Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-33280

 

 

HFF, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   51-0610340
(State of Incorporation)   (I.R.S. Employer Identification No.)

 

One Oxford Centre  
301 Grant Street, Suite 1100  
Pittsburgh, Pennsylvania   15219
(Address of Principal Executive Offices)   (Zip code)

(412) 281-8714

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

Number of shares of Class A common stock, par value $0.01 per share, of the registrant outstanding as of April 30, 2015 was 37,833,071 shares.

 

 

 


Table of Contents

HFF, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

March 31, 2015

 

     Page  

PART I. FINANCIAL INFORMATION

     4   

Item 1. Financial Statements

     4   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     31   

Item 4. Controls and Procedures

     31   

PART II. OTHER INFORMATION

     32   

Item 1. Legal Proceedings

     32   

Item 1A. Risk Factors

     32   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     32   

Item 3. Defaults upon Senior Securities

     32   

Item 4. Mine Safety Disclosures

     32   

Item 5. Other Information

     32   

Item 6. Exhibits

     32   

Signatures

     33   

Certification Pursuant to Section 302

  

Certification Pursuant to Section 302

  

Certification Pursuant to Section 1350

  

 

2


Table of Contents

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, those described under the caption “Risk Factors” in our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

SPECIAL NOTE REGARDING THE REGISTRANT

In connection with our initial public offering, we effected a reorganization of our business into a holding company holding the partnership interests in Holliday Fenoglio Fowler, L.P. and HFF Securities L.P. (together, the “Operating Partnerships”), held through the wholly owned subsidiary HFF Partnership Holdings, LLC, a Delaware limited liability company and all of the outstanding shares of Holliday GP Corp., the sole general partner of each of the Operating Partnerships. The transactions that occurred in connection with the initial public offering and reorganization are referred to as the “Reorganization Transactions.”

Unless the context otherwise requires, references to (1) “HFF Holdings” refer solely to HFF Holdings LLC, a Delaware limited liability company that was previously the holding company for our consolidated subsidiaries, and not to any of its subsidiaries, (2) “HFF LP” refer to Holliday Fenoglio Fowler, L.P., a Texas limited partnership, (3) “HFF Securities” refer to HFF Securities L.P., a Delaware limited partnership and registered broker-dealer, (4) “Holliday GP” refer to Holliday GP Corp., a Delaware corporation and the general partner of HFF LP and HFF Securities, (5) “HoldCo LLC” refer to HFF Partnership Holdings LLC, a Delaware limited liability company and a wholly-owned subsidiary of HFF, Inc., and (6) “Holdings Sub” refer to HFF LP Acquisition LLC, a Delaware limited liability company and wholly-owned subsidiary of HFF Holdings (together, the “Holdings Affliliates”). Our business operations are conducted by HFF LP and HFF Securities, which are sometimes referred to in this Quarterly Report on Form 10-Q as the “Operating Partnerships.” Also, except where specifically noted, references in this Quarterly Report on Form 10-Q to “the Company,” “we” or “us” mean HFF, Inc., a Delaware corporation and its consolidated subsidiaries, after giving effect to the Reorganization Transactions.

 

3


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HFF, Inc.

Consolidated Balance Sheets

(Dollars in Thousands)

(Current period unaudited)

 

     March 31,
2015
    December 31,
2014
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 142,493      $ 232,053   

Accounts receivable

     3,524        1,462   

Receivable from affiliate

     2        2   

Mortgage notes receivable

     604,246        185,128   

Prepaid taxes

     1,118        729   

Prepaid expenses and other current assets

     4,984        3,281   

Deferred tax asset, net

     4,793        5,955   
  

 

 

   

 

 

 

Total current assets, net

  761,160      428,610   

Property and equipment, net

  10,348      10,173   

Deferred tax asset, net

  134,367      140,095   

Goodwill

  3,712      3,712   

Intangible assets, net

  22,213      20,647   

Other noncurrent assets

  971      1,015   
  

 

 

   

 

 

 

Total Assets

$ 932,771    $ 604,252   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Current portion of long-term debt

$ 350    $ 337   

Warehouse line of credit

  604,246      185,128   

Accrued compensation and related taxes

  26,880      51,335   

Accounts payable

  1,450      2,087   

Payable under tax receivable agreement

  10,789      10,789   

Other current liabilities

  25,490      37,031   
  

 

 

   

 

 

 

Total current liabilities

  669,205      286,707   

Deferred rent credit

  7,565      7,304   

Payable under the tax receivable agreement, less current portion

  122,276      123,367   

Long-term debt, less current portion

  393      429   
  

 

 

   

 

 

 

Total liabilities

  799,439      417,807   

Stockholders’ equity:

Class A common stock, par value $0.01 per share, 175,000,000 authorized; 38,348,771 and 38,125,363 shares issued, respectively; 37,833,071 and 37,677,981 shares outstanding, respectively

  383      381   

Treasury stock, 515,700 and 447,382 shares at cost, respectively

  (11,418   (9,042

Additional paid-in-capital

  110,700      101,148   

Retained earnings

  33,667      93,958   
  

 

 

   

 

 

 

Total equity

  133,332      186,445   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 932,771    $ 604,252   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

4


Table of Contents

HFF, Inc.

Consolidated Statements of Income

(Dollars in Thousands, except per share data)

(Unaudited)

 

     Three Months Ended
March 31,
 
     2015     2014  

Revenues

    

Capital markets services revenue

   $ 91,257      $ 75,141   

Interest on mortgage notes receivable

     2,489        425   

Other

     525        465   
  

 

 

   

 

 

 
  94,271      76,031   

Expenses

Cost of services

  56,379      46,074   

Personnel

  11,518      13,941   

Occupancy

  2,784      2,351   

Travel and entertainment

  3,659      2,996   

Supplies, research, and printing

  1,790      1,398   

Insurance

  603      504   

Professional fees

  1,281      1,207   

Depreciation and amortization

  2,119      2,053   

Interest on warehouse line of credit

  1,297      249   

Other operating

  1,605      1,440   
  

 

 

   

 

 

 
  83,035      72,213   

Operating income

  11,236      3,818   

Interest and other income, net

  5,541      2,910   

Interest expense

  (11   (7

(Increase) decrease in payable under the tax receivable agreement

  1,091      501   
  

 

 

   

 

 

 

Income before income taxes

  17,857      7,222   

Income tax expense

  8,448      3,515   
  

 

 

   

 

 

 

Net income

$ 9,409    $ 3,707   
  

 

 

   

 

 

 

Earnings per share - Basic and Diluted

Income available to HFF, Inc. common stockholders - Basic

$ 0.25    $ 0.10   

Income available to HFF, Inc. common stockholders - Diluted

$ 0.25    $ 0.10   

See accompanying notes to the consolidated financial statements.

 

5


Table of Contents

HFF, Inc.

Consolidated Statements of Stockholders’ Equity

(Dollars in Thousands, except share data)

(Unaudited)

 

     Common Stock      Treasury Stock     Additional
Paid in
Capital
    Retained
Earnings
    Total
Equity
 
     Shares     Amount      Shares      Amount        

Stockholders’ equity, December 31, 2014

     37,677,981      $ 381         447,382       $ (9,042   $ 101,148      $ 93,958      $ 186,445   

Stock compensation and other, net

     —          —           —           —          7,270        —          7,270   

Excess tax benefits from share-based award activities

     —          —           —           —          296        —          296   

Issuance of Class A common stock, net

     223,408        2         —           —          107        —          109   

Repurchase of Class A common stock

     (68,318     —           68,318         (2,376     —          —          (2,376

Dividends paid

     —          —           —           —          1,879        (69,700     (67,821

Net income

     —          —           —           —          —          9,409        9,409   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity, March 31, 2015

  37,833,071    $ 383      515,700    $ (11,418 $ 110,700    $ 33,667    $ 133,332   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     Common Stock      Treasury Stock     Additional
Paid in
Capital
    Retained
Earnings
    Total
Equity
 
     Shares     Amount      Shares      Amount        

Stockholders’ equity, December 31, 2013

     37,248,416      $ 372         250,380       $ (2,760   $ 76,097      $ 101,865      $ 175,574   

Stock compensation and other, net

     —          —           —           —          17,979        —          17,979   

Excess tax benefits from share-based award activities

     —          —           —           —          955        —          955   

Issuance of Class A common stock, net

     622,713        9         —           —          (9     —          —     

Repurchase of Class A common stock

     (197,002     —           197,002         (6,282     —          —          (6,282

Dividends paid

     —          —           —           —          1,027        (69,193     (68,166

Net income

     —          —           —           —          —          3,707        3,707   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity, March 31, 2014

  37,674,127    $ 381      447,382    $ (9,042 $ 96,049    $ 36,379    $ 123,767   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

6


Table of Contents

HFF, Inc.

Consolidated Statements of Cash Flows

(Dollars In Thousands)

(Unaudited)

 

     Three Months Ended March 31,  
     2015      2014  

Operating activities

     

Net income

   $ 9,409       $ 3,707   

Adjustments to reconcile net income to net cash used in operating activities:

     

Stock based compensation

     2,250         4,745   

Excess tax benefits from share-based award activities

     (296      (955

Deferred taxes

     6,890         3,415   

Increase (decrease) in payable under the tax receivable agreement

     (1,091      (501

Depreciation and amortization:

     

Property and equipment

     564         489   

Intangibles

     1,555         1,564   

Gain on sale or disposition of assets, net

     (3,541      (1,134

Mortgage service rights assumed

     (134      (854

Proceeds from sale of mortgage servicing rights

     555         399   

Increase (decrease) in cash from changes in:

     

Accounts receivable

     (2,062      (1,579

Receivable from affiliates

     —           (1

Mortgage notes receivable

     (419,118      16,662   

Net borrowings on warehouse line of credit

     419,118         (16,662

Prepaid taxes, prepaid expenses and other current assets

     (2,092      (3,358

Other noncurrent assets

     44         82   

Accrued compensation and related taxes

     (19,435      (18,714

Accounts payable

     (637      (323

Other accrued liabilities

     (11,245      (9,373

Other long-term liabilities

     261         (77
  

 

 

    

 

 

 

Net cash used in operating activities

  (19,005   (22,468

Investing activities

Purchases of property and equipment

  (671   (418
  

 

 

    

 

 

 

Net cash used in investing activities

  (671   (418

Financing activities

Payments on long-term debt

  (92   (73

Proceeds from stock options exercised

  109      —     

Excess tax benefits from share-based award activities

  296      955   

Dividends paid

  (67,821   (68,166

Treasury stock

  (2,376   (6,282
  

 

 

    

 

 

 

Net cash used in financing activities

  (69,884   (73,566
  

 

 

    

 

 

 

Net decrease in cash

  (89,560   (96,452

Cash and cash equivalents, beginning of period

  232,053      201,262   
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

$ 142,493    $ 104,810   
  

 

 

    

 

 

 

See accompanying notes to the consolidated financial statements.

 

7


Table of Contents

HFF, Inc.

Notes to Consolidated Financial Statements

1. Organization and Basis of Presentation

Organization

HFF, Inc., a Delaware corporation (the “Company”), through its Operating Partnerships, Holliday Fenoglio Fowler, L.P., a Texas limited partnership (“HFF LP”), and HFF Securities L.P., a Delaware limited partnership and registered broker-dealer (“HFF Securities” and together with HFF LP, the “Operating Partnerships”), is a commercial real estate financial intermediary providing commercial real estate and capital markets services including debt placement, investment sales, equity placements, investment banking and advisory services, loan sales and loan sale advisory services, commercial loan servicing, and capital markets advice and maintains 22 offices in the United States.

Initial Public Offering and Reorganization

The Company was formed in November 2006 in connection with a proposed initial public offering of its Class A common stock. On November 9, 2006, the Company filed a registration statement on Form S-1 with the United States Securities and Exchange Commission (the “SEC”) relating to a proposed underwritten initial public offering of 14,300,000 shares of Class A common stock of the Company (the “Offering”). On January 30, 2007, the SEC declared the registration statement on Form S-1 effective and the Company priced 14,300,000 shares for the initial public offering at a price of $18.00 per share. On January 31, 2007, the Company’s common stock began trading on the New York Stock Exchange under the symbol “HF.”

The proceeds of the Offering were used to purchase from HFF Holdings LLC, a Delaware limited liability company (“HFF Holdings”), all of the shares of Holliday GP Corp. (“Holiday GP”) and partnership units representing approximately 38.9% of each of the Operating Partnerships (including partnership units in the Operating Partnerships held by Holliday GP).

On February 21, 2007, the underwriters exercised their option to purchase an additional 2,145,000 shares of Class A common stock (15% of original issuance) at $18.00 per share. These proceeds were used to purchase HFF Holdings partnership units representing approximately 5.8% of each of the Operating Partnerships. The Company did not retain any of the proceeds from the Offering.

In addition to cash received for its sale of all of the shares of Holliday GP and approximately 44.7% of partnership units of each of the Operating Partnerships (including partnership units in the Operating Partnerships held by Holliday GP), HFF Holdings also received, through the issuance of one share of the Company’s Class B common stock to HFF Holdings, an exchange right that permitted HFF Holdings to exchange interests in the Operating Partnerships for shares of (i) the Company’s Class A common stock (the “Exchange Right”) and (ii) rights under a tax receivable agreement between the Company and HFF Holdings. Since all of the partnership units had been exchanged as of August 31, 2012, the Class B common stock was transferred to the Company and retired on August 31, 2012 in accordance with the Company’s certificate of incorporation. See Note 12 for further discussion of the tax receivable agreement.

