atarget,a aproject,a aintenda and similar expressions constitute forward-looking statements.These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Companya™s actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this earnings press release. Investors, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.Any forward-looking statements speak only as of the date of this earnings press release and, except to the extent required by applicable securities laws, the Company expressly disclaims any obligation to update or revise any of them to reflect actual results, any changes in expectations or any change in events.If the Company does update one or more forward-looking statements, no inference should be drawn that it will make additional updates with respect to those or other forward-looking statements.Factors that could cause results to differ materially include, but are not limited to: (1) general economic conditions and commercial real estate market conditions, including the current conditions in the global markets and, in particular, the U.S. debt markets; (2) the Companya™s ability to retain and attract transaction professionals; (3) the Companya™s ability to retain its business philosophy and partnership culture; (4) competitive pressures; and (5) other factors discussed in the Companya™s public filings, including the risk factors included in the Companya™s most recent Annual Report on Form 10-K.

Additional information concerning factors that may influence HFF, Inc.'s financial information is discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and "Forward-Looking Statements" in the Companya™s most recent Annual Report on Form 10-K, as well as in the Company's press releases and other periodic filings with the Securities and Exchange Commission. Such information and filings are available publicly and may be obtained from the Company's web site at [ www.hfflp.com ] or upon request from the HFF, Inc. Investor Relations Department at [ investorrelations@hfflp.com ].

EBITDA Reconciliation

The Company defines EBITDA as net income (loss) attributable to controlling interest before interest expense, income taxes, depreciation and amortization and income reported to the noncontrolling interest. The Company uses EBITDA in its business operations to, among other things, evaluate the performance of its business, develop budgets and measure its performance against those budgets. The Company also believes that analysts and investors use EBITDA as a supplemental measure to evaluate its overall operating performance. However, EBITDA has material limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of the Companya™s results as reported under GAAP. The Company finds EBITDA as a useful tool to assist in evaluating performance because it eliminates items related to capital structure and taxes. Note that the Company classifies the interest expense on its warehouse lines of credit as an operating expense and, accordingly, it is not eliminated from net income in determining EBITDA. In addition, note that the Company includes in net income the income upon the initial recognition of mortgage servicing rights and, accordingly, it is included in net income in determining EBITDA. The items that the Company has eliminated from net income in determining EBITDA are interest expense, income taxes, depreciation of fixed assets and amortization of intangible assets and noncontrolling interest. Some of these eliminated items are significant to the Companya™s business. For example, (i)interest expense is a necessary element of the Companya™s costs and ability to generate revenue because it incurs interest expense related to any outstanding indebtedness, (ii)payment of income taxes is a necessary element of the Companya™s costs and (iii)depreciation and amortization are necessary elements of the Companya™s costs. Any measure that eliminates components of the Companya™s capital structure and costs associated with carrying significant amounts of fixed assets on its balance sheet has material limitations as a performance measure. In light of the foregoing limitations, the Company does not rely solely on EBITDA as a performance measure and also considers its GAAP results. EBITDA is not a measurement of the Companya™s financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with GAAP. Because EBITDA is not calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies.

Set forth below is an unaudited reconciliation of consolidated net income (loss) to EBITDA for the Company for the three and nine months ended September 30, 2010 and 2009: