UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017ended: March 31, 2019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
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 Victory Park | ||
2323 Victory Avenue, Suite 1200 | ||
Dallas, Texas | 75219 | |
(Address of Principal Executive Offices) | (Zip code) |
(214)265-0880
(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 ☒☑ 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 RegulationS-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 ☒☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”filer”, “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☑ | Accelerated filer | ☐ | |||||
Non-accelerated filer |
| Smaller Reporting Company | ☐ | |||||
Emerging | ☐ |
If an emerging growth company, indicatedindicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒☑
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Class A Common Stock | HF | New York Stock Exchange |
Number of shares of Class A common stock, par value $0.01 per share, of the registrant outstanding as of October 31, 2017April 30, 2019 was 38,579,54439,823,827 shares.
September 30, 2017
Page | ||||||
Item 1. | 4 | |||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | |||||
32 | ||||||
32 | ||||||
Item 1. | 33 | |||||
33 | ||||||
33 | ||||||
33 | ||||||
33 | ||||||
33 | ||||||
34 | ||||||
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2
This Quarterly Report on Form10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The 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 Form10-K and this Quarterly Report on Form 10-Q. 10-Q.Additionally, risks and uncertainties related to the merger are set forth in the preliminary Proxy Statement/Prospectus filed by Jones Lang LaSalle Incorporated on Form S-4 with the Securities and Exchange Commission on April 29, 2019, and incorporated herein by reference. 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 Form10-Q. 10-Q and our other periodic filings with the Securities and Exchange Commission. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.otherwise, except as required by securities laws.
SPECIAL NOTE REGARDING THE REGISTRANT
In connection with our initial public offering in February 2007, 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. (“Holliday GP”), 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., (6) “Holdings Sub” refer to HFF LP Acquisition LLC, a Delaware limited liability company and wholly-owned subsidiary of HFF Holdings, (7) “HFF Real Estate” refer to HFF Real Estate Limited, a company incorporated in England and Wales and (8) “HFF Securities Limited” refer to HFF Securities Limited, a company incorporated in England and Wales (collectively, with HFF Real Estate, the “UK Subsidiaries” and, with HFF Securities, the “Securities Subsidiaries”). Except where specifically noted, references in this Quarterly Report onForm 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
PART I. FINANCIAL FINANCIAL INFORMATION
HFF, Inc.
(Dollars in Thousands)
(Current period unaudited)thousands, except share data)
|
| March 31, |
|
| December 31, |
| ||||||||||
| 2019 |
|
| 2018 |
| |||||||||||
September 30, 2017 | December 31, 2016 |
| (unaudited) |
|
|
|
|
| ||||||||
ASSETS |
|
|
|
|
|
|
|
| ||||||||
Current assets: |
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents | $ | 221,805 | $ | 235,582 |
| $ | 235,212 |
|
| $ | 305,555 |
| ||||
Restricted cash |
|
| 5,234 |
|
|
| 1,723 |
| ||||||||
Accounts receivable | 3,123 | 2,124 |
|
| 10,283 |
|
|
| 8,150 |
| ||||||
Mortgage notes receivable | 736,218 | 290,933 |
|
| 966,694 |
|
|
| 351,194 |
| ||||||
Prepaid taxes | 1,640 | 1,118 |
|
| 1,240 |
|
|
| 671 |
| ||||||
Prepaid expenses and other current assets | 12,712 | 12,971 |
|
| 18,787 |
|
|
| 13,021 |
| ||||||
|
| |||||||||||||||
Total current assets, net | 975,498 | 542,728 | ||||||||||||||
Total current assets |
|
| 1,237,450 |
|
|
| 680,314 |
| ||||||||
Property and equipment, net | 16,930 | 15,837 |
|
| 18,778 |
|
|
| 17,196 |
| ||||||
Operating lease right-of-use asset |
|
| 34,970 |
|
|
| — |
| ||||||||
Deferred tax asset, net | 95,672 | 112,557 |
|
| 35,863 |
|
|
| 41,124 |
| ||||||
Goodwill | 8,421 | 3,712 |
|
| 8,581 |
|
|
| 8,512 |
| ||||||
Intangible assets, net | 50,124 | 36,614 |
|
| 74,313 |
|
|
| 73,862 |
| ||||||
Securities - held to maturity |
|
| 25,000 |
|
|
| 25,000 |
| ||||||||
Other noncurrent assets | 9,233 | 5,211 |
|
| 12,820 |
|
|
| 12,045 |
| ||||||
|
| |||||||||||||||
Total Assets | $ | 1,155,878 | $ | 716,659 | ||||||||||||
|
| |||||||||||||||
Total assets |
| $ | 1,447,775 |
|
| $ | 858,053 |
| ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| ||||||||
Current liabilities: |
|
|
|
|
|
|
|
| ||||||||
Current portion of long-term debt | $ | 303 | $ | 448 |
| $ | 79 |
|
| $ | 3,898 |
| ||||
Current portion of operating lease liabilities |
|
| 9,397 |
|
|
| — |
| ||||||||
Warehouse line of credit | 734,244 | 290,980 |
|
| 961,252 |
|
|
| 348,378 |
| ||||||
Accrued compensation and related taxes | 48,668 | 44,685 |
|
| 49,705 |
|
|
| 67,653 |
| ||||||
Accounts payable | 1,326 | 2,065 |
|
| 4,359 |
|
|
| 3,204 |
| ||||||
Payable under tax receivable agreement | 11,346 | 11,315 |
|
| 8,313 |
|
|
| 8,313 |
| ||||||
Other current liabilities | 13,424 | 18,803 |
|
| 29,094 |
|
|
| 21,968 |
| ||||||
|
| |||||||||||||||
Total current liabilities | 809,311 | 368,296 |
|
| 1,062,199 |
|
|
| 453,414 |
| ||||||
Deferred rent credit | 10,554 | 11,485 |
|
| — |
|
|
| 11,825 |
| ||||||
Payable under the tax receivable agreement, less current portion | 88,326 | 100,077 |
|
| 41,977 |
|
|
| 41,977 |
| ||||||
Long-term debt, less current portion | 47 | 259 |
|
| 52 |
|
|
| 66 |
| ||||||
|
| |||||||||||||||
Noncurrent operating lease liabilities |
|
| 37,436 |
|
|
| — |
| ||||||||
Other noncurrent liabilities |
|
| 608 |
|
|
| 225 |
| ||||||||
Total liabilities | 908,238 | 480,117 |
|
| 1,142,272 |
|
|
| 507,507 |
| ||||||
Stockholders’ equity: |
|
|
|
|
|
|
|
| ||||||||
Class A common stock, par value $0.01 per share, 175,000,000 authorized; 38,742,698 and 38,463,448 shares issued, respectively; 38,579,544 and 38,091,123 shares outstanding, respectively | 387 | 385 | ||||||||||||||
Treasury stock, 163,154 and 372,325 shares at cost, respectively | (4,971 | ) | (11,477 | ) | ||||||||||||
Class A common stock, par value $0.01 per share, 175,000,000 authorized; 39,857,514 and 39,143,253 shares issued, respectively; 39,823,827 and 39,116,745 shares outstanding, respectively |
|
| 399 |
|
|
| 391 |
| ||||||||
Treasury stock, 33,687 and 26,508 shares at cost, respectively |
|
| (1,501 | ) |
|
| (1,220 | ) | ||||||||
Additionalpaid-in-capital | 139,966 | 132,513 |
|
| 159,229 |
|
|
| 159,636 |
| ||||||
Accumulated other comprehensive loss | (81 | ) | — |
|
| (728 | ) |
|
| (743 | ) | |||||
Retained earnings | 112,339 | 115,121 |
|
| 148,104 |
|
|
| 192,482 |
| ||||||
|
| |||||||||||||||
Total equity | 247,640 | 236,542 |
|
| 305,503 |
|
|
| 350,546 |
| ||||||
|
| |||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,155,878 | $ | 716,659 |
| $ | 1,447,775 |
|
| $ | 858,053 |
| ||||
|
|
See accompanying notes to the consolidated financial statements.
4
HFF, Inc.
Consolidated Statements of Comprehensive Income
(Dollars in Thousands,thousands, except per share data)
(Unaudited)
| Three Months Ended March 31, |
| ||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, |
| 2019 |
|
| 2018 |
| |||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| (Unaudited) |
| ||||||||||||||||||
Revenues |
|
|
|
|
|
|
|
| ||||||||||||||||
Capital markets services revenue | $ | 142,857 | $ | 122,349 | $ | 409,285 | $ | 349,887 |
| $ | 153,366 |
|
| $ | 125,458 |
| ||||||||
Interest on mortgage notes receivable | 4,325 | 3,098 | 12,041 | 9,274 |
|
| 4,589 |
|
|
| 5,244 |
| ||||||||||||
Other | 840 | 1,088 | 2,866 | 2,569 |
|
| 1,227 |
|
|
| 916 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||
148,022 | 126,535 | 424,192 | 361,730 |
|
| 159,182 |
|
|
| 131,618 |
| |||||||||||||
Expenses |
|
|
|
|
|
|
|
| ||||||||||||||||
Cost of services | 84,020 | 71,348 | 243,441 | 206,336 |
|
| 90,271 |
|
|
| 78,644 |
| ||||||||||||
Personnel | 15,109 | 11,733 | 44,731 | 39,715 |
|
| 20,289 |
|
|
| 22,064 |
| ||||||||||||
Occupancy | 3,959 | 3,678 | 12,331 | 10,408 |
|
| 4,160 |
|
|
| 3,813 |
| ||||||||||||
Travel and entertainment | 4,294 | 3,710 | 14,003 | 12,211 |
|
| 5,918 |
|
|
| 6,382 |
| ||||||||||||
Supplies, research, and printing | 2,269 | 2,102 | 6,065 | 5,993 |
|
| 2,316 |
|
|
| 2,191 |
| ||||||||||||
Insurance | 630 | 534 | 1,853 | 1,699 |
|
| 692 |
|
|
| 689 |
| ||||||||||||
Professional fees | 1,693 | 1,204 | 5,306 | 3,906 |
|
| 3,239 |
|
|
| 1,670 |
| ||||||||||||
Depreciation and amortization | 4,563 | 3,063 | 12,262 | 8,625 |
|
| 6,127 |
|
|
| 5,481 |
| ||||||||||||
Interest on warehouse line of credit | 3,473 | 1,885 | 9,129 | 5,562 |
|
| 3,911 |
|
|
| 4,211 |
| ||||||||||||
Other operating | 3,366 | 3,017 | 10,264 | 8,688 |
|
| 3,403 |
|
|
| 3,766 |
| ||||||||||||
|
|
|
|
|
| 140,326 |
|
|
| 128,911 |
| |||||||||||||
123,376 | 102,274 | 359,385 | 303,143 | |||||||||||||||||||||
Operating income | 24,646 | 24,261 | 64,807 | 58,587 |
|
| 18,856 |
|
|
| 2,707 |
| ||||||||||||
Interest and other income, net | 12,209 | 9,053 | 36,045 | 24,109 |
|
| 14,211 |
|
|
| 15,171 |
| ||||||||||||
Interest expense | (5 | ) | (9 | ) | (17 | ) | (33 | ) |
|
| (1 | ) |
|
| (5 | ) | ||||||||
(Increase) decrease in payable under the tax receivable agreement | 479 | (1,025 | ) | 479 | (1,025 | ) |
|
| — |
|
|
| — |
| ||||||||||
|
|
|
| |||||||||||||||||||||
Income before income taxes | 37,329 | 32,280 | 101,314 | 81,638 |
|
| 33,066 |
|
|
| 17,873 |
| ||||||||||||
Income tax expense | 15,726 | 12,260 | 40,593 | 31,896 |
|
| 5,256 |
|
|
| 805 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||
Net income | $ | 21,603 | $ | 20,020 | $ | 60,721 | $ | 49,742 |
| $ | 27,810 |
|
| $ | 17,068 |
| ||||||||
|
|
|
| |||||||||||||||||||||
Other comprehensive income: |
|
|
|
|
|
|
|
| ||||||||||||||||
Foreign currency translation adjustments |
|
| 15 |
|
|
| 495 |
| ||||||||||||||||
Comprehensive income |
| $ | 27,825 |
|
| $ | 17,563 |
| ||||||||||||||||
Earnings per share - Basic and Diluted |
|
|
|
|
|
|
|
| ||||||||||||||||
Income available to HFF, Inc. common stockholders - Basic | $ | 0.56 | $ | 0.52 | $ | 1.57 | $ | 1.30 | ||||||||||||||||
Income available to HFF, Inc. common stockholders - Diluted | $ | 0.54 | $ | 0.51 | $ | 1.54 | $ | 1.28 | ||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||
Foreign currency translation adjustments | (44 | ) | — | (81 | ) | — | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Comprehensive income | $ | 21,559 | $ | 20,020 | $ | 60,640 | $ | 49,742 | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Earnings per share available to HFF, Inc. common stockholders - Basic |
| $ | 0.70 |
|
| $ | 0.44 |
| ||||||||||||||||
Earnings per share available to HFF, Inc. common stockholders - Diluted |
| $ | 0.69 |
|
| $ | 0.42 |
|
See accompanying notes to the consolidated financial statements.
5
HFF, Inc.
Consolidated Statements of Stockholders’ Equity
(Dollars in Thousands,thousands, except share data)
(Unaudited)
|
| Common Stock |
|
| Treasury Stock |
|
| Additional |
|
| Accumulated Other |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
| Paid in |
|
| Comprehensive |
|
| Retained |
|
| Total |
| ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| (Loss) Income |
|
| Earnings |
|
| Equity |
| ||||||||||||||||||||||||||||||||||||||||
Stockholders' Equity, December 31, 2018 |
|
| 39,116,745 |
|
| $ | 391 |
|
|
| 26,508 |
|
| $ | (1,220 | ) |
| $ | 159,636 |
|
| $ | (743 | ) |
| $ | 192,482 |
|
| $ | 350,546 |
| ||||||||||||||||||||||||||||||||
Stock compensation and other, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,365 |
|
|
| — |
|
|
| — |
|
|
| 10,365 |
| ||||||||||||||||||||||||||||||||
Issuance of Class A common stock, net |
|
| 1,044,669 |
|
|
| 8 |
|
|
| (330,408 | ) |
|
| 14,231 |
|
|
| (14,239 | ) |
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||||||
Repurchase of Class A common stock |
|
| (337,587 | ) |
|
| — |
|
|
| 337,587 |
|
|
| (14,512 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14,512 | ) | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 15 |
|
|
| — |
|
|
| 15 |
| ||||||||||||||||||||||||||||||||
Dividends paid |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,467 |
|
|
| — |
|
|
| (72,188 | ) |
|
| (68,721 | ) | ||||||||||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 27,810 |
|
|
| 27,810 |
| ||||||||||||||||||||||||||||||||
Stockholders' Equity, March 31, 2019 |
|
| 39,823,827 |
|
| $ | 399 |
|
|
| 33,687 |
|
| $ | (1,501 | ) |
| $ | 159,229 |
|
| $ | (728 | ) |
| $ | 148,104 |
|
| $ | 305,503 |
| ||||||||||||||||||||||||||||||||
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Common Stock | Treasury Stock | Additional | Accumulated Other |
| Common Stock |
|
| Treasury Stock |
|
| Additional |
|
| Accumulated Other |
|
|
|
|
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| |||||||||||||||||||||||||||||||||||||||||
Paid in | Comprehensive | Retained | Total |
|
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|
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|
| Paid in |
|
| Comprehensive |
|
| Retained |
|
| Total |
| |||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Income (Loss) | Earnings | Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity, December 31, 2016 | 38,091,123 | $ | 385 | 372,325 | $ | (11,477 | ) | $ | 132,513 | $ | — | $ | 115,121 | $ | 236,542 | |||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| (Loss) Income |
|
| Earnings |
|
| Equity |
| ||||||||||||||||||||||||||||||||||||||||
Stockholders' Equity, December 31, 2017 |
|
| 38,579,544 |
|
| $ | 387 |
|
|
| 163,154 |
|
| $ | (4,971 | ) |
| $ | 144,304 |
|
| $ | 171 |
|
| $ | 146,576 |
|
| $ | 286,467 |
| ||||||||||||||||||||||||||||||||
Cumulative effect of adoption of new accounting standard |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,304 |
|
|
| 1,304 |
| ||||||||||||||||||||||||||||||||
Stock compensation and other, net | — | — | — | — | 16,965 | — | (557 | ) | 16,408 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,188 |
|
|
| — |
|
|
| — |
|
|
| 10,188 |
| |||||||||||||||||||||||
Issuance of Class A common stock, net | 681,970 | 2 | (405,088 | ) | 12,439 | (12,441 | ) | — | — | — |
|
| 822,207 |
|
|
| 4 |
|
|
| (423,501 | ) |
|
| 17,273 |
|
|
| (17,277 | ) |
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||
Repurchase of Class A common stock | (193,549 | ) | — | 195,917 | (5,933 | ) | — | — | — | (5,933 | ) |
|
| (298,931 | ) |
|
| — |
|
|
| 298,931 |
|
|
| (14,101 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14,101 | ) | |||||||||||||||||||||
Other comprehensive (loss) | — | — | — | — | — | (81 | ) | — | (81 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 495 |
|
|
| — |
|
|
| 495 |
| ||||||||||||||||||||||||||||||||
Dividends paid | — | — | — | — | 2,929 | — | (62,946 | ) | (60,017 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,663 |
|
|
| — |
|
|
| (71,435 | ) |
|
| (67,772 | ) | ||||||||||||||||||||||
Net income | — | — | — | — | — | — | 60,721 | 60,721 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17,068 |
|
|
| 17,068 |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity, September 30, 2017 | 38,579,544 | $ | 387 | 163,154 | $ | (4,971 | ) | $ | 139,966 | $ | (81 | ) | $ | 112,339 | $ | 247,640 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders' Equity, March 31, 2018 |
|
| 39,102,820 |
|
| $ | 391 |
|
|
| 38,584 |
|
| $ | (1,799 | ) |
| $ | 140,878 |
|
| $ | 666 |
|
| $ | 93,513 |
|
| $ | 233,649 |
|
Common Stock | Treasury Stock | Additional | ||||||||||||||||||||||||||||
Paid in | Retained | Total | ||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||||||||||
Stockholders’ equity, December 31, 2015 | 37,854,312 | $ | 383 | 497,055 | $ | (11,378 | ) | $ | 117,216 | $ | 108,283 | $ | 214,504 | |||||||||||||||||
Stock compensation and other, net | — | — | — | — | 13,303 | — | 13,303 | |||||||||||||||||||||||
Incremental tax adjustment from share-based award activities | — | — | — | — | (586 | ) | — | (586 | ) | |||||||||||||||||||||
Issuance of Class A common stock, net | 343,554 | 2 | (231,473 | ) | 2,715 | (2,717 | ) | — | — | |||||||||||||||||||||
Repurchase of Class A common stock | (112,081 | ) | — | 112,081 | (2,979 | ) | — | — | (2,979 | ) | ||||||||||||||||||||
Dividends paid | — | — | — | — | 1,995 | (70,357 | ) | (68,362 | ) | |||||||||||||||||||||
Net income | — | — | — | — | — | 49,742 | 49,742 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Stockholders’ equity, September 30, 2016 | 38,085,785 | $ | 385 | 377,663 | $ | (11,642 | ) | $ | 129,211 | $ | 87,668 | $ | 205,622 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
6
HFF, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)thousands)
| Three Months Ended March 31, |
| ||||||||||||||
Nine Months Ended September 30, |
| 2019 |
|
| 2018 |
| ||||||||||
2017 | 2016 |
| (Unaudited) |
| ||||||||||||
Operating activities |
|
|
|
|
|
|
|
| ||||||||
Net income | $ | 60,721 | $ | 49,742 |
| $ | 27,810 |
|
| $ | 17,068 |
| ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Stock based compensation | 13,049 | 8,941 |
|
| 5,850 |
|
|
| 5,752 |
| ||||||
Incremental tax adjustment from share-based award activities | — | 586 | ||||||||||||||
Deferred taxes | 16,798 | 14,074 |
|
| 5,091 |
|
|
| 666 |
| ||||||
Increase (decrease) in payable under the tax receivable agreement | (479 | ) | 1,025 |
|
| — |
|
|
| — |
| |||||
Depreciation and amortization: | ||||||||||||||||
Property and equipment | 3,191 | 2,377 | ||||||||||||||
Intangibles | 9,070 | 6,248 | ||||||||||||||
Gain on sale or disposition of assets, net | (20,178 | ) | (12,191 | ) | ||||||||||||
Depreciation |
|
| 1,183 |
|
|
| 1,100 |
| ||||||||
Amortization |
|
| 4,944 |
|
|
| 4,381 |
| ||||||||
Gain on sale and initial recording of mortgage servicing rights |
|
| (7,112 | ) |
|
| (8,573 | ) | ||||||||
Mortgage service rights assumed | (3,300 | ) | (3,334 | ) |
|
| (885 | ) |
|
| (935 | ) | ||||
Proceeds from sale of mortgage servicing rights | — | 2,265 | ||||||||||||||
Other |
|
| (370 | ) |
|
| — |
| ||||||||
Increase (decrease) in cash from changes in: |
|
|
|
|
|
|
|
| ||||||||
Accounts receivable | (87 | ) | (913 | ) |
|
| (2,133 | ) |
|
| (1,960 | ) | ||||
Receivable from affiliates | — | 4 | ||||||||||||||
Payable under the tax receivable agreement | (11,241 | ) | (10,824 | ) | ||||||||||||
Mortgage notes receivable | (443,264 | ) | (505,899 | ) |
|
| (612,874 | ) |
|
| (508,586 | ) | ||||
Net borrowings on warehouse line of credit | 443,264 | 505,899 |
|
| 612,874 |
|
|
| 508,586 |
| ||||||
Prepaid taxes, prepaid expenses and other current assets | (233 | ) | (1,871 | ) |
|
| (5,781 | ) |
|
| 914 |
| ||||
Other noncurrent assets | (4,022 | ) | (3,312 | ) |
|
| (538 | ) |
|
| 1,159 |
| ||||
Accrued compensation and related taxes | 7,342 | (9,597 | ) |
|
| (13,263 | ) |
|
| (15,167 | ) | |||||
Accounts payable | (747 | ) | (201 | ) |
|
| 1,155 |
|
|
| (1,740 | ) | ||||
Other current liabilities | (5,757 | ) | (10,101 | ) |
|
| 7,126 |
|
|
| (4,279 | ) | ||||
Deferred rent | (931 | ) | 1,336 | |||||||||||||
|
| |||||||||||||||
Deferred rent and other noncurrent liabilities |
|
| — |
|
|
| (309 | ) | ||||||||
Net cash provided by operating activities | 63,196 | 34,254 |
|
| 23,077 |
|
|
| (1,923 | ) | ||||||
Investing activities |
|
|
|
|
|
|
|
| ||||||||
Purchases of property and equipment | (4,355 | ) | (4,014 | ) |
|
| (2,788 | ) |
|
| (490 | ) | ||||
Purchase of businesses | (6,230 | ) | — | |||||||||||||
|
| |||||||||||||||
Purchase of securities and other investments |
|
| (3,800 | ) |
|
| — |
| ||||||||
Net cash used in investing activities | (10,585 | ) | (4,014 | ) |
|
| (6,588 | ) |
|
| (490 | ) | ||||
Financing activities |
|
|
|
|
|
|
|
| ||||||||
Payments on long-term debt | (357 | ) | (415 | ) |
|
| (33 | ) |
|
| (62 | ) | ||||
Incremental tax adjustment from share-based award activities | — | (586 | ) | |||||||||||||
Dividends paid | (60,017 | ) | (68,362 | ) |
|
| (68,721 | ) |
|
| (67,772 | ) | ||||
Treasury stock | (5,933 | ) | (2,979 | ) |
|
| (14,512 | ) |
|
| (14,101 | ) | ||||
|
| |||||||||||||||
Net cash used in financing activities | (66,307 | ) | (72,342 | ) |
|
| (83,266 | ) |
|
| (81,935 | ) | ||||
Effects of foreign currency translation on cash and cash equivalents | (81 | ) | — | |||||||||||||
|
| |||||||||||||||
Net decrease in cash | (13,777 | ) | (42,102 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | 235,582 | 233,904 | ||||||||||||||
|
| |||||||||||||||
Cash and cash equivalents, end of period | $ | 221,805 | $ | 191,802 | ||||||||||||
|
| |||||||||||||||
Effects of exchange rate changes on cash and cash equivalents and restricted cash |
|
| (55 | ) |
|
| 374 |
| ||||||||
Net decrease in cash and cash equivalents and restricted cash |
|
| (66,832 | ) |
|
| (83,974 | ) | ||||||||
Cash and cash equivalents and restricted cash, beginning of period |
|
| 307,278 |
|
|
| 276,802 |
| ||||||||
Cash and cash equivalents and restricted cash, end of period |
| $ | 240,446 |
|
| $ | 192,828 |
|
See accompanying notes to the consolidated financial statements.
7
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Organization and Basis of Presentation
Organization
HFF, Inc., a Delaware corporation (the “Company”), through its Operating Partnerships,wholly-owned subsidiaries, Holliday Fenoglio Fowler, L.P., a Texas limited partnership (“HFF LP”), HFF Securities L.P., a Delaware limited partnership and registered broker-dealer (“HFF Securities” and together with HFF LP, the “Operating Partnerships”), HFF Real Estate Limited a company incorporated in England and Wales and HFF Securities Limited, a company incorporated in England and Wales (collectively, with HFF Real Estate Limited, the “UK Subsidiaries”),United Kingdom, is a commercial real estate financial intermediary providing commercial real estate and capital markets services including debt placement, investment advisory, equity placements, investment banking and advisory services, loan sales and loan sale advisory services, commercial loan servicing, and capital markets advice and maintains offices in 2325 cities in the United States and effective January 17, 2017, one office in London, United Kingdom. The Company’s operations are impacted by the availability of equity and/orand debt as well as credit and liquidity in the domestic and global capital markets especially in the commercial real estate sector. Significant disruptions or changes in domestic and global capital market flows, as well as credit and liquidity issues in the global and domestic capital markets, regardless of their duration, could adversely affect the supply and/orand demand for capital from investors for commercial real estate investments which could have a significant impact on all of the Company’s capital market services revenues.
Initial Public Offering and Reorganization
The Company was formed in November 2006 in connection with a proposedcompleted its initial public offering of its(“IPO”) and the Company’s Class A common stock. On November 9, 2006, the Company filed a registration statement on FormS-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 FormS-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 stockCommon Stock began trading on the New York Stock Exchange under the symbol “HF.”“HF” in the first quarter of 2007. The proceeds of the initial public offering, including the exercise of the underwriter’s option to purchase additional shares, were used to purchase from HFF Holdings LLC, a Delaware limited liability company (“HFF Holdings”), all of the shares of Holliday GP Corp. (“Holliday GP”) and purchase from HFF Holdings partnership units of the Operating Partnerships (including partnership units in the Operating Partnerships held by Holliday GP). HFF Holdings used a portion of its proceeds to repay all outstanding indebtedness under HFF LP’s credit agreement. Accordingly, the Company did not retain any of the proceeds from the initial public offering.
In addition to cash received for its sale of all of the shares of Holliday GP and approximately 44.7%45% 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’sHFF, Inc.’s Class B common stock to HFF Holdings, an exchange right that permitted, subject to certain restrictions, 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 CompanyHoldings (the “TRA”). See Notes 16 and retired on August 31, 2012 in accordance with the Company’s certificate of incorporation. See Note 1517 for further discussion of the tax receivable agreement.
As a result of the reorganization in connection with the IPO, the Company became a holding company through a series of transactions pursuant to a sale and purchase agreement. Pursuant toAs a result of the OfferingIPO and reorganization, the Company’s sole assets were partnership interests in Operating Partnerships (that are held through its wholly-owned subsidiary HoldCoHFF Partnership Holdings, LLC, partnership interests of HFF LP and HFF Securitiesa Delaware limited liability company (“Partnership Holdings”) and all of the shares of Holliday GP.GP, the sole general partner of each of the Operating Partnerships. The transactions that occurred in connection with the IPO and reorganization are referred to as the “Reorganization Transactions.”
The Reorganization Transactions were treated, for financial reporting purposes, as a reorganization of entities under common control. As of August 31, 2012, HFF Holdings had utilized its Exchange Right to exchange all of its remaining interests in the Operating Partnerships and therefore the Company, through its wholly-owned subsidiaries, became and continues to be the sole equity holder of the Operating Partnerships.
Proposed Merger with Jones Lang LaSalle Incorporated
On March 18, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Jones Lang LaSalle Incorporated, a Maryland corporation (“Parent”), JLL CM, Inc., a Delaware corporation and wholly owned subsidiary of JLL (“Merger Sub”), JLL CMG, LLC, a Delaware limited liability company and wholly owned subsidiary of JLL (“Merger LLC”), and the Company. The Merger Agreement provides, among other things, that, upon the terms and subject to the conditions set forth in the Merger Agreement, (i) Merger Sub will merge with and into the Company, with the Company as the surviving corporation (the “Merger”), and (ii) following the completion of the Merger, the surviving corporation from the Merger will merge with and into Merger LLC (the “Subsequent Merger”), with Merger LLC surviving the Subsequent Merger and continuing as a wholly owned subsidiary of Parent.
8
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
The Company’s Board of Directors (the “Board”) has, by unanimous vote, approved the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, (the “Effective Time”), each share of Class A common stock of the Company, par value $0.01 per share (“Company Shares”), issued and outstanding immediately prior to the Effective Time (other than shares held by the Company, Parent or any of their respective subsidiaries and shares held by any holder of Company Shares who is entitled to demand and properly demands appraisal of such shares under Delaware law) will convert into (i) $24.63 per share in cash and (ii) 0.1505 of a share of common stock of Parent, par value $0.01 per share (“Parent Common Stock”). No fractional shares of Parent Common Stock will be issued in the Merger, and holders of Company Shares will receive cash in lieu of any fractional shares of Parent Common Stock.
The closing of the Merger is subject to certain conditions, including, among others, (i) the adoption of the Merger Agreement by the holders of at least a majority of the outstanding Company Shares entitled to vote thereon, (ii) the approval for listing on the New York Stock Exchange of the shares of Parent Common Stock issuable to the Company’s stockholders pursuant to the Merger Agreement, (iii) the expiration or earlier termination of the waiting period under Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and regulatory approval by FINRA, the U.K. Financial Conduct Authority, the Federal Home Loan Mortgage Corporation and certain state regulatory authorities, (iv) no court order or other legal restraint or prohibition preventing the consummation of the Merger or the Subsequent Merger, (v) the effectiveness of a registration statement on Form S-4 to be filed with the Securities and Exchange Commission by Parent in connection with the issuance of shares of Parent Company Stock in the Merger, (vi) in the case of each party’s obligation to effect the Merger, the absence of a material adverse effect with respect to the other party since the date of the Merger Agreement and (vii) subject to materiality exceptions, the accuracy of the representations and warranties made by Parent, Merger Sub and Merger LLC, on the one hand, and the Company, on the other hand, and compliance by Parent, Merger Sub, Merger LLC and the Company in all material respects with their respective obligations under the Merger Agreement. Effective April 15, 2019, the early termination of the Hart-Scott-Rodino waiting period was granted by the Federal Trade Commission.
The Merger Agreement contains specified termination rights for both the Company and Parent. The Company must pay Parent a termination fee of $54,000,000 if the Merger Agreement is terminated under certain specified circumstances, including (i) following a failure by the Company to obtain the requisite stockholder approval if the Company enters into a transaction with respect to a Company Competing Proposal (as defined in the Merger Agreement) within 12 months of such termination, (ii) if Parent terminates the Merger Agreement following a change of recommendation, (iii) if the Company terminates the Merger Agreement to enter into a Company Superior Proposal (as defined in the Merger Agreement) or (iv) if the Company has committed a material breach of the restrictions regarding dealing with third parties. Furthermore, Parent must pay the Company a termination fee of $75,000,000 if the Merger Agreement is terminated under certain specified circumstances, including (i) as a result of a judgment or other legal prohibition or restraint arising under the antitrust laws, and solely in such case, as of the date of such termination, all of the conditions other than antitrust-related conditions have been satisfied or waived other than those conditions that by their nature are only capable of being satisfied at the closing and (ii) if, upon reaching the 9-month anniversary of the Merger Agreement (which may be extended by up to 6 months under certain circumstances), the Company or Parent terminates the Merger Agreement and all of the conditions other than approval under the antitrust laws have been satisfied or waived at such time, other than conditions that by their nature would be satisfied if the closing and the closing date had occurred on the date of such termination.
The foregoing summary of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference to the terms and conditions of the Merger Agreement, a copy of which is attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed on March 20, 2019.
Basis of Presentation
The accompanying consolidated financial statements of the Company as of September 30, 2017 and December 31, 2016 and for the three and nine month periods ended September 30, 2017 and September 30, 2016, include the accounts of HFF LP, HFF Securities, HFF Real Estate Limited and HFF Securities Limited, as well as the Company’s additional wholly-owned subsidiaries, Holliday GP, and Partnership Holdings and effective January 17, 2017, HFF Securities Limited and HFF Real Estate Limited.InvestCo LLC. All significant intercompany accounts and transactions have been eliminated. As the sole stockholder of Holliday GP (the sole general partner of the Operating Partnerships), HFF, Inc. operates and controls all of the business and affairs of the Operating Partnerships. As the indirect sole stockholder of the UK Subsidiaries, HFF, Inc. also operates and controls all of the business and affairs of the UK Subsidiaries. The Company consolidates the financial results of the Operating Partnerships and the UK Subsidiaries.
Recent Accounting Pronouncements
In December 2016, the Financial Accounting Standards Board (“FASB”) issued update2016-19 – “Technical Corrections and Improvements,” which covers a wide range of Topics in the Accounting Standards Codification (“ASC”). The amendments in this update represent changes to clarify, correct errors, or make minor improvements to the ASC, making it easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments generally fall into one of the following categories: amendments related to differences between original guidance and the ASC, guidance clarification and reference corrections, simplification, or minor improvements. Most of the amendments in this update do not require transition guidance and are effective upon issuance of this update.
In March 2016, the FASB issued changes to the accounting for equity compensation. This update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This update also permits an entity to make an election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. This update was effective for the Company beginning in fiscal year 2017 and the Company made an election to change its accounting for forfeitures from the previously-required estimation method to recognizing forfeitures when they occur. The Company recognized $0.6 million as a reduction in retained earnings on January 1, 2017 as a result of eliminating the estimated forfeiture rate on unvested restricted stock units.
In February 2016, the FASB issued new guidance on the accounting for leases. This new guidance will requirerequires that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The Company adopted the new lease accounting requirements are effective for the Company’sstandard on January 1, 2019 fiscal year withon a modified retrospective basis and did not restate comparative periods. Upon adoption, the Company elected to utilize the package of practical expedients permitted
9
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
under the transition approach required,guidance, which allows the Company to carryforward (i) the historical lease classification, (ii) its assessment on whether a contract is or contains a lease and (iii) previously capitalized initial direct costs for any leases that exist prior to adoption of the new standard. The Company will also elect to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of comprehensive income on a straight-line basis over the lease term. Upon adoption, approximately $37.0 million was recognized as a right-of-use asset and approximately $49.4 million was recorded as a lease liability on our consolidated statement of financial position as of January 1, 2019. The new standard also requires expanded disclosure regarding the amounts, timing and uncertainties of cash flows related to a company’s lease portfolio. Refer to Note 9 for additional information on the adoption of the lease standard.
In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for annual and interim financial statement periods beginning after December 15, 2019, with early adoption permitted.permitted for financial statement periods beginning after December 15, 2018. The Company is currently evaluating this standard to determine the impact of this new guidanceadoption on its consolidated financial statements.
In May 2014,June 2018, the FASB issued ASUNo. 2014-09, “Revenue from Contracts with Customers,” which is required 2018-07 “Stock Compensation (Topic 718): Improvements to be adoptedNonemployee Share-based Payment Accounting”, to simplify the accounting for share–based payments granted to nonemployees by aligning the Company in fiscal year 2018. This ASU supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. The standard implements a five-step model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) or retrospectivelyaccounting with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method).
requirements for employee share–based compensation.The Company will adoptadopted the new standard effectiveon January 1, 2018,2019 and plans to use the modified retrospective approach. The Company has conducted initial analyses, developed project management procedures, assessed for adjustments to existing accounting policies, and completed detailed contract reviews to support an evaluation of the standard’sadoption did not have a material impact on the Company’sCompany's consolidated financial statements. As we complete our overall assessment, we are also identifying any needed changes
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to our businessthe Disclosure Requirements for the Fair Value Measurement. The update eliminates the disclosure requirements associated with (a) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (b) policies related to the timing and transfers between levels of the fair value hierarchy and (c) the valuation processes systemsfor Level 3 fair value measurements. ASU 2018-13 will require disclosures related to the range and controlsweighted averages used to support the new revenue recognition and disclosure requirements. Based on our evaluation to date,develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for the Company expects the timing of revenue recognition for our equity placement services to be accelerated.on January 1, 2020 with early adoption permitted. The Company also expects revenue recognition disclosures to include additional detail in accordance with the new requirements. However, the Company does not expect the adoption of this accounting guidance to have a significant impact on our consolidated financial statements.
In January 2017, FASB issued ASUNo. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU eliminates Step 2 from the goodwill impairment test. This ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those years, with early adoption permitted. We are evaluating the effect that ASU2017-04 will have on our goodwill assessment process, but do not believe the adoption of ASU2017-04 will have a material impact on ourthe Company's consolidated financial statements and relatedor disclosures.
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 Form10-Q and Rule10-01Article 10 of RegulationS-X and should be read in conjunction with the Company’s Annual Report on Form10-K for the year ended December 31, 2016.2018. Accordingly, significant accounting policiesthey do not include all of the information and disclosures normally provided have been omitted as such items are disclosed therein.footnotes required by GAAP for complete financial statements. 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 and nine months ended September 30, 2017March 31, 2019 are not necessarily indicative of the results expected for the year ending December 31, 2017.2019.
Revenue Recognition. Substantially all of the Company’s revenues are derived from capital markets services. These capital markets services revenues are in the form of fees collected from the Company’s clients, usually negotiated on a transaction-by-transaction basis, which includes origination fees, investment advisory fees earned for brokering sales of commercial real estate, loan sales and loan servicing fees. The Company also earns interest on mortgage notes receivable during the period between the origination of the loan and the subsequent sale to Freddie Mac in connection with the Company’s participation in the Freddie Mac Program.
Total Revenues:
Capital markets services revenues. The Company earns its capital markets services revenue through the following activities and sources:
Origination fees. Origination fees are earned through the placement of debt and equity or structured financing for commercial real estate transactions. Fees earned by the Securities Subsidiaries for discretionary and non-discretionary equity capital raises and other debt referral transactions are also included within origination fees in the Company’s consolidated statements of comprehensive income.
10
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
Investment advisory fees. The Company earns investment advisory fees by acting as a broker for commercial real estate owners seeking to sell a property or multiple properties or an interest in a property or multiple properties and by providing investment banking advisory services through the Securities Subsidiaries.
Loan sales. The Company generates loan sales fees through assisting its clients in their efforts to sell all or portions of commercial real estate debt notes.
The Company’s contracts are generally negotiated on a transaction-by-transaction basis with a success-based fee awarded upon the satisfaction of the origination, sale, referral, placement or equity raise. The Company’s agreements generally include such success-based fees for services that are performed over time under one performance obligation. The variable consideration associated with the successful outcome remains constrained until the completion of the transaction, generally at the closing of the applicable financing or funding of the transaction. Once the constraint is lifted, revenue is recognized as the Company’s fee agreements do not include terms or conditions that require the Company to perform any service or fulfill any obligation once the transaction closes. The substantial majority of the Company’s transactions are completed within one year and the Company has utilized the practical expedients within Topic 606 related to financing components and costs of obtaining a contract due to the short-term nature of the contracts.
Loan servicing fees and loan performance fees. The Company generates loan servicing fees through the provision of collection, remittance, recordkeeping, reporting and other related loan servicing functions, activities and services for either lenders or borrowers on mortgages placed with third-party lenders. The Company also generates loan performance fees associated with indemnification obligations related to the Risk Transfer Agreement. Revenue is recognized as the Company fulfills its stand ready obligation to satisfy such indemnification obligations.
The revenues associated with loan servicing fees are accounted for in accordance with Topic 860, Transfers and Servicing, whereby the Company recognizes loan servicing revenues at the time services are rendered, provided the loans are current and the debt service payments are made by the borrowers.
Interest on mortgage notes receivable. The Company recognizes interest income on the accrual basis during the holding period based on the contract interest rate in the loan that is to be purchased by Freddie Mac in connection with the Company’s participation in the Freddie Mac Multifamily Approved Seller/Servicer for Conventional and Senior Housing Loans program (“Freddie Mac Program”), provided that the debt service is paid by the borrower.
Other. Certain of the Company’s fee agreements provide for reimbursement of transaction-related costs which the Company recognizes as other revenue. Reimbursements received from clients for out-of-pocket expenses are characterized as revenue in the consolidated statements of comprehensive income rather than as a reduction of expenses incurred. Because the Company is the primary obligor, has supplier discretion, and bears the credit risk for such expenses, the Company records reimbursement revenue for such out-of-pocket expenses. Reimbursement revenue is recognized over time based upon the measure of progress to completion.
Disaggregation of Revenue. The Company disaggregates its revenue from contracts with customers by its multiple platforms, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the Company’s revenue and cash flows are affected by economic factors. The following table provides a reconciliation of the Company’s revenue recognized under Topic 606 to the Company’s consolidated revenues:
Revenue Category |
| Three Months Ended March 31, 2019 |
|
| Three Months Ended March 31, 2018 |
| ||
Debt placement origination fees |
| $ | 65,508 |
|
| $ | 54,871 |
|
Investment advisory fees |
|
| 61,432 |
|
|
| 47,523 |
|
Equity placement origination fees |
|
| 16,667 |
|
|
| 14,081 |
|
Loan sales |
|
| 359 |
|
|
| 592 |
|
Capital markets services revenue recognized under Topic 606 |
|
| 143,966 |
|
|
| 117,067 |
|
Loan servicing and loan performance fees |
|
| 9,400 |
|
|
| 8,391 |
|
Capital markets services revenue |
|
| 153,366 |
|
|
| 125,458 |
|
Interest on mortgage notes receivable |
|
| 4,589 |
|
|
| 5,244 |
|
Other(1) |
|
| 1,227 |
|
|
| 916 |
|
Total revenue |
| $ | 159,182 |
|
| $ | 131,618 |
|
11
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(1)- Other revenues are recognized under Topic 606.
Firm and Office Profit Participation Plans and Executive Bonus Plan. The Company has a firm profit participation plan, office profit participation plans, and an executive bonus plan (the “Plans”) that each allow for incentive payments to be made, based on the achievement of 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 comprehensive 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. Based on an accounting policy election and consistent with ASC Topic 718, Compensation - Stock Compensation, 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, the employees of the Company understand the requirements to earn the award, the number of shares is not determined before the grant date and, finally, if the performance metrics are not met during the performance year, the award is not earned and therefore forfeited. 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 comprehensive 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 additionalpaid-in-capital upon the granting of the awards on the Company’s consolidated balance sheets. The Plans allow for payment to be made in both cash and share-based awards. The cash portion of the awards will not be subject to time-based vesting conditions and will be expensed during the performance year. The share-based portion of the awards is subject to a three yearthree-year time-based vesting schedule beginning on the first anniversary of the grant (which is made in the first calendar quarter of the subsequent year). As a result, the total expense for the share-based portion of the awards is recorded over the period from the beginning of the performance year through the vesting date, or 50 months.
3. Stock Compensation
The stock compensation cost that has been charged against income for the three and nine months ended September 30, 2017March 31, 2019 and 2018 was $4.3$5.9 million and $13.0 million, respectively, which is recorded in personnel expenses in the consolidated statements of comprehensive income. The stock compensation cost that has been charged against income for the three and nine months ended September 30, 2016 was $2.9 million and $8.9$5.8 million, respectively. At September 30, 2017,March 31, 2019, there was approximately $37.0$53.9 million of unrecognized compensation cost related tonon-vested restricted stock units (“RSUs”) with a weighted average remaining contractual term of 2.32.7 years. As of September 30, 2017,March 31, 2019, there were 2,390,737 RSUs1,951,716 restricted stock units outstanding, of which 2,180,0301,783,355 have continued vesting requirements.
During the three monththree-month period ended September 30, 2017,March 31, 2019, no options were granted, vested, exercised or forfeited.
During the three monththree-month period ended September 30, 2017, noMarch 31, 2019, 755,823 new RSUsrestricted stock units were granted, 5,374 RSUs1,053,742 restricted stock units vested 6,260 RSUsof which 1,044,669 were converted to Class A common stock, and 12,727 RSUs51,006 restricted stock units were forfeited.
The fair value of vested RSUsrestricted stock units was $8.3$11.4 million at September 30, 2017.March 31, 2019.
12
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
4. Property and Equipment
Property and equipment consist of the following (dollars in thousands):following:
|
| March 31, |
|
| December 31, |
| ||||||||||
| 2019 |
|
| 2018 |
| |||||||||||
September 30, 2017 | December 31, 2016 |
| (in thousands) |
| ||||||||||||
Furniture and equipment | $ | 8,160 | $ | 7,667 |
| $ | 8,327 |
|
| $ | 8,426 |
| ||||
Computer equipment | 2,203 | 2,145 |
|
| 1,759 |
|
|
| 1,759 |
| ||||||
Capitalized software costs | 2,561 | 2,043 |
|
| 3,931 |
|
|
| 3,665 |
| ||||||
Leasehold improvements | 18,076 | 15,813 |
|
| 23,297 |
|
|
| 21,065 |
| ||||||
|
| |||||||||||||||
Subtotal | 31,000 | 27,668 | ||||||||||||||
Property and equipment, gross |
|
| 37,314 |
|
|
| 34,915 |
| ||||||||
Less accumulated depreciation and amortization | (14,070 | ) | (11,831 | ) |
|
| (18,536 | ) |
|
| (17,719 | ) | ||||
|
| |||||||||||||||
$ | 16,930 | $ | 15,837 | |||||||||||||
|
| |||||||||||||||
Property and equipment, net |
| $ | 18,778 |
|
| $ | 17,196 |
|
At September 30, 2017March 31, 2019 and December 31, 2016,2018, the Company has recorded, within furniture and equipment, office equipment under capitalfinance leases of $1.8$1.1 million and $1.9$1.2 million, respectively, including accumulated amortization of $1.4$1.0 million and $1.2$1.0 million, respectively, which is included within depreciation and amortization expense in the accompanying consolidated statements of comprehensive income. See Note 7 for discussion of the related capital lease obligations.
5. Goodwill and Intangible Assets
The Company’s intangible assets consist of mortgage servicing rightsgoodwill at March 31, 2019 is summarized as follows (in thousands):
Balance at December 31, 2018 |
| $ | 8,512 |
|
Additions through acquisitions |
|
| — |
|
Foreign currency translation |
|
| 69 |
|
Balance at March 31, 2019 |
| $ | 8,581 |
|
The Company performs goodwill impairment tests annually during the fourth quarter, and customer contracts and relationships. The customer contracts and relationships intangibles were part of the assets acquired in two business acquisitionsalso performs interim goodwill impairment tests if it is determined that it is more likely than not that the Company completed infair value of a reporting unit is less than the first quarter of 2017. The acquisitions, which were not significant, were accountedcarrying amount. No goodwill impairment test was required for as business combinations using the acquisition method of accounting, which established a new basis of accounting for all assets acquired and liabilities assumed at fair value. The purchase price allocation was based on preliminary fair values of the assets acquired and liabilities assumed at the date of acquisitions. The purchase price allocation will be finalized within twelve months from the closing date of the respective acquisitions.three-month period ended March 31, 2019.
The Company’s intangible assets are summarized as follows (dollars in thousands):follows:
| March 31, 2019 |
|
| December 31, 2018 |
| |||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 |
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Book Value |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Book Value |
| |||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value |
| (in thousands) |
| ||||||||||||||||||||||||||||||||||||||||
Amortizable intangible assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Mortgage servicing rights | $ | 81,422 | $ | (32,022 | ) | $ | 49,400 | $ | 64,648 | $ | (28,034 | ) | $ | 36,614 |
| $ | 120,198 |
|
| $ | (46,087 | ) |
| $ | 74,111 |
|
| $ | 116,683 |
|
| $ | (43,039 | ) |
| $ | 73,644 |
| ||||||||||
Other | 1,038 | (314 | ) | 724 | — | — | — |
|
| 671 |
|
|
| (469 | ) |
|
| 202 |
|
|
| 940 |
|
|
| (722 | ) |
| $ | 218 |
| |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total intangible assets | $ | 82,460 | $ | (32,336 | ) | $ | 50,124 | $ | 64,648 | $ | (28,034 | ) | $ | 36,614 |
| $ | 120,869 |
|
| $ | (46,556 | ) |
| $ | 74,313 |
|
| $ | 117,623 |
|
| $ | (43,761 | ) |
| $ | 73,862 |
| ||||||||||
|
|
|
|
|
|
As of September 30, 2017March 31, 2019 and December 31, 2016,2018, the Company serviced $65.8$82.9 billion and $58.0$81.2 billion, respectively, of commercial loans. The Company earned $7.3$9.4 million and $21.0$8.4 million in servicing fees and interest on float and escrow balances for the three months ended March 31, 2019 and nine month periods ending September 30, 2017,2018, respectively. The Company earned $5.8 million and $17.0 million in servicing fees and interest on float and escrow balances for the three and nine month periods ending September 30, 2016. These revenues are recorded aswithin capital markets services revenues in the consolidated statements of comprehensive income.
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 Topic 860,Transfers and Servicing (“ASC 860”) on January 1, 2007 and involved no initial consideration paid by the Company. As of September 30, 2017March 31, 2019 and December 31, 20162018 the Company has recorded mortgage servicing rights of $49.4$74.1 million and $36.6$73.6 million on $64.8$82.1 billion and $56.5$80.3 billion, respectively, of the total loans serviced.
13
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
The Company stratifies its servicing portfolio based on the type of loan, including life company loans,Freddie Mac, commercial mortgage backed securities (“CMBS”), Freddie Maclife company loans and limited-service life company loans.
Changes in the carrying value of mortgage servicing rights for the nine month periodsthree months ended September 30, 2017March 31, 2019 and 2016,2018, were as follows (dollars in thousands):
Category | 12/31/16 | Capitalized | Amortized | Sold / Transferred | 9/30/17 | December 31, 2018 |
|
| Capitalized |
|
| Amortized |
|
| March 31, 2019 |
| |||||||||||||||||||
Freddie Mac | $ | 16,234 | $ | 18,242 | $ | (3,621 | ) | $ | — | $ | 30,855 | $ | 57,747 |
|
| $ | 4,509 |
|
| $ | (3,329 | ) |
| $ | 58,927 |
| |||||||||
CMBS | 16,247 | 774 | (3,006 | ) | — | 14,015 |
| 11,314 |
|
|
| 53 |
|
|
| (752 | ) |
|
| 10,615 |
| ||||||||||||||
Life company | 3,567 | 2,150 | (1,860 | ) | — | 3,857 |
| 4,097 |
|
|
| 786 |
|
|
| (749 | ) |
|
| 4,134 |
| ||||||||||||||
Life company – limited | 566 | 376 | (269 | ) | — | 673 |
| 486 |
|
|
| 46 |
|
|
| (97 | ) |
|
| 435 |
| ||||||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||||
Total | $ | 36,614 | $ | 21,542 | $ | (8,756 | ) | $ | — | $ | 49,400 | $ | 73,644 |
|
| $ | 5,394 |
|
| $ | (4,927 | ) |
| $ | 74,111 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Category | 12/31/15 | Capitalized | Amortized | Sold / Transferred | 9/30/16 | December 31, 2017 |
|
| Capitalized |
|
| Amortized |
|
| March 31, 2018 |
| |||||||||||||||||||
Freddie Mac | $ | 7,074 | $ | 8,460 | $ | (1,576 | ) | $ | (2,450 | ) | $ | 11,508 | $ | 40,468 |
|
| $ | 6,284 |
|
| $ | (2,621 | ) |
| $ | 44,131 |
| ||||||||
CMBS | 16,768 | 778 | (3,001 | ) | 1,948 | 16,493 |
| 13,514 |
|
|
| 297 |
|
|
| (903 | ) |
|
| 12,908 |
| ||||||||||||||
Life company | 2,729 | 2,154 | (1,448 | ) | — | 3,435 |
| 3,833 |
|
|
| 548 |
|
|
| (665 | ) |
|
| 3,716 |
| ||||||||||||||
Life company – limited | 351 | 404 | (222 | ) | — | 533 |
| 668 |
|
|
| 90 |
|
|
| (106 | ) |
|
| 652 |
| ||||||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||||
Total | $ | 26,922 | $ | 11,796 | $ | (6,247 | ) | $ | (502 | ) | $ | 31,969 | $ | 58,483 |
|
| $ | 7,219 |
|
| $ | (4,295 | ) |
| $ | 61,407 |
| ||||||||
|
|
|
|
|
Amounts capitalized represent mortgage servicing rights retained upon the sale of originated loans to Federal Home Loan Mortgage Corporation (“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 $6.5$4.5 million and $18.2$6.3 million on $1.7$0.7 billion and $4.3$1.3 billion of loans respectively, during the three months ended March 31, 2019 and nine month periods ending September 30, 2017, respectively, and $2.2 million and $8.5 million on $0.6 billion and $2.8 billion of loans, respectively, during the three and nine month periods ending September 30, 2016.2018, respectively. The Company recorded mortgage servicing rights acquired without the exchange of initial consideration on the CMBS and Life company tranches of $1.2$0.9 million and $3.3$0.9 million on $3.5$2.6 billion and $9.3$2.9 billion of loans, respectively, during the three months ended March 31, 2019 and nine month periods ending September 30, 2017, respectively, and $0.8 million and $3.3 million on $1.8 billion and $8.4 billion of loans, respectively, during the three and nine month periods ending September 30, 2016. During the nine months ending September 30, 2016, the2018, respectively. 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 that the Company recorded a gain in the three and nine months ending September 30, 2016 of $0.0 million and $1.8 million, respectively, within interest and other income, net in the consolidated statements of comprehensive income. During the three and nine months ending September 30, 2017, the Company did not sell any of the servicing rights on certain Freddie Mac loans upon their securitization. However, the Companyalso received securitization compensation in relation to the securitization of certain Freddie Mac mortgagesmortgage servicing rights in the three months ended March 31, 2019 and nine months ending September 30, 20172018 of $3.6$2.9 million and $8.6$4.9 million, respectively, and $1.3 million and $4.2 million during the three and nine month periods ending September 30, 2016, respectively. The securitization compensation is recorded within interest and other income, net in the consolidated statements of comprehensive income.
Amortization expense related to intangible assets was $3.5$4.9 million and $9.1$4.4 million during the three months ended March 31, 2019 and nine month periods ended September 30, 2017 and $2.2 million and $6.2 million during the three and nine month periods ending September 30, 2016,2018, respectively and is recorded in depreciation and amortization in the consolidated statements of comprehensive income.
Estimated amortization expense for the next fiveremainder of 2019 and the following four years is as follows (dollars in thousands):
Remainder of 2017 | $ | 2,944 | ||||||
2018 | 10,720 | |||||||
2019 | 8,526 | |||||||
Remainder of 2019 |
| $ | 11,695 |
| ||||
2020 | 6,647 |
|
| 13,632 |
| |||
2021 | 5,718 |
|
| 11,630 |
| |||
2022 | 5,062 |
|
| 9,913 |
| |||
2023 |
|
| 8,817 |
|
The weighted-average life of the mortgage servicing rights intangible asset was 6.6 years at September 30, 2017.March 31, 2019.
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 ourthe Company’s 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.
14
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
In the normal course of business, the Company enters into contractual commitments to originate (purchase) and sell multifamily mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrowers“lock-in” “lock-in” a specified interest rate. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company enters into a sale commitment with Freddie Mac simultaneously with the rate lock commitment with the borrower. The terms of the contract with Freddie Mac and the rate lock with the borrower are matched in substantially all respects to eliminate interest rate risk. Both the rate lock commitments to borrowers and the forward sale contracts to Freddie Mac are undesignated derivatives with level 2 inputs and, accordingly, are marked to fair value through earnings. The impact on ourthe Company’s financial position and earnings resulting from loan commitments is not significant. The Company elected the fair value option for all mortgage notes receivable originated after January 1, 2016 to eliminate the impact of the variability in interest rate movements on the value of the mortgage notes receivable.
The following tables set forth the Company’s financial assets that were accounted for at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2017March 31, 2019 and December 31, 20162018 (in thousands):
Recurring fair value measurements
September 30, 2017 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) | |||||||||||||
Recurring fair value measurements | ||||||||||||||||
Mortgage notes receivable | $ | 736,218 | $ | — | $ | 736,218 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total recurring fair value measurements | $ | 736,218 | $ | — | $ | 736,218 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements Using: |
| ||||||||||||||||||||||||||
December 31, 2016 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) | |||||||||||||||||||||||||||||
Recurring fair value measurements | ||||||||||||||||||||||||||||||||
March 31, 2019 |
| Carrying Value |
|
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||||||||||||||||||
Mortgage notes receivable | $ | 290,933 | $ | — | $ | 290,933 | $ | — |
| $ | 966,694 |
|
| $ | — |
|
| $ | 966,694 |
|
| $ | — |
| ||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total recurring fair value measurements | $ | 290,933 | $ | — | $ | 290,933 | $ | — |
| $ | 966,694 |
|
| $ | — |
|
| $ | 966,694 |
|
| $ | — |
| ||||||||
|
|
|
|
|
|
|
|
|
| Fair Value Measurements Using: |
| |||||||||
December 31, 2018 |
| Carrying Value |
|
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||
Mortgage notes receivable |
| $ | 351,194 |
|
| $ | — |
|
| $ | 351,194 |
|
| $ | — |
|
Total recurring fair value measurements |
| $ | 351,194 |
|
| $ | — |
|
| $ | 351,194 |
|
| $ | — |
|
The valuation of mortgage notes receivable is calculated based on already locked in interest rates. These assets are classified as Level 2 in the fair value hierarchy as all inputs are reasonably observable.
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, 2019 and December 31, 2018 (in thousands):
Nonrecurring fair value measurements:
|
|
|
|
|
| Fair Value Measurements Using: |
| |||||||||
March 31, 2019 |
| Carrying Value |
|
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||
Mortgage servicing rights |
| $ | 74,111 |
|
| $ | — |
|
| $ | — |
|
| $ | 92,490 |
|
Total nonrecurring fair value measurements |
| $ | 74,111 |
|
| $ | — |
|
| $ | — |
|
| $ | 92,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements Using: |
| |||||||||
December 31, 2018 |
| Carrying Value |
|
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||
Mortgage servicing rights |
| $ | 73,644 |
|
| $ | — |
|
| $ | — |
|
| $ | 91,787 |
|
Total nonrecurring fair value measurements |
| $ | 73,644 |
|
| $ | — |
|
| $ | — |
|
| $ | 91,787 |
|
15
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
In accordance with GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. These assets may include mortgage servicing rights. The mortgage servicing rights are recorded at fair value upon initial recording and were notre-measured remeasured at fair value during the third quarteras of 2017March 31, 2019 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 September 30, 2017.
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 September 30, 2017 and DecemberMarch 31, 2016 (in thousands):2019.
Nonrecurring fair value measurements:
September 30, 2017 | Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Mortgage servicing rights | $ | 49,400 | $ | — | $ | — | $ | 66,308 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total nonrecurring fair value measurements | $ | 49,400 | $ | — | $ | — | $ | 66,308 | ||||||||
|
|
|
|
|
|
|
| |||||||||
December 31, 2016 | Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Mortgage servicing rights | $ | 36,614 | $ | — | $ | — | $ | 49,970 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total nonrecurring fair value measurements | $ | 36,614 | $ | — | $ | — | $ | 49,970 | ||||||||
|
|
|
|
|
|
|
|
Mortgage servicing rights do not trade in an active, open market with readily-available observable prices. Since there is no readyobservable inputs do not exist to determine the 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 September 30, 2017March 31, 2019 and December 31, 20162018 are as follows:
| March 31, |
| December 31, | |||||||||
September 30, 2017 | December 31, 2016 |
| 2019 |
| 2018 | |||||||
Expected life of cash flows | 3 years to 9 years | 3 years to 11 years |
| 3 years to 10 years |
| 3 years to 10 years | ||||||
Discount rate (1) | 10% to 16% | 10% to 16% |
| 10% to 16% |
| 10% to 16% | ||||||
Prepayment rate | 0% to 8% | 0% to 8% |
| 0% to 8% |
| 0% to 8% | ||||||
Inflation rate | 2% | 2% |
| 2% |
| 2% | ||||||
Cost of service per loan | $ | 1,920 to $4,787 | $ | 1,920 to $4,997 |
| $1,920 to $4,803 |
| $1,920 to $4,743 |
(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 aboutThe Company’s 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 balancesalso include cash and cash equivalents, restricted cash, securities held to maturity and warehouse lines of credit. The cash and cash equivalents and restricted cash balances include accounts with maturities of less than three months. Themonths and therefore, the carrying amount approximates fair value due to the short-term maturities of these instruments; theseinstruments. The cash and cash equivalents and restricted cash accounts are consideredclassified as Level 1 within the fair values.
Warehousevalue hierarchy. The Company’s $25.0 million investment in securities held to maturity are classified as level 2 within the fair value hierarchy and carried at amortized cost. The securities are required to be redeemed upon the completion of the three-year term of the Risk Transfer Agreement, as defined in Note 7, and will be redeemed for $25.0 million. The warehouse line of credit: Due to the is a short-term nature andfacility with variable interest rates of this instrument,and therefore, fair value approximates carrying value; these are consideredvalue. The warehouse line of credit is classified as Level 2 within the fair values.value hierarchy.
7. Securities Held-to-Maturity
On July 2, 2018, the Company invested $25.0 million in mandatorily redeemable preferred stock of M&T Realty Capital Lease ObligationsCorporation (“M&T-RCC”) in connection with a risk transfer agreement entered into between the Company and M&T-RCC (the “Risk Transfer Agreement”), which is expected to enable the Company to increase the Company’s share of Fannie Mae’s Delegated Underwriting and Servicing (“DUS®”) business. Through the Risk Transfer Agreement, the Company sources multifamily property loans to M&T-RCC, which funds the loans through its Fannie Mae DUS® loan platform.
Capital leaseIn connection with the Risk Transfer Agreement, the Company indemnifies M&T-RCC for their credit recourse obligations consistassociated with loans originated under the Risk Transfer Agreement. In addition to the $25.0 million investment, the Company deposits a portion of the following at September 30, 2017 and Decemberoriginal principal balance for each loan originated under the Risk Transfer Agreement to serve as collateral for any potential future indemnification obligations. As of March 31, 2016 (dollars in thousands):2019, collateral deposits totaling $3.7 million has been recorded within other noncurrent assets. For additional information on the Company’s indemnification obligation under the Risk Transfer Agreement see Note 16.
16
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
September 30, 2017 | December 31, 2016 | |||||||
Capital lease obligations | $ | 350 | $ | 707 | ||||
Less current maturities | 303 | 448 | ||||||
|
|
|
| |||||
$ | 47 | $ | 259 | |||||
|
|
|
|
Capital lease obligations consist primarily of office equipment leases that expire at various dates through November 2019. A summary of future minimum lease payments under capital leases at September 30, 2017 is as follows (dollars in thousands):
Remainder of 2017 | $ | 91 | ||
2018 | 218 | |||
2019 | 41 | |||
|
| |||
$350 | ||||
|
|
HFF LP maintains two uncommitted warehouse revolving lines of credit for the purpose of funding the Freddie Mac mortgage loans that it originates as aunder the Freddie Mac Multifamily Approved Seller/Servicer for Conventional and Senior Housing Loan provider (“Freddie Mac Program”).Program. The Company is a party to an uncommitted $600 million financing arrangement with PNC Bank, N.A. (“PNC”). The PNC arrangement was modifiedamended during the thirdfirst quarter of 2017 to increase the uncommitted amount from $450 million to $600 million which can be increased to $800 million an unlimited number of times per year for a period of 30 calendar days. In addition, PNC also agreed that the maximum capacity of the financing arrangement would be increased to $1.5 billion. On October 2, 2017, HFF LP entered into an extended funding agreement with Freddie Mac whereby Freddie Mac can extend the required purchase date for each mortgage that has an Original Funding Date (as defined in the agreement) occurring within the fourth quarter of 2017, to February 15, 2018. In connection with the extended funding agreement with Freddie Mac, PNC agreed2018 to increase the maximum capacity of the financing arrangementfrom $600 million to $2.0$1.0 billion. The maximum capacity under the PNC arrangement will revert to $1.5 billion after the expiration of the extended funding agreement. The Company is also party to an uncommitted $150 million financing arrangement with The Huntington National Bank (“Huntington”). The Huntington arrangement was amended in July 2017 to increase theincludes an uncommitted amount from $125 million toof $150 million, which can be increased to $175 million three times in aone-year period for 45 calendar days and may be increased to $175 million from October 1, 2017 through February 15, 2018.days.
Each funding is separately approved on atransaction-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 the Freddie Mac Program and cannot be used for any other purpose. As of September 30, 2017March 31, 2019 and December 31, 2016,2018, HFF LP had $734.2$961.3 million and $291.0 $348.4 million, respectively, outstanding on the warehouse lines of credit. Interest on the warehouse lines of credit is at the30-day LIBOR rate (1.23%(2.49% and 0.62%2.50% at September 30, 2017March 31, 2019 and December 31, 2016,2018, respectively) plus a spread. HFF LP is also paid interest on the mortgage note receivable secured by a multifamily loan at the rate in the Freddie Mac note.
9. Lease Commitments
The Company has various operating and financing leases for various corporate offices (which leases sometime include parking spaces) and office equipment under noncancelable operating leases.equipment. These leases have initial terms of three to eleven years. SeveralCertain of the Company’s leases have termination clausesi) options to extend the leases for up to 6 years, ii) options to terminate the lease and iii.) options whereby the term may be reduced by two to seveneight years upon prior notice and payment of a termination fee by the Company.
The components of lease expense were as follows:
|
| March 31, 2019 |
| |
|
| (in thousands) |
| |
Operating lease costs |
| $ | 2,541 |
|
Finance lease costs: |
|
|
|
|
Amortization of right-of-use assets |
|
| 33 |
|
Interest on lease liabilities |
|
| 1 |
|
Total finance lease costs |
| $ | 34 |
|
Supplemental cash flow information related to leases was as follows:
|
| March 31, 2019 |
| |
|
| (in thousands) |
| |
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
Operating cash flows used by operating leases |
| $ | 3,056 |
|
Operating cash flows used by finance leases |
|
| 1 |
|
Financing cash flows used by finance leases |
|
| 33 |
|
17
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
During the three-month period ended March 31, 2019, there were no right-of-use assets obtained in exchange for lease obligations.
Supplemental balance sheet information related to leases was as follows:
|
| March 31, 2019 |
| |
|
| (in thousands) |
| |
Operating leases |
|
|
|
|
Operating lease right-of-use assets |
| $ | 34,970 |
|
|
|
|
|
|
Current portion of operating lease liabilities |
|
| 9,397 |
|
Noncurrent operating lease liabilities |
|
| 37,436 |
|
Total operating lease liabilities |
|
| 46,833 |
|
|
|
|
|
|
Finance leases |
|
|
|
|
Property and equipment, at cost |
|
| 1,089 |
|
Accumulated depreciation |
|
| (970 | ) |
Property and equipment, net |
|
| 119 |
|
|
|
|
|
|
Current portion of long-term debt |
|
| 79 |
|
Long-term debt, less current portion |
|
| 52 |
|
Total finance lease liabilities |
|
| 131 |
|
|
|
|
|
|
Weighted average remaining lease term |
|
|
|
|
Operating leases |
| 5.8 years |
| |
Finance leases |
| 2.2 years |
| |
Weighted average discount rate |
|
|
|
|
Operating leases |
|
| 3.7 | % |
Finance leases |
|
| 2.2 | % |
Maturities of lease liabilities were as follows:
|
| Operating leases |
|
| Finance leases |
| ||
|
| (in thousands) |
| |||||
Remainder of 2019 |
| $ | 8,067 |
|
| $ | 74 |
|
2020 |
|
| 10,279 |
|
|
| 51 |
|
2021 |
|
| 9,450 |
|
|
| 9 |
|
2022 |
|
| 7,545 |
|
|
| 7 |
|
2023 |
|
| 4,692 |
|
|
| 2 |
|
Thereafter |
|
| 11,745 |
|
|
| — |
|
Total lease payments |
| $ | 51,778 |
|
| $ | 143 |
|
Less imputed interest |
|
| (4,945 | ) |
|
| (12 | ) |
Total |
| $ | 46,833 |
|
| $ | 131 |
|
Total rental expense charged to operations was $3.2$3.5 million and $10.2$3.2 million respectively, during the three months ended March 31, 2019 and nine month periods ending September 30, 2017 and $3.0 million and $8.6 million,2018, respectively, during the three and nine month periods ended September 30, 2016 and is recorded within occupancy expense in the consolidated statements of comprehensive 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 2017 | $ | 2,667 | ||
2018 | 10,988 | |||
2019 | 10,719 | |||
2020 | 9,913 | |||
2021 | 8,440 | |||
2022 | 6,317 |
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 comprehensive income.income and is not material to the Company’s consolidated financial position.
The Company also leases certain office equipment under capital leases that expire at various dates through 2019. See Note 4 and Note 7 above for further description of the assets and related obligations recorded under these capital leases at September 30, 2017 and December 31, 2016, respectively.
18
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
10. Servicing
The Company services commercial real estate loans for lenders. The unpaid principal balance of the servicing portfolio totaled $65.8$82.9 billion and $58.0$81.2 billion at September 30, 2017March 31, 2019 and December 31, 2016,2018, 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 September 30, 2017 and December 31, 2016, the funds held in escrow totaled $252.6 million and $182.3 million, respectively. These funds, and the offsetting obligations, are not presented in the Company’s 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 comprehensive income.
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 Topic 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.
Income tax expense includes current and deferred taxes as follows for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
September 30, | ||||||||
2017 | 2016 | |||||||
U.S. Federal: | ||||||||
Current | $ | 20,175 | $ | 14,897 | ||||
Deferred | 15,901 | 13,528 | ||||||
|
|
|
| |||||
36,076 | 28,425 | |||||||
|
|
|
| |||||
State and Local: | ||||||||
Current | 3,620 | 2,925 | ||||||
Deferred | 1,808 | 546 | ||||||
|
|
|
| |||||
5,428 | 3,471 | |||||||
|
|
|
| |||||
International: | ||||||||
Current | — | — | ||||||
Deferred | (911 | ) | — | |||||
|
|
|
| |||||
(911 | ) | — | ||||||
|
|
|
| |||||
Total | $ | 40,593 | $ | 31,896 | ||||
|
|
|
|
|
| Current |
|
| Deferred |
|
| Total |
| |||
Three Months Ended March 31, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | — |
|
| $ | 4,391 |
|
| $ | 4,391 |
|
State |
|
| 165 |
|
|
| 649 |
|
|
| 814 |
|
Foreign |
|
| — |
|
|
| 51 |
|
|
| 51 |
|
|
| $ | 165 |
|
| $ | 5,091 |
|
| $ | 5,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current |
|
| Deferred |
|
| Total |
| |||
Three Months Ended March 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | — |
|
| $ | 1,390 |
|
| $ | 1,390 |
|
State |
|
| 139 |
|
|
| (380 | ) |
|
| (241 | ) |
Foreign |
|
| — |
|
|
| (344 | ) |
|
| (344 | ) |
|
| $ | 139 |
|
| $ | 666 |
|
| $ | 805 |
|
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 ninethree months ended September 30, 2017March 31, 2019 and 20162018 (dollars in thousands):
September 30, |
| March 31, |
| |||||||||||||||||||||||||||||
2017 | 2016 |
| 2019 |
|
| 2018 |
| |||||||||||||||||||||||||
Income tax expense / (benefit) | Rate | Rate |
|
|
|
|
| Rate |
|
|
|
|
|
| Rate |
| ||||||||||||||||
Taxes computed at federal rate | $ | 35,460 | 35.0 | % | $ | 28,573 | 35.0 | % |
| $ | 6,944 |
|
|
| 21.0 | % |
| $ | 3,753 |
|
|
| 21.0 | % | ||||||||
State and local taxes, net of federal tax benefit | 4,019 | 4.0 | % | 3,288 | 4.0 | % |
|
| 1,769 |
|
|
| 5.4 | % |
|
| 870 |
|
|
| 4.9 | % | ||||||||||
Rate differential onnon-US income | 541 | 0.5 | % | — | — |
|
| (4 | ) |
|
| (0.0 | )% |
|
| (1 | ) |
|
| 0.0 | % | |||||||||||
Effect of deferred rate change | 476 | 0.5 | % | (1,188 | ) | (1.5 | )% | |||||||||||||||||||||||||
Change in income tax benefit payable to stockholder | (117 | ) | (0.1 | )% | 206 | 0.3 | % | |||||||||||||||||||||||||
Effect of shortfalls (windfalls) related to equity compensation | (1,139 | ) | (1.1 | )% | — | — | ||||||||||||||||||||||||||
Provision to return adjustment | (131 | ) | (0.1 | )% | 196 | 0.2 | % | |||||||||||||||||||||||||
Effect of windfalls related to equity compensation |
|
| (3,814 | ) |
|
| (11.5 | )% |
|
| (4,535 | ) |
|
| (25.4 | )% | ||||||||||||||||
Meals and entertainment | 1,160 | 1.1 | % | 789 | 1.0 | % |
|
| 375 |
|
|
| 1.1 | % |
|
| 321 |
|
|
| 1.8 | % | ||||||||||
Other | 324 | 0.3 | % | 32 | 0.1 | % |
|
| (14 | ) |
|
| (0.1 | )% |
|
| 397 |
|
|
| 2.2 | % | ||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Income tax expense | $ | 40,593 | 40.1 | % | $ | 31,896 | 39.1 | % |
| $ | 5,256 |
|
|
| 15.9 | % |
| $ | 805 |
|
|
| 4.5 | % | ||||||||
|
|
|
|
13. StockholdersStockholders’ 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 stockstock vote together as a single class on all matters presented to the stockholders for their vote or approval. The Company had issued 38,742,69839,857,514 and 38,463,44839,143,253 shares of Class A common stock as of September 30, 2017March 31, 2019 and December 31, 2016,2018, respectively.