As a result of the reorganization, the Company became a holding company through a series of transactions pursuant to a sale and purchase agreement. Pursuant to the Offering and reorganization, the Company’s sole assets are, through its wholly-owned subsidiary HFF Partnership Holdings, LLC, a Delaware limited liability company (“HoldCo LLC”), partnership interests of HFF LP and HFF Securities and all of the shares of Holliday GP. The transactions that occurred in connection with the initial public offering and reorganization are referred to as the “Reorganization Transactions.”

Basis of Presentation

The accompanying consolidated financial statements of the Company as of March 31, 2015 and December 31, 2014 and for the three month periods ended March 31, 2015 and March 31, 2014, include the accounts of HFF LP, HFF Securities, and the Company’s wholly-owned subsidiaries, Holliday GP and HoldCo LLC. All significant intercompany accounts and transactions have been eliminated.

The purchase of shares of Holliday GP and partnership units in each of the Operating Partnerships are treated as a reorganization under common control for financial reporting purposes. HFF Holdings owned 100% of Holliday GP, HFF LP Acquisition, LLC, a Delaware limited liability company (“Holdings Sub”), and the Operating Partnerships prior to the Reorganization Transactions. The initial purchase of shares of Holliday GP and the initial purchase of units in the Operating Partnerships were accounted for at historical cost, with no change in basis for financial reporting purposes. Accordingly, the net assets of HFF Holdings purchased by the Company are reported in the consolidated financial statements of the Company at HFF Holdings’ historical cost.

 

8


Table of Contents

As the sole stockholder of Holliday GP (the sole general partner of the Operating Partnerships), the Company now operates and controls all of the business and affairs of the Operating Partnerships. The Company consolidates the financial results of the Operating Partnerships.

Pending Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued changes to revenue recognition with customers. This update provides a five-step analysis of transactions to determine when and how revenue is recognized. An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition guidance will be effective for HFF, Inc. beginning January 1, 2017. However, the FASB, on April 1, 2015, voted to propose to defer the effective date by one year and that proposal is planned to be subject to a 30-day comment period. If the proposal is approved, early adoption would be permitted as of the original effective date. As proposed the guidance permits two implementation approaches: one, requiring retrospective application with restatement for each period presented or; two, as a cumulative-effect adjustment with disclosure of changes as compared with prior standards for each period presented. We are currently evaluating the methods of adoption as well as the impact that it may have, if any, on our consolidated financial statements. The new revenue guidance will supersede existing revenue guidance affecting our Company, and may also affect our business processes and our information technology systems. As a result, our evaluation of the effect of the new revenue guidance will extend over future periods.

2. Summary of Significant Accounting Policies

These interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Accordingly, significant accounting policies and disclosures normally provided have been omitted as such items are disclosed therein. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair presentation of the results for the interim periods presented have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. These estimates are based on information available as of the date of the unaudited consolidated financial statements. Therefore, actual results could differ from those estimates. Furthermore, operating results for the three months ended March 31, 2015 are not necessarily indicative of the results expected for the year ending December 31, 2015.

The Company has a firm profit participation plan, office profit participation plans and effective January 1, 2015, an executive bonus plan (the “Plans”) that allow for incentive payments to be made, based on achieving various performance metrics, either in the form of cash or stock at the election of the Company’s board of directors. The expense associated with the Plans is included within personnel expenses in the consolidated statements of income. The expense recorded for these Plans is estimated during the year based on actual results at each interim reporting date and an estimate of future results for the remainder of the year. The Plans allow for payments to be made in both cash and share-based awards, the composition of which is determined in the first calendar quarter of the subsequent year. Effective January 1, 2015, cash and share-based awards issued under these Plans are subject to vesting conditions over the subsequent three years beginning on the first anniversary of each grant, such that the total expense measured for these Plans is recorded over the period from the beginning of the performance year through the vesting date. Based on an accounting policy election, the expense associated with the estimated share-based component of the estimated incentive payout is recognized before the grant date of the share-based awards due to the fact that the terms of the Plans have been approved by the Company’s board of directors and the employees of the Company understand the requirements to earn the award. Prior to the grant date, the share-based component expense is recorded as incentive compensation expense within personnel expenses in the Company’s consolidated statements of income. Following the award, if any, of the related incentive payout, the share-based component expense is reclassified as stock compensation costs within personnel expenses and the share-based component of the accrued incentive compensation is reclassified as additional paid-in-capital upon the granting of the awards on the Company’s consolidated balance sheets.

3. Stock Compensation

The stock compensation cost that has been charged against income for the three months ended March 31, 2015 and 2014 was $2.3 million and $4.7 million, respectively, which is recorded in personnel expenses in the consolidated statements of income. At March 31, 2015, there was approximately $27.2 million of unrecognized compensation cost related to non-vested restricted stock units with a weighted average remaining contractual term of 3.7 years. As of March 31, 2015, there were 1,183,873 restricted stock units outstanding. Stock compensation expense related to the liability awards, which final vesting was on March 1, 2014, that had been included within income for the three months ended March 31, 2015 and 2014, was $0.0 million and $3.3 million, respectively.

 

9


Table of Contents

During the three months ended March 31, 2015, no options were granted, vested, or forfeited. During the three months ended March 31, 2015, 9,034 options were exercised and converted to Class A common stock.

During the three month period ending March 31, 2015, 510,980 new restricted stock units were granted, 221,383 restricted stock units vested of which 214,374 were converted to Class A common stock and no restricted stock units were forfeited. Of the 510,980 new restricted stock units granted during the three month period ending March 31, 2015, $5.0 million of costs associated with 211,597 of these restricted stock units were recognized in income during 2014 pursuant to the Company’s accounting policy election regarding the firm and office profit participation plans as further discussed in Note 2. Additionally, $5.0 million of the share-based component of the accrued incentive compensation that was paid in the form of restricted shares was reclassified to additional paid-in-capital on the Company’s consolidated balance sheets. During the three month period ending March 31, 2014, there were 983,809 restricted stock units granted for which $3.8 million of costs were recognized in income during 2013 pursuant to the Company’s accounting policy election regarding the firm and office profit participation plans. Additionally, $3.8 million of the share-based component of the accrued incentive compensation that was paid in the form of restricted shares was reclassified to additional paid-in-capital on the Company’s consolidated balance sheets.

The fair value of vested restricted stock units was $5.9 million at March 31, 2015.

4. Property and Equipment

Property and equipment consist of the following (dollars in thousands):

 

     March 31,
2015
    December 31,
2014
 

Furniture and equipment

   $ 6,640      $ 8,035   

Computer equipment

     1,425        1,072   

Capitalized software costs

     515        497   

Leasehold improvements

     10,738        9,523   
  

 

 

   

 

 

 

Subtotal

  19,318      19,127   

Less accumulated depreciation and amortization

  (8,970   (8,954
  

 

 

   

 

 

 
$ 10,348    $ 10,173   
  

 

 

   

 

 

 

At each of March 31, 2015 and December 31, 2014, the Company has recorded, within furniture and equipment, office equipment under capital leases of $1.4 million, including accumulated amortization of $0.7 million and $0.6 million, respectively, which is included within depreciation and amortization expense in the accompanying consolidated statements of income. See Note 7 for discussion of the related capital lease obligations.

5. Intangible Assets

The Company’s intangible assets are summarized as follows (dollars in thousands):

 

     March 31, 2015      December 31, 2014  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Book
Value
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Book
Value
 

Amortizable intangible assets:

               

Mortgage servicing rights

   $ 42,601       $ (20,488   $ 22,113       $ 41,041       $ (20,494   $ 20,547   

Unamortizable intangible assets:

               

FINRA license

     100         —          100         100         —          100   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets

$ 42,701    $ (20,488 $ 22,213    $ 41,141    $ (20,494 $ 20,647   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

As of March 31, 2015 and December 31, 2014, the Company serviced $41.4 billion and $39.3 billion, respectively, of commercial loans. The Company earned $4.5 million and $4.0 million in servicing fees and interest on float and escrow balances for the three month periods ending March 31, 2015 and 2014, respectively. These revenues are recorded as capital markets services revenues in the consolidated statements of income.

 

10


Table of Contents

The total commercial loan servicing portfolio includes loans for which there are no corresponding mortgage servicing rights recorded on the balance sheet, as these servicing rights were assumed prior to the Company’s adoption of ASC 860, Transfers and Servicing (ASC 860) on January 1, 2007 and involved no initial consideration paid by the Company. The Company recorded mortgage servicing rights of $22.1 million and $20.5 million on $36.8 billion and $34.5 billion, respectively, of the total loans serviced as of March 31, 2015 and December 31, 2014.

The Company stratifies its servicing portfolio based on the type of loan, including life company loans, commercial mortgage backed securities (CMBS), Freddie Mac and limited-service life company loans.

Changes in the carrying value of mortgage servicing rights for the three month periods ended March 31, 2015 and 2014, and the fair value at the end of each period were as follows (dollars in thousands):

 

Category

   12/31/14      Capitalized      Amortized     Sold /
Transferred
    3/31/15  

Freddie Mac

   $ 5,199       $ 2,470       $ (350   $ (868   $ 6,451   

CMBS

     13,021         298         (801     677        13,195   

Life company

     1,913         519         (337     —          2,095   

Life company – limited

     414         25         (67     —          372   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

$ 20,547    $ 3,312    $ (1,555 $ (191 $ 22,113   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

Category

   12/31/13      Capitalized      Amortized     Sold /
Transferred
    3/31/14  

Freddie Mac

   $ 3,730       $ 823       $ (588   $ (408   $ 3,557   

CMBS

     10,978         241         (627     304        10,896   

Life company

     1,537         604         (287     —          1,854   

Life company – limited

     431         25         (62     —          394   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

$ 16,676    $ 1,693    $ (1,564 $ (104 $ 16,701   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Amounts capitalized represent mortgage servicing rights retained upon the sale of originated loans to Freddie Mac and mortgage servicing rights acquired without the exchange of initial consideration. The Company recorded mortgage servicing rights retained upon the sale of originated loans to Freddie Mac of $2.5 million and $0.8 million on $1.1 billion and $307.4 million of loans, respectively, during the three month periods ending March 31, 2015 and 2014, respectively. The Company recorded mortgage servicing rights acquired without the exchange of initial consideration on the CMBS and Life company tranches of $0.8 million and $0.9 million on $2.0 billion and $2.1 billion of loans, respectively, during the three month periods ending March 31, 2015 and 2014, respectively. During the three months ending March 31, 2015 and 2014, the Company sold the cashiering portion of certain Freddie Mac mortgage servicing rights. While the Company transferred the risks and rewards of ownership of the cashiering portion of the mortgage servicing rights, the Company continues to perform limited servicing activities on these securitized loans. Therefore, the remaining servicing rights were transferred to the CMBS servicing tranche. The net result of these transactions was the Company recording a gain in the three months ending March 31, 2015 and 2014 of $0.4 million and $0.3 million, respectively, within interest and other income, net in the consolidated statements of income. The Company also received securitization compensation in relation to the sale of the cashiering portion of certain Freddie Mac mortgage servicing rights in the three months ending March 31, 2015 and 2014 of $0.7 million and $0.3 million, respectively. The securitization compensation is recorded within interest and other income, net in the consolidated statements of income.

Amortization expense related to intangible assets was $1.6 million during each of the three month periods ended March 31, 2015 and 2014 and is recorded in depreciation and amortization in the consolidated statements of income.

Estimated amortization expense for the next five years is as follows (dollars in thousands):

 

Remainder of 2015

$ 4,097   

2016

  4,716   

2017

  3,644   

2018

          2,669   

2019

  2,089   

2020

  1,662   

The weighted-average life of the mortgage servicing rights intangible asset was 6.4 years at March 31, 2015.

 

11


Table of Contents

6. Fair Value Measurement

ASC Topic 820, Fair Value Measurement (ASC 820) establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into the following three levels: Level 1 inputs which are quoted market prices in active markets for identical assets or liabilities; Level 2 inputs which are observable market-based inputs or unobservable inputs corroborated by market data for the asset or liability; and Level 3 inputs which are unobservable inputs based on our own assumptions that are not corroborated by market data. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

As of March 31, 2015, the Company did not have any financial assets or liabilities recognized at fair value on a recurring basis.

In accordance with generally accepted accounting principles, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. These assets may include mortgage servicing rights and mortgage notes receivable. The mortgage servicing rights are recorded at fair value upon initial recording and were not re-measured at fair value during the first quarter of 2015 because the Company continues to utilize the amortization method under ASC 860 and the fair value of the mortgage servicing rights exceeds the carrying value at March 31, 2015. The fair value of the mortgage notes receivable was based on prices observable in the market for similar loans and equaled carrying value at March 31, 2015. Therefore, no lower of cost or fair value adjustment was required.

The following table sets forth the Company’s financial assets that were accounted for at fair value on a nonrecurring basis by level within the fair value hierarchy as of March 31, 2015 (in thousands):

 

            March 31, 2015
Fair Value Measurements Using:
 
     Carrying
Value
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Nonrecurring fair value measurements

           

Mortgage notes receivable

   $ 604,246       $ —         $ 604,246       $ —     

Mortgage servicing rights

     22,113         —           —           27,942   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total nonrecurring fair value measurements

$ 626,359    $ —      $ 604,246    $ 27,942   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth the Company’s financial assets that were accounted for at fair value on a nonrecurring basis by level within the fair value hierarchy as of December 31, 2014 (in thousands):

 

            December 31, 2014
Fair Value Measurements Using:
 
     Carrying
Value
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Nonrecurring fair value measurements

           

Mortgage notes receivable

   $ 185,128       $ —         $ 185,128       $ —    

Mortgage servicing rights

     20,547         —           —          25,972   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total nonrecurring fair value measurements

$ 205,675      —      $ 185,128    $ 25,972   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

Mortgage servicing rights do not trade in an active, open market with readily-available observable prices. Since there is no ready market value for the mortgage servicing rights, such as quoted market prices or prices based on sales or purchases of similar assets, the Company determines the fair value of the mortgage servicing rights by estimating the present value of future cash flows associated with the servicing of the loans. Management makes certain assumptions and judgments in estimating the fair value of servicing rights, including the benefits of servicing (contractual servicing fees and interest on escrow and float balances), the cost of servicing, prepayment rates (including risk of default), an inflation rate, the expected life of the cash flows and the discount rate. The significant assumptions utilized to value servicing rights as of March 31, 2015 and December 31, 2014 are as follows:

 

     March 31, 2015      December 31, 2014  

Expected life of cash flows

     3 years to 9 years         3 years to 11 years   

Discount rate (1)

     14% to 20%         14% to 20%   

Prepayment rate

     0% to 8%         0% to 8%   

Inflation rate

     2%         2%   

Cost of service per loan

     $1,600 to $4,120         $1,600 to $4,189   

 

(1) Reflects the time value of money and the risk of future cash flows related to the possible cancellation of servicing contracts, transferability restrictions on certain servicing contracts, concentration in the life company portfolio and large loan risk.

The above assumptions are subject to change based on management’s judgments and estimates of future changes in the risks related to future cash flows and interest rates. Changes in these factors would cause a corresponding increase or decrease in the prepayment rates and discount rates used in the Company’s valuation model.

FASB ASC Topic 825, Financial Instruments also requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. Our financial instruments, excluding those included in the preceding fair value tables above, are as follows:

Cash and Cash Equivalents : These balances include cash and cash equivalents with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments; these are considered Level 1 fair values.

Warehouse line of credit : Due to the short-term nature and variable interest rates of this instrument, fair value approximates carrying value; these are considered Level 2 fair values.

7. Capital Lease Obligations

Capital lease obligations consist of the following at March 31, 2015 and December 31, 2014 (dollars in thousands):

 

     March 31,
2015
     December 31,
2014
 

Capital lease obligations

   $ 743       $ 766   

Less current maturities

     350         337   
  

 

 

    

 

 

 
$ 393    $ 429   
  

 

 

    

 

 

 

Capital lease obligations consist primarily of office equipment leases that expire at various dates through April 2017. A summary of future minimum lease payments under capital leases at March 31, 2015 is as follows (dollars in thousands):

 

Remainder of 2015

$ 266   

2016

  309   

2017

          166   

2018

  2   

2019

  —     
  

 

 

 
$ 743   
  

 

 

 

 

13


Table of Contents

8. Warehouse Line of Credit

HFF LP maintains two uncommitted warehouse revolving lines of credit for the purpose of funding the Freddie Mac mortgage loans that it originates in connection with its services as a Freddie Mac Multifamily Program Plus ® Seller/Servicer. The Company is party to an uncommitted $450 million financing arrangement with PNC Bank, N.A. (“PNC”) and an uncommitted $125 million financing arrangement with The Huntington Bank (“Huntington”). In January 2015, PNC agreed to provide a $500 million bulge facility for a period of 15 days, which was utilized in April 2015. Effective March 2015, PNC then increased the financing arrangement by $100 million to a total of $450 million. Additionally, in January 2015, HFF LP entered into an agreement with Huntington to increase the uncommitted financing arrangement by $100 million for a period to extend no later than May 1, 2015, at which time the arrangement reverted back to $125 million.

Each funding is separately approved on a transaction-by-transaction basis and is collateralized by a loan and mortgage on a multifamily property that is ultimately purchased by Freddie Mac. The PNC and Huntington financing arrangements are only for the purpose of supporting the Company’s participation in Freddie Mac’s Program Plus Seller/Servicer program and cannot be used for any other purpose. As of March 31, 2015 and December 31, 2014, HFF LP had $604.2 million and $185.1 million, respectively, outstanding on the warehouse lines of credit and a corresponding amount of mortgage notes receivable. Interest on the warehouse lines of credit is at the 30-day LIBOR rate (0.18% and 0.15% at March 31, 2015 and December 31, 2014, respectively) plus a spread. HFF LP is also paid interest on its loan secured by a multifamily loan at the rate in the Freddie Mac note.

9. Lease Commitments

The Company leases various corporate offices (which leases sometime include parking spaces) and office equipment under noncancelable operating leases. These leases have initial terms of three to eleven years. Several of the leases have termination clauses whereby the term may be reduced by two to seven years upon prior notice and payment of a termination fee by the Company. Total rental expense charged to operations was $2.3 million and $1.9 million during the three month periods ended March 31, 2015 and 2014, respectively, and is recorded within occupancy expense in the consolidated statements of income.

Future minimum rental payments for the next five years under operating leases with noncancelable terms in excess of one year and without regard to early termination provisions are as follows (dollars in thousands):

 

Remainder of 2015

$ 5,660   

2016

  6,462   

2017

  6,325   

2018

  5,914   

2019

  5,241   

2020

  4,610   

Thereafter

      5,450   
  

 

 

 
$ 39,662   
  

 

 

 

The Company subleases certain office space to subtenants, which subleases may be canceled at any time. The rental income received from these subleases is included as a reduction of occupancy expenses in the accompanying consolidated statements of income.

The Company also leases certain office equipment under capital leases that expire at various dates through 2018. See Note 4 and Note 7 above for further description of the assets and related obligations recorded under these capital leases at March 31, 2015 and December 31, 2014, respectively.

10. Servicing

The Company services commercial real estate loans for lenders. The unpaid principal balance of the servicing portfolio totaled $41.4 billion and $39.3 billion at March 31, 2015 and December 31, 2014, respectively.

In connection with its servicing activities, the Company holds funds in escrow for the benefit of mortgagors for hazard insurance, real estate taxes and other financing arrangements. At March 31, 2015 and December 31, 2014, the funds held in escrow totaled $147.7 million and $240.3 million, respectively. These funds, and the offsetting liabilities of the borrowers to external parties, are not presented in the Company’s consolidated financial statements as they do not represent the assets and liabilities of the Company. Pursuant to the requirements of the various investors for which the Company services loans, the Company maintains bank accounts, holding escrow funds, which have balances in excess of the FDIC insurance limit. The fees earned on these escrow funds are reported in capital markets services revenue in the consolidated statements of income.

 

14


Table of Contents

11. Legal Proceedings

The Company is party to various litigation matters, in most cases involving ordinary course and routine claims incidental to its business. The Company cannot estimate with certainty its ultimate legal and financial liability with respect to any pending matters. In accordance with ASC 450, Contingencies, a reserve for estimated losses is recorded when the amount is probable and can be reasonably estimated. However, the Company does not believe, based on examination of such pending matters, that a material loss related to these matters is reasonably possible.

12. Income Taxes

Income tax expense includes current and deferred taxes as follows (dollars in thousands):

 

     Current      Deferred      Total  

Three Months Ended March 31, 2015:

        

Federal

   $ 979       $ 5,054       $ 6,033   

State

     579         1,836         2,415   
  

 

 

    

 

 

    

 

 

 
$ 1,558    $ 6,890    $ 8,448   
  

 

 

    

 

 

    

 

 

 

 

     Current      Deferred      Total  

Three Months Ended March 31, 2014:

        

Federal

   $ —         $ 2,544       $ 2,544   

State

     100         871         971   
  

 

 

    

 

 

    

 

 

 
$ 100    $ 3,415    $ 3,515   
  

 

 

    

 

 

    

 

 

 

The reconciliation between the income tax computed by applying the U.S. federal statutory rate and the effective tax rate on net income is as follows for the three months ended March 31, 2015 and 2014 (dollars in thousands):

 

     March 31,  
     2015     2014  

Income tax expense / (benefit)

         Rate           Rate  

Taxes computed at federal rate

   $ 6,250        35.0   $ 2,528        35.0

State and local taxes, net of federal tax benefit

     790        4.4     336        4.7

Effect of deferred tax rate change

     1,284        7.2     590        8.2

Change in income tax benefit payable to stockholder

     (57     (0.3 )%      (15     (0.2 )% 

Compensation limitation

     —          0.0     7        0.1

Meals and entertainment

     180        1.0     72        1.0

Other

     1        0.0     (3     (0.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

$ 8,448      47.3 $ 3,515      48.7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

Deferred income tax assets and liabilities consist of the following at March 31, 2015 and December 31, 2014 (dollars in thousands):

 

     March 31,
2015
    December 31,
2014
 

Deferred income tax assets:

    

Section 754 election tax basis step-up

   $ 141,004      $ 145,151   

Tenant improvements

     2,884        2,800   

Net operating loss carryforward

     22        36   

Restricted stock units

     3,907        3,762   

Compensation

     2,716        5,054   

Intangible asset

     460        470   

Other

     446        398   
  

 

 

   

 

 

 

Deferred income tax asset

  151,439      157,671   

Deferred income tax liabilities:

Goodwill

  (1,277   (1,276

Servicing rights

  (8,423   (7,815

Deferred rent

  (1,994   (1,944

Investment in partnership

  (585   (586
  

 

 

   

 

 

 

Deferred income tax liability

  (12,279   (11,621
  

 

 

   

 

 

 

Net deferred income tax asset

$ 139,160    $ 146,050   
  

 

 

   

 

 

 

The primary deferred tax asset represents a tax basis step-up election under Section 754 of the Internal Revenue Code (“Section 754”) made by the Company relating to the initial purchase of units of the Operating Partnerships in connection with the Reorganization Transactions and a tax basis step-up on subsequent exchanges of Operating Partnership units for shares of the Company’s Class A common stock since the date of the Reorganization Transactions. As a result of the step-up in basis from these transactions, the Company is entitled to annual future tax benefits in the form of amortization for income tax purposes. The annual pre-tax benefit on the Section 754 step-up and past payments under the tax receivable agreement was approximately $32.6 million at March 31, 2015. To the extent that the Company does not have sufficient taxable income in a year to fully utilize this annual deduction, the unused benefit is recharacterized as a net operating loss and can then be carried back two years or carried forward for twenty years. The Company measured the deferred tax asset based on the estimated income tax effects of the increase in the tax basis of the assets owned by the Operating Partnerships utilizing the enacted tax rates at the date of the transaction. All subsequent changes in the measurement of the deferred tax assets due to changes in the enacted tax rates or changes in the valuation allowance, if any, are recorded as a component of income tax expense.

In evaluating the realizability of the deferred tax assets, management makes estimates and judgments regarding the level and timing of future taxable income, including projecting future revenue growth and changes to the cost structure. In order to realize the anticipated 2015 pre-tax benefit of approximately $32.6 million, the Company needs to generate approximately $287 million in revenue during 2015, assuming a constant cost structure. In the event that the Company cannot realize the anticipated 2015 pre-tax benefit of $32.6 million, the shortfall becomes a net operating loss that can be carried back two years to offset prior years’ taxable income or carried forward twenty years to offset future taxable income. Based on this analysis and other quantitative and qualitative factors, management believes that it is currently more likely than not that the Company will be able to generate sufficient taxable income to realize the net deferred tax assets resulting from the basis step up transactions (initial sale of units in the Operating Partnerships and subsequent exchanges of Operating Partnership units since the date of the Reorganization Transactions). The Company has no federal net operating losses at March 31, 2015. The state tax effected net operating loss carryforwards of $22,000 at March 31, 2015 represent the cumulative excess of the Section 754 annual tax deductions over taxable income for 2015 and prior years. The state net operating loss carryforwards expire in 2028.

The Company will recognize interest and penalties related to unrecognized tax benefits in interest and other income, net in the consolidated statements of income. There were no interest or penalties recorded in the three month periods ending March 31, 2015 and 2014.

 

16


Table of Contents

Tax Receivable Agreement

In connection with the Reorganization Transactions, HFF LP and HFF Securities made an election under Section 754 for 2007 and kept that election in effect for each taxable year in which an exchange of Operating Partnership partnership units for shares of the Company’s Class A common stock occurred. The initial sale as a result of the Offering and subsequent exchanges of Operating Partnership units for shares of Class A common stock produced increases in the tax basis of the assets owned by HFF LP and HFF Securities to their fair market value. This increase in tax basis allows the Company to reduce the amount of tax payments to the extent that the Company has taxable income. As a result of the increase in tax basis, the Company is entitled to future tax benefits of $141.0 million and has recorded this amount as a deferred tax asset on its consolidated balance sheet. The Company has updated its estimate of these future tax benefits based on the changes to the estimated annual effective tax rate for 2014. The Company is obligated, however, pursuant to its tax receivable agreement with HFF Holdings, to pay to HFF Holdings 85% of the amount of cash savings in U.S. federal, state and local income tax that the Company actually realizes as a result of these increases in tax basis and as a result of certain other tax benefits arising from the Company entering into the tax receivable agreement and making payments under that agreement. For purposes of the tax receivable agreement, actual cash savings in income tax is computed by comparing the Company’s actual income tax liability to the amount of such taxes that it would have been required to pay had there been no increase to the tax basis of the assets of HFF LP and HFF Securities as a result of the initial sale and later exchanges had the Company not entered into the tax receivable agreement.

The Company accounts for the income tax effects and corresponding tax receivable agreement effects as a result of the initial purchase and the sale of units of the Operating Partnerships in connection with the Reorganization Transactions and subsequent exchanges of Operating Partnership units for the Company’s Class A shares, by recognizing a deferred tax asset for the estimated income tax effects of the increase in the tax basis of the assets owned by the Operating Partnerships, based on enacted tax rates at the date of the transaction, less any tax valuation allowance the Company believes is required. In accordance with ASC 740, the tax effects of transactions with stockholders that result in changes in the tax basis of a company’s assets and liabilities will be recognized in equity. If transactions with stockholders result in the recognition of deferred tax assets from changes in the Company’s tax basis of assets and liabilities, the valuation allowance initially required upon recognition of these deferred assets will be recorded in equity. Subsequent changes in enacted tax rates or any valuation allowance are recorded as a component of income tax expense.

The Company believes it is more likely than not that it will realize the benefit represented by the deferred tax asset, and, therefore, the Company recorded 85% of this estimated amount of the increase in deferred tax assets as a liability to HFF Holdings under the tax receivable agreement and the remaining 15% of the increase in deferred tax assets directly in additional paid-in capital in stockholders’ equity at the time of each exchange of Operating Partnership partnership units for shares of the Company’s Class A common stock. As of August 31, 2012, all of the Operating Partnership partnership units have been exchanged.

While the actual amount and timing of payments under the tax receivable agreement depend upon a number of factors, including the amount and timing of taxable income generated in the future, changes in future tax rates, the value of individual assets, the portion of the Company’s payments under the tax receivable agreement constituting imputed interest and increases in the tax basis of the Company’s assets resulting in payments to HFF Holdings, the Company has estimated that the future payments that will be made to HFF Holdings will be $133.1 million, and has recorded this obligation to HFF Holdings as a liability on the consolidated balance sheet. To the extent the Company does not realize all of the tax benefits in future years, this liability to HFF Holdings may be reduced.

In conjunction with the filing of the Company’s 2013 federal and state tax returns, the benefit for 2013 relating to the Section 754 basis step-up was finalized resulting in $12.5 million of tax benefits being realized by the Company. As discussed above, the Company is obligated to remit to HFF Holdings 85% of any such cash savings in federal and state tax. As such, during the third quarter of 2014, the Company paid $10.7 million to HFF Holdings under the tax receivable agreement. In conjunction with the filing of the Company’s 2012 federal and state tax returns, the benefit for 2012 relating to the Section 754 basis step-up was finalized resulting in $12.2 million of tax benefits being realized by the Company and as such, during the third quarter of 2013, the Company paid $10.4 million to HFF Holdings under the tax receivable agreement. As of March 31, 2015, the Company has made payments to HFF Holdings pursuant to the terms of the tax receivable agreement in an aggregate amount of approximately $52.6 million and the Company anticipates to make a payment of $10.8 million to HFF Holdings in 2015.

 

17


Table of Contents

13. Stockholders Equity

The Company is authorized to issue 175,000,000 shares of Class A common stock, par value $0.01 per share. Each share of Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally. Holders of Class A common stock vote together as a single class on all matters presented to our stockholders for their vote or approval. The Company had issued 38,348,771 and 38,125,363 shares of Class A common stock as of March 31, 2015 and December 31, 2014, respectively.

On January 20, 2015, our board of directors declared a special cash dividend of $1.80 per share of Class A common stock to stockholders of record on February 2, 2015. The aggregate dividend payment was paid on February 13, 2015 and totaled approximately $67.8 million based on the number of shares of Class A common stock then outstanding. Additionally, 49,383 restricted stock units (dividend units) were granted for those unvested and vested but not issued restricted stock units as of the record date of February 2, 2015. These dividend units follow the same vesting terms as the underlying restricted stock units.

14. Earnings Per Share

The Company’s net income and weighted average shares outstanding for the three month periods ended March 31, 2015 and 2014 consist of the following (dollars in thousands):

 

     Three months ended
March 31,
 
     2015      2014  

Net income

   $ 9,409       $ 3,707   

Weighted Average Shares Outstanding:

     

Basic

     37,895,463         37,559,212   

Diluted

     38,167,778         37,595,392   

The calculations of basic and diluted net income per share amounts for the three month periods ended March 31, 2015 and 2014 are described and presented below.

Basic Net Income per Share

Numerator — net income for the three month periods ended March 31, 2015 and 2014, respectively.

Denominator — the weighted average shares of Class A common stock for the three month periods ended March 31, 2015 and 2014, including 156,238 and 137,531 restricted stock units that have vested and whose issuance is no longer contingent as of March 31, 2015 and March 31, 2014, respectively.

Diluted Net Income per Share

Numerator — net income for the three month periods ended March 31, 2015 and 2014 as in the basic net income per share calculation described above.

Denominator — the weighted average shares of Class A common stock for the three month periods ended March 31, 2015 and 2014, including 156,238 and 137,531 restricted stock units that have vested and whose issuance is no longer contingent as of March 31, 2015 and March 31, 2014, respectively, plus the dilutive effect of the unvested restricted stock units and stock options.

 

18


Table of Contents
     Three months ended March 31,  
     2015      2014  

Basic Earnings Per Share of Class A Common Stock

     

Numerator:

     

Net income

   $ 9,409       $ 3,707   

Denominator:

     

Weighted average number of shares of Class A common stock outstanding

     37,895,463         37,559,212   

Basic net income per share of Class A common stock

   $ 0.25       $ 0.10   

Diluted Earnings Per Share of Class A Common Stock

     

Numerator:

     

Net income

   $ 9,409       $ 3,707   

Denominator:

     

Basic weighted average number of shares of Class A common stock

     37,895,463         37,559,212   

Add — dilutive effect of:

     

Unvested restricted stock units

     249,462         11,219   

Stock options

     22,853         24,961   

Weighted average common shares outstanding — diluted

     38,167,778         37,595,392   

Diluted earnings per share of Class A common stock

   $ 0.25       $ 0.10   

15. Related Party Transactions

The Company made payments on behalf of two affiliates of $213 and $426, respectively, during the three month period ended March 31, 2015. The Company made payments on behalf of two affiliates of $213 and $852, respectively, during the three month period ended March 31, 2014. These payments by the Company are primarily for professional services fees and other miscellaneous operating expenses on behalf of the affiliates. The Company had a net receivable from affiliates of $2,000 and $2,000 at March 31, 2015 and December 31, 2014, respectively.

As a result of the Company’s initial public offering, the Company entered into a tax receivable agreement with HFF Holdings that provides for the payment by the Company to HFF Holdings of 85% of the amount of the cash savings in U.S. federal, state and local income tax that the Company actually realizes as a result of the increase in tax basis of the assets owned by HFF LP and HFF Securities and as a result of certain other tax benefits arising from entering into the tax receivable agreement and making payments under that agreement. As members of HFF Holdings, each of Mark Gibson, the Company’s chief executive officer, and Jody Thornton, the Company’s president, and each a member of the Company’s board of directors and a transaction professional of the Operating Partnerships, John Fowler, a current director emeritus of the Company’s board of directors and a transaction professional of the Operating Partnerships, and H. Scott Galloway, Matthew D. Lawton, Gerard T. Sansosti and Manuel A. de Zarraga, each an Executive Managing Director and a transaction professional of the Operating Partnerships, is entitled to participate in such payments, in each case on a pro rata basis based upon such person’s ownership of interests in each series of tax receivable payments created by the initial public offering or subsequent exchange of Operating Partnership units. The Company retains the remaining 15% of cash savings in income tax that it realizes. For purposes of the tax receivable agreement, cash savings in income tax is computed by comparing the Company’s actual income tax liability to the amount of such taxes that it would have been required to pay had there been no increase to the tax basis of the assets of HFF LP and HFF Securities allocable to the Company as a result of the initial sale and later exchanges and had the Company not entered into the tax receivable agreement. The term of the tax receivable agreement commenced upon consummation of the offering and will continue until all such tax benefits have been utilized or have expired. See Note 12 for further information regarding the tax receivable agreement and Note 16 for the amount recorded in relation to this agreement.

 

19


Table of Contents

16. Commitments and Contingencies

The Company is obligated, pursuant to its tax receivable agreement with HFF Holdings, to pay to HFF Holdings 85% of the amount of cash savings in U.S. federal, state and local income tax that the Company actually realizes as a result of the increases in tax basis under Section 754 and as a result of certain other tax benefits arising from the Company entering into the tax receivable agreement and making payments under that agreement. The Company has recorded $133.1 million and $134.2 million for this obligation to HFF Holdings as a liability on the consolidated balance sheet as of March 31, 2015 and December 31, 2014.

In recent years, the Company has entered into arrangements with newly-hired transaction professionals whereby these transaction professionals would be paid additional compensation if certain performance targets are met over a defined period. These payments will be made to the transaction professionals only if they enter into an employment agreement at the end of the performance period. Payments under these arrangements, if earned, would be paid in fiscal years 2016 through 2018. Currently, the Company cannot reasonably estimate the amounts that would be payable under all of these arrangements. The Company begins to accrue for these payments when it is deemed probable that payments will be made; therefore, on a quarterly basis, the Company evaluates the probability of each of the transaction professionals achieving the performance targets and the probability of each of the transaction professionals signing an employment agreement. As of March 31, 2015 and December 31, 2014, $4.1 million and $3.3 million, respectively, have been accrued for these arrangements on the consolidated balance sheet.

 

20


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion summarizes the financial position of the Company and its subsidiaries as of March 31, 2015, and the results of our operations for the three month period ended March 31, 2015, and should be read in conjunction with (i) the unaudited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) the consolidated financial statements and accompanying notes to our Annual Report on Form 10-K for the year ended December 31, 2014.

Overview

Our Business

We are, based on transaction volume, one of the largest full-service commercial real estate financial intermediaries in the U.S. providing commercial real estate and capital markets services to both the consumers and providers of capital to the U.S. commercial real estate industry. We operate out of 22 offices nationwide with 732 associates including 286 transaction professionals as of March 31, 2015.

Substantially all of our revenues are in the form of capital markets services fees collected from our clients, usually negotiated on a transaction-by-transaction basis. We also earn fees from commercial loan servicing activities. We believe that our multiple product offerings and platform services, diverse client mix, expertise in a wide range of property types and national platform create a diversified revenue stream within the U.S. commercial real estate sector.

We operate in one reportable segment, the commercial real estate financial intermediary segment, and offer debt placement, investment sales, equity placements, investment banking and advisory services, loan sales and loan sale advisory services, commercial loan servicing and capital markets advice.

Our business may be significantly affected by factors outside of our control, particularly including:

 

    Economic and commercial real estate market downturns. Our business is dependent on international and domestic economic conditions and the demand for commercial real estate and related services in the markets in which we operate. A slow-down, a significant downturn and/or recession in either the global economy and/or the domestic economy, including but not limited to even a regional economic downturn, could adversely affect our business. A general decline in acquisition and disposition activity, as well as a general decline in commercial real estate investment activity, can lead to a reduction in fees and commissions for arranging such transactions, as well as in fees and commissions for arranging financing for acquirers and property owners that are seeking to recapitalize their existing properties. Such a general decline can also lead to a significant reduction in our loan servicing activities, due to increased delinquencies and defaults and lack of additional loans that we would have otherwise added to our loan servicing portfolio.

 

    Global and domestic credit and liquidity issues. Global and domestic credit and liquidity issues have in the recent past led to an economic downturn, including a commercial real estate market downturn. This downturn in turn led to a decrease in transaction activity and lower values. Restrictions on the availability of capital, both debt and/or equity, created significant reductions, and could in the future cause, further reductions of the liquidity in and the flow of capital to the commercial real estate markets. These restrictions also caused, and could in the future cause, commercial real estate prices to decrease due to the reduced amount of equity capital and debt financing available which can lead to a reduction in our revenues.

 

    Decreased investment allocation to commercial real estate class. Allocations to commercial real estate as an asset class for investment portfolio diversification may decrease for a number of reasons beyond our control, including but not limited to poor performance of the asset class relative to other asset classes or the superior performance of other asset classes when compared with the performance of the commercial real estate asset class. In addition, while commercial real estate is now viewed as an accepted and valid class for portfolio diversification, if this perception changes, there could be a significant reduction in the amount of debt and equity capital available in the commercial real estate sector.

 

21


Table of Contents
    Fluctuations in interest rates. Significant fluctuations in interest rates as well as steady and protracted movements of interest rates in one direction (increases or decreases) could adversely affect the operation and income of commercial real estate properties as well as the demand from investors for commercial real estate investments. Both of these events could adversely affect investor demand and the supply of capital for debt and equity investments in commercial real estate. In particular, increased interest rates may cause prices to decrease due to the increased costs of obtaining financing and could lead to decreases in purchase and sale activities, thereby reducing the amounts of investment sales and loan originations and related servicing fees. If our debt placement and investment sales origination and servicing businesses are negatively impacted, it is likely that our other lines of business would also suffer due to the relationship among our various capital markets services.

The factors discussed above have adversely affected and continue to be a risk to our business, as evidenced by the effects of the significant recent disruptions in the global capital and credit markets, and in particular the domestic capital markets. While conditions in 2011 through year to date 2015 have generally improved, the global and domestic credit and liquidity issues, coupled with the global and domestic economic recession/slow down as well as other global and domestic macro events beyond our control, could reduce in the future the number of acquisitions, dispositions and loan originations, as well as the respective number of transactions and transaction volumes. This has had, and may have in the future, a significant adverse effect on our capital markets services revenues (including but not limited to our servicing revenues). The significant balance sheet issues of many of the CMBS lenders, banks, life insurance companies, mortgage REITS and debt funds, captive finance companies and other financial institutions have adversely affected, and could again in the future adversely affect the global and domestic economies and the flow of commercial mortgage debt to the U.S. capital markets, and, in turn, could potentially adversely affect all of our capital markets services platforms and resulting revenues.

Other factors that may adversely affect our business are discussed under the heading “Forward-Looking Statements” and under the caption “Risk Factors” in this Quarterly Report on Form 10-Q.

 

22


Table of Contents

Results of Operations

Following is a discussion of our results of operations for the three months ended March 31, 2015 and March 31, 2014. The table included in the period comparisons below provides summaries of our results of operations. The period-to-period comparisons of financial results are not necessarily indicative of future results. For a description of the key financial measures and indicators included in our consolidated financial statements, refer to the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Financial Measures and Indicators” in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

     For the Three Months Ended March 31,     Total
Dollar
Change
    Total
Percentage
Change
 
     2015     2014      
     Dollars     % of
Revenue
    Dollars     % of
Revenue
     
     (dollars in thousands, unless percentages)  

Revenues

            

Capital markets services revenue

   $ 91,257        96.8   $ 75,141        98.8   $ 16,116        21.4

Interest on mortgage notes receivable

     2,489        2.6     425        0.6     2,064        485.6

Other

     525        0.6     465        0.6     60        12.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  94,271      100.0   76,031      100.0   18,240      24.0

Operating expenses

Cost of services

  56,379      59.8   46,074      60.6   10,305      22.4

Personnel

  11,518      12.2   13,941      18.3   (2,423   (17.4 )% 

Occupancy

  2,784      3.0   2,351      3.1   433      18.4

Travel and entertainment

  3,659      3.9   2,996      3.9   663      22.1

Supplies, research and printing

  1,790      1.9   1,398      1.8   392      28.0

Other

  6,905      7.3   5,453      7.2   1,452      26.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  83,035      88.1   72,213      95.0   10,822      15.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  11,236      11.9   3,818      5.0   7,418      194.3

Interest and other income, net

  5,541      5.9   2,910      3.8   2,631      90.4

Interest expense

  (11   (0.0 )%    (7   (0.0 )%    (4   57.1

(Increase) decrease in payable under tax receivable agreement

  1,091      1.2   501      0.7   590      117.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

  17,857      18.9   7,222      9.5   10,635      147.3

Income tax expense

  8,448      9.0   3,515      4.6   4,933      140.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

$ 9,409      10.0 $ 3,707      4.9 $ 5,702      153.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (1)

$ 17,834      18.9 $ 11,834      15.6 $ 6,000      50.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The Company defines Adjusted EBITDA as net income before (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, (iv) stock-based compensation expense, which is a non-cash charge, (v) income recognized on the initial recording of mortgage servicing rights that are acquired with no initial consideration, which is also a non-cash income amount that can fluctuate significantly based on the level of mortgage servicing right volumes, and (vi) the increase (decrease) in payable under the tax receivable agreement, which represents changes in a liability recorded on the Company’s consolidated balance sheet determined by the ongoing remeasurement of related deferred tax assets and, therefore, can be income or expense in the Company’s consolidated statement of income in any individual period. The Company uses Adjusted 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 Adjusted EBITDA as a supplemental measure to evaluate its overall operating performance. However, Adjusted EBITDA has material limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of the Company’s results as reported under U.S. generally acceptable accounting principles (“GAAP”). The Company finds Adjusted EBITDA as a useful tool to assist in evaluating performance because it eliminates items related to capital structure and taxes, including the Company’s tax receivable agreement. 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 Adjusted EBITDA. Some of the items that the Company has eliminated from net income in determining Adjusted EBITDA are significant to the Company’s business. For example, (i) interest expense is a necessary element of the Company’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 Company’s costs, and (iii) depreciation and amortization are necessary elements of the Company’s costs.

 

23


Table of Contents

Any measure that eliminates components of the Company’s capital structure and costs associated with the Company’s operations has material limitations as a performance measure. In light of the foregoing limitations, the Company does not rely solely on Adjusted EBITDA as a performance measure and also considers its GAAP results. Adjusted EBITDA is not a measurement of the Company’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 Adjusted 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 a reconciliation of consolidated net income to Adjusted EBITDA for the Company for the three months ended March 31, 2015 and 2014:

Adjusted EBITDA for the Company is calculated as follows:

(dollars in thousands)

 

     For the Three Months Ended
March 31,
 
     2015     2014  

Net income

   $ 9,409      $ 3,707   

Add:

    

Interest expense

     11        7   

Income tax expense

     8,448        3,515   

Depreciation and amortization

     2,119        2,053   

Stock-based compensation (a)

     2,250        4,745   

Initial recording of mortgage servicing rights

     (3,312     (1,692

Increase (decrease) in payable under the tax receivable agreement

     (1,091     (501
  

 

 

   

 

 

 

Adjusted EBITDA

$ 17,834    $ 11,834   
  

 

 

   

 

 

 

 

  (a) Amounts do not reflect expense associated with the stock component of estimated incentive payouts under the Company’s Plans that are anticipated to be paid in respect of the applicable year. Such expense is recorded as incentive compensation expense within personnel expenses in the Company’s consolidated statements of income during the year to which the expense relates. Following the award, if any, of the related incentive payout, the stock component expense is reclassified as stock compensation costs within personnel expenses. See Note 2 to the Company’s consolidated financial statements for further information regarding the Company’s accounting policies relating to its Plans. Stock-based compensation expense for the three months ended March 31, 2015 reflects $0.6 million expense recognized during such period that was associated with restricted stock granted in February 2015 under the Company’s firm profit participation bonus plan or office profit participation bonus plans in respect of 2014. Stock-based compensation expense for the three months ended March 31, 2014 reflects $0.5 million expense recognized during such period that was associated with restricted stock granted in March 2014 under the Company’s firm profit participation bonus plan or office profit participation bonus plans in respect of 2013. Stock-based payments under the firm profit participation bonus plan or office profit participation bonus plans were first made in 2012 in respect of 2011. See Note 3 to the Company’s consolidated financial statements for further information regarding the Company’s accounting policies relating to its stock compensation.

Revenues. Our total revenues were $94.3 million for the three months ended March 31, 2015 compared to $76.0 million for the same period in 2014, an increase of $18.2 million, or 24.0%. Revenues increased primarily due to a 33.1% increase in total production volumes as compared to the first quarter of 2014.

 

    The revenues we generated from capital markets services for the three months ended March 31, 2015 increased $16.1 million, or 21.4%, to $91.3 million from $75.1 million for the same period in 2014. The increase is primarily attributable to an increase in the total production volume during the first quarter of 2015 compared to the first quarter of 2014.

 

    The revenues derived from interest on mortgage notes receivable were $2.5 million for the three months ended March 31, 2015 compared to $0.4 million for the same period in 2014, an increase of approximately $2.1 million. Revenues increased primarily as a result of an increase in transactions in the first quarter of 2015 compared to the first quarter of 2014 in connection with our services as a Freddie Mac Multifamily Program Plus ® Seller/Servicer.

 

24


Table of Contents
    The other revenues we earned, which include expense reimbursements from clients related to out-of-pocket costs incurred and vary on a transaction-by-transaction basis, were approximately $0.5 million for each of the three month periods ended March 31, 2015 and March 31, 2014.

Total Operating Expenses. Our total operating expenses were $83.0 million for the three months ended March 31, 2015 compared to $72.2 million for the same period in 2014, an increase of $10.8 million, or 15.0%. Expenses increased primarily due to increased cost of services from an increase in capital markets services revenue and increased headcount.

 

    The cost of services for the three months ended March 31, 2015 increased $10.3 million, or 22.4%, to $56.4 million from $46.1 million for the same period in 2014. The increase is primarily the result of the increase in commissions and other incentive compensation directly related to the increase in capital markets services revenues, and increase in compensation expense directly tied to performance-based incentives earned in connection with employment agreements for recruited transaction professionals. Also contributing to the increase in cost of services are higher salary and fringe benefit costs from increased headcount. Cost of services as a percentage of capital markets services revenues was approximately 61.8% and 61.3% for the three month periods ended March 31, 2015 and March 31, 2014, respectively.

 

    Personnel expenses that are not directly attributable to providing services to our clients decreased $2.4 million, or 17.4%, to $11.5 million for the three months ended March 31, 2015 from $13.9 million for the same period in 2014. The decrease is primarily related to a decrease in equity compensation costs from the restricted stock awards accounted for as liability awards which were revalued each quarter and which fully vested on March 1, 2014. The total expense related to these liability awards was $0.0 million and $3.3 million for the three months ended March 31, 2015 and 2014, respectively. This decrease was partially offset by an increase in equity compensation costs from other restricted stock awards of $0.8 million, salaries and incentive compensation costs of $0.2 million, and an increase in profit participation costs of $0.2 million. Personnel expenses are also impacted quarterly by the adjustments made to accrue for the estimated expense associated with the Plans. The Plans allow for payments in the form of both cash and share-based awards based on the decision of the Company’s board of directors. The stock compensation cost included in personnel expenses was $2.3 million and $4.7 million for the three months ended March 31, 2015 and 2014, respectively. The decrease in stock compensation costs is primarily due to the mark-to-market adjustment on existing restricted stock awards accounted for as liability awards which resulted in $0.0 million of expense (or a $3.3 million decrease as compared to the first quarter of 2014). At March 31, 2015, there was approximately $27.2 million of unrecognized compensation cost related to share based awards. The weighted average remaining contractual term of the unvested restricted stock units is 3.7 years as of March 31, 2015. The weighted average remaining contractual term of the vested options is 4.0 years as of March 31, 2015.

 

    Occupancy, travel and entertainment and supplies, research and printing expenses for the three months ended March 31, 2015 increased $1.5 million, or 22.1%, to $8.2 million compared to the same period in 2014. These increases are primarily due to increased travel and entertainment costs stemming from the increase in headcount and production volumes, increased occupancy costs from office expansions from the increase in headcount and increased supplies, research and printing costs from the increase in production volumes, the number of transactions and expenses related to new leases/office expansions.

 

    Other expenses, including costs for insurance, professional fees, depreciation and amortization, interest on our warehouse line of credit and other operating expenses, were $6.9 million in the three months ended March 31, 2015, an increase of $1.5 million, or 26.6%, versus $5.5 million in the three months ended March 31, 2014. This increase is primarily related to increased interest on the warehouse lines of credit of $1.0 million due to increased volume on the lines of credit.

Net Income. Our net income for the three months ended March 31, 2015 was $9.4 million, an increase of $5.7 million versus $3.7 million for the same fiscal period in 2014. This increase is primarily due to the increase in revenue as described above.

 

    Interest and other income, net for the three months ended March 31, 2015 was $5.5 million, an increase of $2.6 million as compared to $2.9 million for the same fiscal period in 2014 primarily due to increased income from a higher number of loans originated in our participation in Freddie Mac’s Program Plus Seller Servicer ® Program during the first quarter of 2015 as compared to the first quarter of 2014, higher gains on sale of servicing rights on certain loans and higher securitization compensation from the sale of servicing rights.

 

    The interest expense we incurred in of the three months ended March 31, 2015 and 2014 was $11,000 and $7,000, respectively.

 

25


Table of Contents
    (Increase) decrease in payable under the tax receivable agreement reflects the change in the estimated tax benefits owed to HFF Holdings under the tax receivable agreement. The $1.1 million decrease in payable under the tax receivable agreement for the three month period ended March 31, 2015 represents 85% of the decrease in the related deferred tax asset of $1.3 million. The $0.5 million decrease in payable under the tax receivable agreement for the three month period ended March 31, 2014 represents 85% of the decrease in the related deferred tax asset of $0.6 million.

 

    Income tax expense was approximately $8.4 million for the three months ended March 31, 2015, as compared to $3.5 million in the three months ended March 31, 2014. This increase is primarily due to the higher income before income taxes during the three months ended March 31, 2015 compared to the same period of the prior year. During the three months ended March 31, 2015, the Company recorded a current income tax expense of $1.6 million and deferred income tax expense of $6.9 million.

Financial Condition

Total assets increased to $932.8 million at March 31, 2015 from $604.3 million at December 31, 2014, primarily due to:

 

    An increase in mortgage notes receivable of $419.1 million due to a higher number of loans pending sale to Freddie Mac at March 31, 2015, compared to December 31, 2014.

This increase was partially offset by a decrease in cash and cash equivalents of $89.6 million primarily due to a dividend payment of $67.8 million and the payment of incentive compensation that was accrued as of December 31, 2014.

Total liabilities increased to $799.4 million at March 31, 2015 from $417.8 million at December 31, 2014, primarily due to:

 

    An increase in amounts outstanding under the warehouse lines of credit of $419.1 million due to a higher number of loans pending sale to Freddie Mac at March 31, 2015, compared to December 31, 2014.

This increase was partially offset by a decrease in accrued compensation and related taxes of $24.5 million primarily due to the payment of incentive compensation and the reclassification of the share-based component of the accrued incentive compensation for the plans to additional paid-in-capital and a decrease in other current liabilities of $11.5 million primarily from the payment of federal, state and local income taxes.

Cash Flows

Our historical cash flows are primarily related to the timing of receipt of transaction fees, the timing of distributions to members of HFF Holdings and payment of commissions and bonuses to employees.

First Three Months of 2015

Cash and cash equivalents decreased $89.6 million in the three months ended March 31, 2015. Net cash of $19.0 million was used in operating activities, primarily resulting from a $19.4 million decrease in accrued compensation and related taxes, an $11.2 million decrease in other accrued liabilities, a $2.1 million increase in prepaid taxes, prepaid expenses and other current assets and a $2.1 million increase in accounts receivable. These uses of cash were partially offset by $9.4 million of net income. Cash of $0.7 million was used for investing in property and equipment. Financing activities used $69.9 million primarily due to a dividend payment of $67.8 million that we made to holders of our Class A common stock on February 13, 2015. Additionally, payments on certain capital leases used $0.1 million, $2.4 million was used to purchase shares of Class A common stock in connection with the minimum employee statutory tax withholdings and we recognized a $0.3 million excess tax benefit related to share-based award activities.

First Three Months of 2014

Cash and cash equivalents decreased $96.5 million in the three months ended March 31, 2014. Net cash of $22.5 million was used in operating activities, primarily resulting from a $18.7 million decrease in accrued compensation and related taxes, a $9.4 million decrease in other accrued liabilities, a $3.4 million increase in prepaid taxes, prepaid expenses and other current assets and a $1.6 million increase in accounts receivable. These uses of cash were partially offset by $3.7 million of net income. Cash of $0.4 million was used for investing in property and equipment. Financing activities used $68.2 million primarily due to a dividend payment that we made to holders of our Class A common stock on February 6, 2014. Additionally, payments on certain capital leases used $0.1 million, $6.3 million was used to purchase shares of Class A common stock in connection with the minimum employee statutory tax withholdings and we recognized a $1.0 million excess tax benefit related to share-based award activities.

 

26


Table of Contents

Liquidity and Capital Resources

Our current assets typically have consisted primarily of cash and cash equivalents and accounts receivable in relation to earned transaction fees. At March 31, 2015, our cash and cash equivalents of approximately $142.5 million were invested or held in a mix of money market funds and bank demand deposit accounts at two financial institutions. Our liabilities have typically consisted of accounts payable and accrued compensation. We regularly monitor our liquidity position, including cash level, credit lines, interest and payments on debt, capital expenditures and other matters relating to liquidity and to compliance with regulatory net capital requirements.

Over the three month period ended March 31, 2015, we used approximately $19.0 million of cash for operations. Our short-term liquidity needs are typically related to compensation expenses and other operating expenses such as occupancy, supplies, marketing, professional fees and travel and entertainment. For the three months ended March 31, 2015, we incurred approximately $83.0 million in total operating expenses. A large portion of our operating expenses are variable, highly correlated to our revenue streams and dependent on the collection of transaction fees. During the three months ended March 31, 2015, approximately 60.1% of our operating expenses were considered variable expenses. Our cash flow generated from operations historically has been sufficient to enable us to meet our objectives. However, if the economy deteriorates in the future we may be unable to generate enough cash flow from operations to meet our operating needs and therefore we could use all or substantially all of our existing cash reserves on hand to support our operations. We currently believe that cash flows from operating activities and our existing cash balance will provide adequate liquidity and are sufficient to meet our working capital needs for the foreseeable future.

Our tax receivable agreement with HFF Holdings entered into in connection with our initial public offering provides for the payment by us to HFF Holdings of 85% of the amount of cash savings in U.S. federal, state and local income tax that we actually realize as a result of the increases in tax basis and as a result of certain other tax benefits arising from our entering into the tax receivable agreement and making payments under that agreement. We have estimated that future payments that will be made to HFF Holdings will be $133.1 million, of which approximately $10.8 million is anticipated to be paid in 2015. Our liquidity needs related to our long term obligations are primarily related to our facility leases. Additionally, for the three months ended March 31, 2015, we incurred approximately $2.8 million in occupancy expenses and approximately $11,000 in interest expense.

We are a party to an uncommitted $450 million financing arrangement with PNC and an uncommitted $125 million financing arrangement with Huntington, to fund our Freddie Mac loan closings. Pursuant to these arrangements, PNC or Huntington funds the multifamily Freddie Mac loan closings on a transaction-by-transaction basis, with each loan being separately collateralized by a loan and mortgage on a multifamily property that is ultimately purchased by Freddie Mac. The PNC and Huntington National Bank financing arrangements are only for the purpose of supporting our participation in Freddie Mac’s Program Plus Seller Servicer program and cannot be used for any other purpose. In January 2015, in anticipation of increased loan volume, PNC agreed to a one-time increase of $500 million to be outstanding for a period of 15 days, which was utilized in April 2015. Effective March 17, 2015, the $350 million financing arrangement with PNC was then increased by $100 million to a total of $450 million. Additionally, on January 27, 2015, HFF LP entered into an agreement with Huntington to increase the uncommitted financing agreement by $100 million for a period of the lesser of 60 days after the first advance or May 1, 2015, at which time the arrangement reverts back to $125 million. As of March 31, 2015, we had outstanding borrowings of $604.2 million under the PNC/Huntington arrangements and a corresponding amount of mortgage notes receivable. Although we believe that our current financing arrangements with PNC and Huntington are sufficient to meet our current needs in connection with our participation in Freddie Mac’s Program Plus Seller Servicer program, in the event we are not able to secure financing for our Freddie Mac loan closings, we will cease originating such Freddie Mac loans until we have available financing.

Critical Accounting Policies; Use of Estimates

We prepare our financial statements in accordance with U.S. generally accepted accounting principles. In applying many of these accounting principles, we need to make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and our actual results may change negatively based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe the following critical accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates and/or judgments. See the notes to our consolidated financial statements for a summary of our significant accounting policies.

 

27


Table of Contents

Intangible Assets. Our intangible assets primarily include mortgage servicing rights under agreements with third party lenders. Servicing rights are recorded at the lower of cost or market. Mortgage servicing rights do not trade in an active, open market with readily available observable prices. Since there is no ready market value for the mortgage servicing rights, such as quoted market prices or prices based on sales or purchases of similar assets, the Company determines the fair value of the mortgage servicing rights by estimating the present value of future cash flows associated with servicing the loans. Management makes certain assumptions and judgments in estimating the fair value of servicing rights. The estimate is based on a number of assumptions, including the benefits of servicing (contractual servicing fees and interest on escrow and float balances), the cost of servicing, prepayment rates (including risk of default), an inflation rate, the expected life of the cash flows and the discount rate. The cost of servicing, prepayment rates and discount rates are the most sensitive factors affecting the estimated fair value of the servicing rights. Management estimates a market participant’s cost of servicing by analyzing the limited market activity and considering the Company’s own internal servicing costs. Management estimates the discount rate by considering the various risks involved in the future cash flows of the underlying loans which include the cancellation of servicing contracts, concentration in the life company portfolio and the incremental risk related to large loans. Management estimates the prepayment levels of the underlying mortgages by analyzing recent historical experience. Many of the commercial loans being serviced have financial penalties for prepayment or early payoff before the stated maturity date. As a result, the Company has consistently experienced a low level of loan runoff. The estimated value of the servicing rights is impacted by changes in these assumptions. As of March 31, 2015, the fair value and net book value of the servicing rights were $27.9 million and $22.1 million, respectively. The most sensitive assumptions in estimating the fair value of the mortgage servicing rights are the level of prepayments, discount rate and cost of servicing. If the assumed level of prepayments increased 106.0%, the discount rate increased 51.0% or if there is a 19.0% increase in the cost of servicing at the stratum level, the estimated fair value of the servicing rights may result in the recorded mortgage servicing rights being potentially impaired and would require management to measure the amount of the impairment charge. The effect of a variation in each of these assumptions on the estimated fair value of the servicing rights is calculated independently without changing any other assumption. Servicing rights are amortized in proportion to and over the period of estimated servicing income which results in an accelerated level of amortization. We evaluate amortizable intangible assets on an annual basis, or more frequently if circumstances so indicate, for potential impairment.

Income Taxes.  The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax losses and for tax credit carryforwards, if any. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of the tax rate change. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Our effective tax rate is sensitive to several factors including changes in the mix of our geographic profitability. We evaluate our estimated tax rate on a quarterly basis to reflect changes in: (i) our geographic mix of income, (ii) legislative actions on statutory tax rates, and (iii) tax planning for jurisdictions affected by double taxation. We continually seek to develop and implement potential strategies and/or actions that would reduce our overall effective tax rate.

The net deferred tax asset of $139.2 million at March 31, 2015 is comprised mainly of a $141.0 million deferred tax asset related to the Section 754 of the Internal Revenue Code (“Section 754”) election tax basis step up. The net deferred tax asset related to the Section 754 election tax basis step up of $141.0 million represents annual pre-tax deductions on the Section 754 basis step up and payments under the tax receivable agreement of approximately $32.6 million in 2015, then increasing to $52.9 million in 2021 and then decreasing over the next nine years to approximately $0.1 million in 2030. In order to realize the anticipated pre-tax benefit of approximately $32.6 million in 2015, the Company needs to generate approximately $287 million in revenue, assuming a constant cost structure. In the event that the Company cannot realize the annual pre-tax benefit each year, the shortfall becomes a net operating loss that can be carried back 2 years to offset prior years’ taxable income, if any, or carried forward 20 years to offset future taxable income. If it is more likely than not that the Company would not be able to generate a sufficient level of taxable income through the carryforward period, a valuation allowance would be recorded as a charge to income tax expense and a proportional reduction would be made in the payable under the tax receivable agreement which would be recorded as income in the consolidated statements of income. The trend in revenue growth over the next few years and through the amortization and carryforward periods is a key factor in assessing the realizability of the deferred tax assets.

 

28


Table of Contents

Leases . The Company leases all of its facilities under operating lease agreements. These lease agreements typically contain tenant improvement allowances. The Company records tenant improvement allowances as leasehold improvement assets, included in property and equipment, net in the consolidated balance sheet, and related deferred rent liabilities and amortizes them on a straight-line basis over the shorter of the term of the lease or useful life of the asset as additional depreciation expense and a reduction to rent expense, respectively. Lease agreements sometimes contain rent escalation clauses or rent holidays, which are recognized on a straight-line basis over the life of the lease in accordance with ASC 840, Leases (ASC 840). Office lease terms generally range from five to ten years. An analysis is performed on each equipment lease to determine whether it should be classified as a capital or operating lease according to ASC 840.

Employment / Non-compete Agreements. The Company has entered into arrangements with newly-hired transaction professionals whereby these transaction professionals would be paid additional compensation if certain performance targets are met over a defined period. Some of these agreements contain provisions that the payments will be made to the transaction professionals only if they enter into an employment agreement at the end of the performance period. Payments under these arrangements, if earned, would be paid in fiscal years 2016 through 2018. The Company begins to accrue for these payments when it is deemed probable that payments will be made; therefore, on a quarterly basis, the Company evaluates the probability of each of the transaction professionals achieving the performance targets and the probability of each of the transaction professionals signing an employment agreement, if applicable. As of March 31, 2015, $4.1 million has been accrued for these arrangements.

Firm and Office Profit Participation Plans and Executive Bonus Plan. The Company’s firm and office profit participation plans, and effective January 1, 2015, our executive bonus plan allows for payments in cash and share-based awards if certain performance targets are achieved during the year. The expense associated with the Plans is included in personnel expenses in the consolidated statements of income. The expense recorded for these plans is estimated during the year based on actual results at each interim reporting date and an estimate of future results for the remainder of the year. The Plans allow for payments to be made in both cash and share-based awards, the composition of which is determined in the first calendar quarter of the subsequent year. Cash and share-based awards issued under these Plans are subject to vesting conditions over the subsequent three years beginning on the first anniversary of each grant, such that the total expense measured for these plans is recorded over the period from the beginning of the performance year through the final vesting date. Based on an accounting policy election, the expense associated with the share-based component of the estimated incentive payout is recognized before the grant date of the stock due to the fact that the terms of the Plans have been approved by the Company’s board of directors and the employees of the Company understand the requirements to earn the award. Prior to the grant date, the expense related to the share-based component is recorded as incentive compensation expense within personnel expenses in the Company’s consolidated statements of income. Following the award, if any, the share-based component expense of the related incentive payout, is reclassified as stock compensation costs with personnel expenses.

Certain Information Concerning Off-Balance Sheet Arrangements

We do not currently invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any leasing activities that expose us to any liability that is not reflected in our consolidated financial statements.

Seasonality

Our capital markets services revenue has historically been seasonal, which can affect an investor’s ability to compare our financial condition and results of operation on a quarter-by-quarter basis. This seasonality has caused our revenue, operating income, net income and cash flows from operating activities to be lower in the first half of the year and higher in the second half of the year. The typical concentration of earnings and cash flows in the last half of the year has historically been due to an industry-wide focus of clients to complete transactions towards the end of the calendar year. However, given the recent disruptions, write-offs and credit losses in the global and domestic capital markets, the liquidity issues facing all global capital markets, and in particular the U.S. commercial real estate markets, this historical pattern of seasonality may or may not continue.

Effect of Inflation and/or Deflation

Inflation and/or deflation, or both, could significantly affect our compensation costs, particularly those not directly tied to our transaction professionals’ compensation, due to factors such as availability of capital and/or increased costs of capital. The rise of inflation could also significantly and adversely affect certain expenses, such as debt service costs, information technology and occupancy costs. To the extent that inflation and/or deflation results in rising interest rates and has other effects upon the commercial real estate markets in which we operate and, to a lesser extent, the securities markets, it may affect our financial position and results of operations by reducing the demand for commercial real estate and related services which could have a material adverse effect on our financial condition. See Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q.

 

29


Table of Contents

Pending Accounting Pronouncements

In May 2014, the FASB issued changes to revenue recognition with customers. This update provides a five-step analysis of transactions to determine when and how revenue is recognized. An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition guidance will be effective for HFF, Inc. beginning January 1, 2017. However, the FASB, on April 1, 2015, voted to propose to defer the effective date by one year and that proposal is planned to be subject to a 30-day comment period. If the proposal is approved, early adoption would be permitted as of the original effective date. As proposed the guidance permits two implementation approaches: one, requiring retrospective application with restatement for each period presented or; two, as a cumulative-effect adjustment with disclosure of changes as compared with prior standards for each period presented. We are currently evaluating the methods of adoption as well as the impact that it may have, if any, on our consolidated financial statements. The new revenue guidance will supersede existing revenue guidance affecting our Company, and may also affect our business processes and our information technology systems. As a result, our evaluation of the effect of the new revenue guidance will extend over future periods.

 

30


Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Due to the nature of our business and the manner in which we conduct our operations, in particular the fact that our financial instruments that are exposed to concentrations of credit risk consist primarily of short-term cash deposits and investments, we believe we do not face any material interest rate risk, foreign currency exchange rate risk, equity price risk or other market risk.

Item 4. Controls and Procedures

Management’s Quarterly Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of March 31, 2015, the Company’s disclosure controls and procedures are effective to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in rules and forms.

The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the three month period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

31


Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are party to various litigation matters, in most cases involving normal ordinary course and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and financial liability with respect to such pending matters. However, we believe, based on our examination of such pending matters, that our ultimate liability for such matters will not have a material adverse effect on our business or financial condition.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

Mark Gibson and Jody Thornton informed us that they each entered into Rule 10b5-1 trading plans pursuant to which Mr. Gibson and Mr. Thornton each plan to sell 200,000 shares of our common stock in the future.

Item 6. Exhibits.

A. Exhibits

 

10.1

Holliday Fenoglio Fowler, L.P. Second Amended and Restated Profit Participation Bonus Plan.

10.2

HFF Securities, L.P. Second Amended and Restated Profit Participation Bonus Plan.

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1

Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

XBRL Taxonomy Definition Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

 

32


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

HFF, INC.
Dated: May 7, 2015 By:

/s/ Mark D. Gibson

Mark D. Gibson
Chief Executive Officer,
Director and Executive Managing Director
(Principal Executive Officer)
Dated: May 7, 2015 By:

/s/ Gregory R. Conley

Gregory R. Conley
Chief Financial Officer
(Principal Financial and Accounting Officer)

 

33


Table of Contents

EXHIBIT INDEX

 

10.1 Holliday Fenoglio Fowler, L.P. Second Amended and Restated Profit Participation Bonus Plan.
10.2 HFF Securities, L.P. Second Amended and Restated Profit Participation Bonus Plan.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase

 

34

Exhibit 10.1

HOLLIDAY FENOGLIO FOWLER, L.P.

SECOND AMENDED AND RESTATED PROFIT PARTICIPATION BONUS PLAN

Adopted: April 14, 2015

1. Purpose . This Profit Participation Bonus Plan (the “Plan”) is established to attract, retain and provide incentives to employees, and to promote the financial success, of Holliday Fenoglio Fowler, L.P., a Texas limited partnership (the “Company”). Capitalized terms shall have the meanings defined herein.

2. Effective Date . The Plan is effective as provided herein.

3. Applicability of Plan to Designated Offices . The Plan shall apply to each separate office and/or line of business in each office of the Company (each, an “Office”) designated by the Managing Member of the Company (the “Managing Member”).

4. Office Bonus Pool Calculation .

(a) Calculation of Office Bonus Pool . With respect to each Office to which the Plan applies and for each calendar year (a “Plan Year”), if a fourteen and one-half percent (14.5%) or greater Profit Margin (as defined below) is generated by such Office, as determined by the Managing Member in accordance with the terms herein, then an amount equal to fifteen percent (15%) of the Net Operating Income (as defined below) generated by such Office, as determined by the Managing Member in accordance with the terms herein, shall comprise the “Office Bonus Pool” for such Office.

(i) For purposes of the Plan, Profit Margin means the Net Operating Income (as defined below) of such Office as a percentage of the revenue of such Office, all as determined in accordance with U.S. Generally Accepted Accounting Principles applied on a consistent basis “GAAP”).

(ii) For purposes of the Plan, Net Operating Income means net operating income (using the same revenue and cost accounts as used in preparing the Company’s audited financial statements) of such Office, which includes appropriate allocations for overhead expenses and servicing expenses plus any applicable other income which may include; (a) gain on sale of mortgage servicing rights, (b) securitization compensation from the securitization of any Freddie Mac loans which the Company services and (c) trading profits from Fannie Mae loan originations.

(b) Timing of Calculation . The amount of the Office Bonus Pool, if any, for each Office to which the Plan applies shall be calculated as soon as reasonably practicable following the closing of the books and records of the Company in accordance with GAAP in respect of the applicable Plan Year (or on such later date determined by the Managing Member) (the “Determination Date”) by the Chief Financial Officer of HFF, Inc. or his or her designee (the “Chief Financial Officer”).


(c) No Adjustment . The Office Bonus Pool shall not be adjusted based on any information that becomes available at any time following the Determination Date, absent fraud, accounting irregularities, willful misconduct, gross negligence or manifest error. The Office Bonus Pool calculation performed on the Determination Date shall take in account all relevant information available on that Determination Date.

(d) Special Rule for Certain Offices .

(i) Default Rule . For any Office in which both investment sales employees and debt employees are employed, the investment sales group and the debt group shall be treated for all purposes under the Plan as separate Offices and the head of each such group (each, a “Group Head”) shall be treated for all purposes under the Plan as an Office Head.

(ii) Election by Group Heads . Notwithstanding Section 4(d)(i) of the Plan, the Group Heads in any Office at which both investment sales employees and debt employees are employed may, prior to the beginning of a Plan Year, jointly elect (after consultation with the Managing Member) to treat the investment sales group and the debt group at such Office as a single Office for all purposes under the Plan by providing a joint notice of such election to the Chief Financial Officer or his or her designee.

5. Allocation of Office Bonus Pool .

(a) Individual Eligibility . Each full-time or part-time employee of the Company is eligible to receive a bonus payment under the Plan (a “Profit Participation Bonus”) with respect to services performed during a Plan Year.

(b) Allocation . For each Plan Year, each Office Head, in consultation with the Managing Member, shall select the recipients of Profit Participation Bonuses and shall determine the allocation of the Office Bonus Pool among such recipients (“Allocation Plan”).

(c) Submission of Allocation Plan . Each Office Head shall submit the Allocation Plan for the Plan Year to the Chief Financial Officer prior to the Determination Date.

(d) Termination of Employment . Except as otherwise provided in an individual’s employment agreement with the Company, if any, no individual shall be eligible to receive a Profit Participation Bonus if the Company does not employ him or her on the date that the Profit Participation Bonus is paid to the eligible individuals. Whether an individual is employed by the Company on the date that the Profit Participation Bonus is paid to the eligible individuals shall be determined in the sole and absolute discretion of the Managing Member.

6. Payment of Profit Participation Bonus .

(a) Subject to any applicable federal, state, local or other withholding taxes, Profit Participation Bonuses shall be paid in accordance with each Office’s Allocation Plan within thirty (30) days following the Determination Date, or, if determined by the Managing Member with respect to any Office, on or before March 15 of the year following the Plan Year with respect to which the Profit Sharing Bonus was earned.

 

2


(b) The Board of Directors of HFF, Inc., or any appropriate committee thereof, may elect in its sole discretion to pay up to one-half (1/2) or fifty percent (50%) of the Profit Participation Bonuses in the form of equity-based awards pursuant to the HFF, Inc. 2006 Omnibus Incentive Compensation Plan (or any other compensation plan adopted by HFF, Inc. under which equity securities of HFF, Inc. are authorized); provided that such equity-based awards shall vest and be paid out pursuant to a vesting schedule determined by the Board of Directors, or any appropriate committee thereof, in its sole discretion; provided, further that any amounts of the Profit Participation Bonuses that are not paid in the form of such equity-based awards shall be paid in cash; provided , further , notwithstanding anything contained herein to the contrary, that any such equity-based awards shall comply in form with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and any such cash payments shall be paid as determined by the Board of Directors, or any appropriate committee thereof, in its sole discretion.

7. Administration .

(a) Managing Member . The Plan shall be administered by the Managing Member; provided that any Profit Participation Bonuses to be paid to any executive officers of HFF, Inc. must be approved in advance by the Board of Directors of HFF, Inc. or any appropriate committee thereof. Except as otherwise provided herein, any action of the Managing Member in administering the Plan shall be final, conclusive and binding on all persons, including the Company, its subsidiaries and affiliates, any employee and any persons claiming rights from or through employees of the Company.

(b) Powers of the Managing Member . Subject to the provisions of the Plan, the Managing Member shall have full and final authority in his or her discretion (i) to construe and interpret the Plan and to make all other determinations, including determinations as to the eligibility of any employee to a benefit hereunder, as he or she may deem necessary or advisable for the administration of the Plan, (ii) to correct any defect or supply any omission or reconcile any inconsistency in the Plan, (iii) to adopt, amend and rescind such rules and regulations as, in his or her opinion, may be advisable in the administration of the Plan, (iv) to require any person to furnish such reasonable information as requested for the purpose of the proper administration of the Plan as a condition to receiving any benefits under the Plan, and (v) to prepare and distribute information explaining the Plan to employees.

(c) Delegation . The Managing Member may delegate all or any portion of his or her duties, responsibilities and powers under the Plan to the chief operating officer, chief financial officer, any Office Head or Group Head, or any other employee of the Company as the Managing Member deems appropriate. The Managing Member may revoke any such allocation or delegation at any time for any reason with or without prior notice.

(d) Indemnification . The Company shall indemnify and hold harmless the Managing Member, each of his or her affiliates and/or agents and the Chief Financial Officer of HFF, Inc. (or his or her designee) (each, a “Managing Member Indemnitee” and collectively the “Managing Member Indemnitees”) from and against any and all liabilities, costs and expenses incurred by the Managing Member Indemnitees as a result of any act or omission to act in connection with the performance of the Managing Member’s or the Chief Financial Officer of

 

3


HFF, Inc.’s duties, responsibilities and obligations under the Plan, to the maximum extent permitted by law, other than such liabilities, costs and expenses as may result from the gross negligence, bad faith, willful misconduct or criminal acts of a Managing Member Indemnitee.

(e) Payment of Administrative Expenses . All reasonable expenses incurred in administering the Plan shall be paid by the Company.

8. Recapitalization . The Managing Member shall determine, in his or her sole and absolute discretion, the effect upon the Plan and the Profit Participation Bonuses payable hereunder, if any, of any stock dividend, recapitalization, forward stock split or reverse stock split, reorganization, division, merger, consolidation, spin-off, combination, repurchase or share exchange, extraordinary or unusual cash distribution or other similar corporate transaction or event.

9. Limits on Transferability; Beneficiaries . No right or other interest of an employee under the Plan shall be pledged, encumbered, or hypothecated to, or in favor of, or subject to any lien, obligation, or liability of such employee to, any party, other than the Company, or any of its subsidiaries or affiliates, or assigned or transferred by such employee otherwise than by will or the laws of descent and distribution. Notwithstanding the foregoing, the Managing Member may, in his or her sole and absolute discretion, provide that rights or other interests of an employee under the Plan are transferable, without consideration, to immediate family members (i.e., children, grandchildren or spouse), to trusts for the benefit of such immediate family members and to partnerships in which such family members are the only partners. The Managing Member may attach to such transferability feature such terms and conditions as he or she deems advisable. In addition, an employee may, in the manner established by the Managing Member, designate a beneficiary (which may be a person or a trust) to receive any payment under the Plan upon the death of the Participant. A beneficiary, guardian, legal representative or other person claiming any rights under the Plan from or through any employee shall be subject to all terms and conditions of the Plan, except as otherwise determined by the Managing Member, and to any additional restrictions deemed necessary or appropriate by the Managing Member.

10. No Right to Future Employment . Nothing in this Plan, nor any Profit Participation Bonus awarded under this Plan, shall confer on any employee or other person any right to be continued in the employ of, be employed by, or enter into or maintain any other relationship with, the Company, or limit in any way the right of the Company to terminate such person’s employment or other relationship at any time, for any reason or no reason.

11. No Right to Continued Participation . An employee’s receipt of a Profit Participation Bonus under the Plan for a Plan Year shall not confer upon such employee the right to receive a Profit Participation Bonus, or any particular amount of a Profit Participation Bonus, in any subsequent Plan Year.

12. Funding . The Plan shall be entirely unfunded at all times and no provision shall be made with respect to segregating assets of the Company for payment of any benefit hereunder at any time. No employee or other person shall have any interest in any particular assets of the Company by reason of the right to receive a benefit under the Plan and any such employee or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan.

 

4


13. Amendment or Termination of Plan . The Plan may only be amended or terminated through a writing executed by each limited partner and general partner of the Company.

14. Successors . The Plan shall be binding upon, and inure to the benefit of, the Company and its successors and assigns and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company’s assets and business, and the successor shall be substituted for the Company under this Plan.

15. Section 409A . To the extent determined necessary or advisable by the Managing Member in his or her sole discretion, Profit Participation Bonus awards hereunder shall be interpreted to the extent possible to comply with the provisions of section 409A of the Code (or avoid application of such Code section), to the extent applicable.

16. Headings . The titles and headings used in the Plan are intended for convenience only and shall not be construed as in any way affecting or modifying the text of this Plan, which text shall control.

17. Governing Law . The obligations of the Company under this Plan shall be governed by and construed and interpreted in accordance with the laws of the State of Texas, without regard to the conflict of laws provisions thereof.

18. Data Protection . By receiving a Profit Participation Bonus under the Plan, an employee consents to the collection, processing, transmission and storage by the Company, in any form whatsoever, of any data of a professional or personal nature which is necessary for the purposes of administering the Plan.

 

5

Exhibit 10.2

HFF SECURITIES L.P.

SECOND AMENDED AND RESTATED PROFIT PARTICIPATION BONUS PLAN

Adopted: April 14, 2015

1. Purpose . This Profit Participation Bonus Plan (the “Plan”) is established to attract, retain and provide incentives to employees, and to promote the financial success, of HFF Securities, L.P., a Delaware limited partnership (the “Company”). Capitalized terms shall have the meanings defined herein.

2. Effective Date . The Plan is effective as provided herein.

3. Applicability of Plan to Designated Offices . The Plan shall apply to each separate office and/or line of business in each office of the Company (each, an “Office”) designated by Holliday GP Corp., a Delaware corporation and the General Partner of the Company (the “General Partner”).

4. Office Bonus Pool Calculation .

(a) Calculation of Office Bonus Pool . With respect to each Office to which the Plan applies and for each calendar year (a “Plan Year”), if a fourteen and one-half percent (14.5%) or greater Profit Margin (as defined below) is generated by such Office, as determined by the General Partner in accordance with the terms herein, then an amount equal to fifteen percent (15%) of the Net Operating Income (as defined below) generated by such Office, as determined by the General Partner in accordance with the terms herein, shall comprise the “Office Bonus Pool” for such Office.

(i) For purposes of the Plan, Profit Margin means the Net Operating Income (as defined below) of such Office as a percentage of the revenue of such Office, all as determined in accordance with U.S. Generally Accepted Accounting Principles applied on a consistent basis (“GAAP”).

(ii) For purposes of the Plan, Net Operating Income means net operating income (using the same revenue and cost accounts as used in preparing the Company’s audited financial statements) of such Office, which includes appropriate allocations for overhead expenses and servicing expenses, plus any applicable other income which may include: (A) gain on sale of mortgage servicing rights, (b) securitization compensation from the securitization of any Freddie Mac loans which the Company services and (c) trading profits from Fannie Mae loan originations.

(b) Timing of Calculation . The amount of the Office Bonus Pool, if any, for each Office to which the Plan applies shall be calculated as soon as reasonably practicable following the closing of the books and records of the Company in accordance with GAAP in respect of the applicable Plan Year (or on such later date determined by the General Partner) (the “Determination Date”) by the Chief Financial Officer of HFF, Inc. or his or her designee (the “Chief Financial Officer”).


(c) No Adjustment . The Office Bonus Pool shall not be adjusted based on any information that becomes available at any time following the Determination Date, absent fraud, accounting irregularities, willful misconduct, gross negligence or manifest error. The Office Bonus Pool calculation performed on the Determination Date shall take in account all relevant information available on that Determination Date.

(d) Special Rule for Certain Offices .

(i) Default Rule . For any Office in which both investment sales employees and debt employees are employed, the investment sales group and the debt group shall be treated for all purposes under the Plan as separate Offices and the head of each such group (each, a “Group Head”) shall be treated for all purposes under the Plan as an Office Head.

(ii) Election by Group Heads . Notwithstanding Section 4(d)(i) of the Plan, the Group Heads in any Office at which both investment sales employees and debt employees are employed may, prior to the beginning of a Plan Year, jointly elect (after consultation with the General Partner) to treat the investment sales group and the debt group at such Office as a single Office for all purposes under the Plan by providing a joint notice of such election to the Chief Financial Officer or his or her designee.

5. Allocation of Office Bonus Pool .

(a) Individual Eligibility . Each full-time or part-time employee of the Company is eligible to receive a bonus payment under the Plan (a “Profit Participation Bonus”) with respect to services performed during a Plan Year.

(b) Allocation . For each Plan Year, each Office Head, in consultation with the General Partner, shall select the recipients of Profit Participation Bonuses and shall determine the allocation of the Office Bonus Pool among such recipients (“Allocation Plan”).

(c) Submission of Allocation Plan . Each Office Head shall submit the Allocation Plan for the Plan Year to the Chief Financial Officer prior to the Determination Date.

(d) Termination of Employment . Except as otherwise provided in an individual’s employment agreement with the Company, if any, no individual shall be eligible to receive a Profit Participation Bonus if the Company does not employ him or her on the date that the Profit Participation Bonus is paid to the eligible individuals. Whether an individual is employed by the Company on the date that the Profit Participation Bonus is paid to the eligible individuals shall be determined in the sole and absolute discretion of the General Partner.

6. Payment of Profit Participation Bonus .

(a) Subject to any applicable federal, state, local or other withholding taxes, Profit Participation Bonuses shall be paid in accordance with each Office’s Allocation Plan within thirty (30) days following the Determination Date, or, if determined by the General Partner with respect to any Office, on or before March 15 of the year following the Plan Year with respect to which the Profit Sharing Bonus was earned.

 

2


(b) The Board of Directors of HFF, Inc., or any appropriate committee thereof, may elect in its sole discretion to pay up to one-half (1/2) or fifty percent (50%) of the Profit Participation Bonuses in the form of equity-based awards pursuant to the HFF, Inc. 2006 Omnibus Incentive Compensation Plan (or any other compensation plan adopted by HFF, Inc. under which equity securities of HFF, Inc. are authorized); provided that such equity-based awards shall vest and be paid out pursuant to a vesting schedule determined by the Board of Directors, or any appropriate committee thereof, in its sole discretion; provided, further that any amounts of the Profit Participation Bonuses that are not paid in the form of such equity-based awards shall be paid in cash; provided , further , notwithstanding anything contained herein to the contrary, that any such equity-based awards shall comply in form with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and any such cash payments shall be paid as determined by the Board of Directors, or any appropriate committee thereof, in its sole discretion.

7. Administration .

(a) General Partner . The Plan shall be administered by the General Partner; provided that any Profit Participation Bonuses to be paid to any executive officers of HFF, Inc. must be approved in advance by the Board of Directors of HFF, Inc. or any appropriate committee thereof. Except as otherwise provided herein, any action of the General Partner in administering the Plan shall be final, conclusive and binding on all persons, including the Company, its subsidiaries and affiliates, any employee and any persons claiming rights from or through employees of the Company.

(b) Powers of the General Partner . Subject to the provisions of the Plan, the General Partner shall have full and final authority in its discretion (i) to construe and interpret the Plan and to make all other determinations, including determinations as to the eligibility of any employee to a benefit hereunder, as he or she may deem necessary or advisable for the administration of the Plan, (ii) to correct any defect or supply any omission or reconcile any inconsistency in the Plan, (iii) to adopt, amend and rescind such rules and regulations as, in his or her opinion, may be advisable in the administration of the Plan, (iv) to require any person to furnish such reasonable information as requested for the purpose of the proper administration of the Plan as a condition to receiving any benefits under the Plan, and (v) to prepare and distribute information explaining the Plan to employees.

(c) Delegation . The General Partner may delegate all or any portion of its duties, responsibilities and powers under the Plan to the chief operating officer, chief financial officer, any Office Head or Group Head, or any other employee of the Company as the General Partner deems appropriate. The General Partner may revoke any such allocation or delegation at any time for any reason with or without prior notice.

(d) Indemnification . The Company shall indemnify and hold harmless the General Partner, each of its directors, officers, employees, affiliates and/or agents and the Chief Financial Officer of HFF, Inc. (or his or her designee) (each, a “General Partner Indemnitee” and

 

3


collectively the “General Partner Indemnitees”) from and against any and all liabilities, costs and expenses incurred by the General Partner Indemnitees as a result of any act or omission to act in connection with the performance of the General Partner’s or the Chief Financial Officer of HFF, Inc.’s duties, responsibilities and obligations under the Plan, to the maximum extent permitted by law, other than such liabilities, costs and expenses as may result from the gross negligence, bad faith, willful misconduct or criminal acts of a General Partner Indemnitee.

(e) Payment of Administrative Expenses . All reasonable expenses incurred in administering the Plan shall be paid by the Company.

8. Recapitalization . The General Partner shall determine, in its sole and absolute discretion, the effect upon the Plan and the Profit Participation Bonuses payable hereunder, if any, of any stock dividend, recapitalization, forward stock split or reverse stock split, reorganization, division, merger, consolidation, spin-off, combination, repurchase or share exchange, extraordinary or unusual cash distribution or other similar corporate transaction or event.

9. Limits on Transferability; Beneficiaries . No right or other interest of an employee under the Plan shall be pledged, encumbered, or hypothecated to, or in favor of, or subject to any lien, obligation, or liability of such employee to, any party, other than the Company, or any of its subsidiaries or affiliates, or assigned or transferred by such employee otherwise than by will or the laws of descent and distribution. Notwithstanding the foregoing, the General Partner may, in its sole and absolute discretion, provide that rights or other interests of an employee under the Plan are transferable, without consideration, to immediate family members (i.e., children, grandchildren or spouse), to trusts for the benefit of such immediate family members and to partnerships in which such family members are the only partners. The General Partner may attach to such transferability feature such terms and conditions as he or she deems advisable. In addition, an employee may, in the manner established by the General Partner, designate a beneficiary (which may be a person or a trust) to receive any payment under the Plan upon the death of the Participant. A beneficiary, guardian, legal representative or other person claiming any rights under the Plan from or through any employee shall be subject to all terms and conditions of the Plan, except as otherwise determined by the General Partner, and to any additional restrictions deemed necessary or appropriate by the General Partner.

10. No Right to Future Employment . Nothing in this Plan, nor any Profit Participation Bonus awarded under this Plan, shall confer on any employee or other person any right to be continued in the employ of, be employed by, or enter into or maintain any other relationship with, the Company, or limit in any way the right of the Company to terminate such person’s employment or other relationship at any time, for any reason or no reason.

11. No Right to Continued Participation . An employee’s receipt of a Profit Participation Bonus under the Plan for a Plan Year shall not confer upon such employee the right to receive a Profit Participation Bonus, or any particular amount of a Profit Participation Bonus, in any subsequent Plan Year.

12. Funding . The Plan shall be entirely unfunded at all times and no provision shall be made with respect to segregating assets of the Company for payment of any benefit hereunder

 

4


at any time. No employee or other person shall have any interest in any particular assets of the Company by reason of the right to receive a benefit under the Plan and any such employee or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan.

13. Amendment or Termination of Plan . The Plan may only be amended or terminated through a writing executed by each limited partner and general partner of the Company.

14. Successors . The Plan shall be binding upon, and inure to the benefit of, the Company and its successors and assigns and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company’s assets and business, and the successor shall be substituted for the Company under this Plan.

15. Section 409A . To the extent determined necessary or advisable by the General Partner in its sole discretion, Profit Participation Bonus awards hereunder shall be interpreted to the extent possible to comply with the provisions of section 409A of the Code (or avoid application of such Code section), to the extent applicable.

16. Headings . The titles and headings used in the Plan are intended for convenience only and shall not be construed as in any way affecting or modifying the text of this Plan, which text shall control.

17. Governing Law . The obligations of the Company under this Plan shall be governed by and construed and interpreted in accordance with the laws of the State of Delaware, without regard to the conflict of laws provisions thereof.

18. Data Protection . By receiving a Profit Participation Bonus under the Plan, an employee consents to the collection, processing, transmission and storage by the Company, in any form whatsoever, of any data of a professional or personal nature which is necessary for the purposes of administering the Plan.

 

5

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Mark D. Gibson, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of HFF, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent function):

 

  (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: May 7, 2015

    By:  

/s/ Mark D. Gibson

      Mark D. Gibson
      Chief Executive Officer,
      Director and Executive Managing Director
      (Principal Executive Officer)

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Gregory R. Conley, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of HFF, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

 

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent function):

 

  (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: May 7, 2015 By:

/s/ Gregory R. Conley

Gregory R. Conley
Chief Financial Officer
(Principal Financial and Accounting Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of HFF, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark D. Gibson, Chief Executive Officer of the Company, and Gregory R. Conley, Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: May 7, 2015 By:

/s/ Mark D. Gibson

Mark D. Gibson
Chief Executive Officer, Director and
Executive Managing Director
(Principal Executive Officer)

 

Dated: May 7, 2015 By:

/s/ Gregory R. Conley

Gregory R. Conley
Chief Financial Officer
(Principal Financial and Accounting Officer)