19
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
On January 24, 2017,31, 2019, the Company’s board of directors declared a special cash dividend of $1.57$1.75 per share of Class A common stock to stockholders of record on February 9, 2017.11, 2019. The aggregate dividend payment was paid on February 21, 201727, 2019 and totaled approximately $60.0$68.7 million based on the number of shares of Class A common stock then outstanding. Additionally, 95,648 RSUs79,324 restricted stock units (dividend equivalent units) were granted for those unvested and vested but not issued RSUsrestricted stock units as of the record date of February 9, 2017.11, 2019. These dividend equivalent units follow the same vesting terms as the underlying RSUs.restricted stock units.
On January 22, 2016,26, 2018, the Company’s board of directors declared a special cash dividend of $1.80$1.75 per share of Class A common stock to stockholders of record on February 8, 2016.9, 2018. The aggregate dividend payment was paid on February 19, 201621, 2018 and totaled approximately $68.4$67.8 million based on the number of shares of Class A common stock then outstanding. Holders ofAdditionally, 79,387 restricted stock units (dividend equivalent units) were granted for those unvested and vested but not issued RSUs were granted, in the aggregate, 82,536 additional RSUsrestricted stock units as of the record date of February 8, 2016.9, 2018. These dividend equivalent units follow the same vesting terms as the underlying RSUs.restricted stock units.
14. Earnings Per Share
The Company’s net income and weighted average shares outstanding for the three months ended March 31, 2019 and nine month periods ended September 30, 2017 and 20162018 consist of the following (dollars in thousands):following:
| Three Months Ended March 31, |
| ||||||||||||||||||||||
Three months ended September 30, | Nine months ended September 30, |
| 2019 |
|
| 2018 |
| |||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| (in thousands, except per share data) |
| ||||||||||||||||||
Net income | $ | 21,603 | $ | 20,020 | $ | 60,721 | $ | 49,742 |
| $ | 27,810 |
|
| $ | 17,068 |
| ||||||||
Weighted Average Shares Outstanding: |
|
|
|
|
|
|
|
| ||||||||||||||||
Basic | 38,706,240 | 38,273,684 | 38,647,021 | 38,234,868 |
|
| 39,680,505 |
|
|
| 39,041,492 |
| ||||||||||||
Diluted | 39,891,583 | 38,958,377 | 39,515,826 | 38,764,829 |
|
| 40,309,251 |
|
|
| 40,201,900 |
|
The calculations of basic and diluted net incomeearnings per share amounts for the three months ended March 31, 2019 and nine month periods ended September 30, 2017 and 20162018 are described and presented below.
Basic Net IncomeEarnings per Share
Numerator— net income for the three months ended March 31, 2019 and nine month periods ended September 30, 2017 and 2016,2018, respectively.
Denominator— the weighted average shares of unrestricted Class A common stock for the three months ended March 31, 2019 and nine month periods ended September 30, 20172018, including 239,375 and 2016, including 210,707 and 189,385 RSUs218,702 restricted stock units that have vested and whose issuance is no longer contingent as of September 30, 2017March 31, 2019 and 2016,2018, respectively.
Diluted Net IncomeEarnings per Share
Numerator— net income for the three months ended March 31, 2019 and nine month periods ended September 30, 2017 and 2016, respectively.2018 as in the basic earnings per share calculation described above.
20
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
Denominator— the weighted average shares of unrestricted Class A common stock for the three months ended March 31, 2019 and nine month periods ended September 30, 20172018, including 239,375 and 2016, including 210,707 and 189,385 RSUs218,702 restricted stock units that have vested and whose issuance is no longer contingent as of September 30, 2017March 31, 2019 and 2016,2018, respectively, plus the dilutive effect of the unvested RSUs,restricted stock units, restricted stock and stock options.
| Three Months Ended March 31, |
| ||||||||||||||||||||||
Three months ended September 30, | Nine months ended September 30, |
| 2019 |
|
| 2018 |
| |||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| (in thousands, except per share data) |
| ||||||||||||||||||
Basic Earnings Per Share of Class A Common Stock |
|
|
|
|
|
|
|
| ||||||||||||||||
Numerator: |
|
|
|
|
|
|
|
| ||||||||||||||||
Net income | $ | 21,603 | $ | 20,020 | $ | 60,721 | $ | 49,742 |
| $ | 27,810 |
|
| $ | 17,068 |
| ||||||||
Denominator: |
|
|
|
|
|
|
|
| ||||||||||||||||
Weighted average number of shares of Class A common stock outstanding | 38,706,240 | 38,273,684 | 38,647,021 | 38,234,868 |
|
| 39,680,505 |
|
|
| 39,041,492 |
| ||||||||||||
Basic net income per share of Class A common stock | $ | 0.56 | $ | 0.52 | $ | 1.57 | $ | 1.30 | ||||||||||||||||
Basic earnings per share of Class A common stock |
| $ | 0.70 |
|
| $ | 0.44 |
| ||||||||||||||||
Diluted Earnings Per Share of Class A Common Stock |
|
|
|
|
|
|
|
| ||||||||||||||||
Numerator: |
|
|
|
|
|
|
|
| ||||||||||||||||
Net income | $ | 21,603 | $ | 20,020 | $ | 60,721 | $ | 49,742 |
| $ | 27,810 |
|
| $ | 17,068 |
| ||||||||
Denominator: |
|
|
|
|
|
|
|
| ||||||||||||||||
Basic weighted average number of shares of Class A common stock | 38,706,240 | 38,273,684 | 38,647,021 | 38,234,868 |
|
| 39,680,505 |
|
|
| 39,041,492 |
| ||||||||||||
Add—dilutive effect of: |
|
|
|
|
|
|
|
| ||||||||||||||||
Unvested RSUs | 1,169,444 | 672,888 | 853,467 | 518,127 | ||||||||||||||||||||
Unvested restricted stock units |
|
| 618,627 |
|
|
| 1,143,646 |
| ||||||||||||||||
Stock options | 15,899 | 11,805 | 15,338 | 11,834 |
|
| 10,119 |
|
|
| 16,762 |
| ||||||||||||
Weighted average common shares outstanding — diluted | 39,891,583 | 38,958,377 | 39,515,826 | 38,764,829 |
|
| 40,309,251 |
|
|
| 40,201,900 |
| ||||||||||||
Diluted earnings per share of Class A common stock | $ | 0.54 | $ | 0.51 | $ | 1.54 | $ | 1.28 |
| $ | 0.69 |
|
| $ | 0.42 |
|
15. Related Party Transactions
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, if any, 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, Jody Thornton, the Company’s president and member of the Company’s board of directors and a capital markets advisor of the Operating Partnerships, John Fowler, a current director emeritus of the Company’s board of directors and a capital markets advisor of the Operating Partnerships, and Matthew D. Lawton, Gerard T. Sansosti, Michael J. Tepedino and Manuel A. de Zarraga, each an Executive Managing Director and a capital markets advisor 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. During the third quarter of 2017, Messrs. Gibson, Thornton, Fowler, Lawton, Sansosti, Tepedino and de Zarraga received payments of $1.1 million, $1.1 million, $0.9 million, $0.3 million, $0.5 million, $0.2 million and $0.3 million, respectively, in connection with the Company’s payment of $11.2 million to HFF Holdings under the tax receivable agreement. During the third quarter of 2016, Messrs. Gibson, Thornton, Fowler, Lawton, Sansosti, Tepedino and de Zarraga received payments of $0.8 million, $0.8 million, $0.7 million, $0.2 million, $0.4 million, $0.2 million and $0.2 million, respectively, in connection with the Company’s payment of $10.8 million to HFF Holdings under the tax receivable agreement. The Company will retain the remaining 15% of cash savings, if any, 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 initial public offering and will continue until all such tax benefits have been utilized or have expired. See Note 16 for the amount recorded in relation to this agreement.
16. Commitments and Contingencies
Tax Receivable Agreement
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 $99.7 million and $111.4 million for this obligation to HFF Holdings as a liability on the consolidated balance sheet as of September 30, 2017 and December 31, 2016, respectively.
In recent years, the Company has entered into arrangements with newly-hired capital markets advisors whereby these capital markets advisors would be paid additional compensation if certain performance targets are met over a defined period. TheseWe have estimated that future payments that will be made to the capital markets advisors only if they enter into an employment agreement at the endHFF Holdings will be $50.3 million, of the performance period. Payments under these arrangements, if earned, wouldwhich, approximately $8.3 million is anticipated to be paid in fiscal years 2017 through 2019. Currently,
21
HFF, Inc.
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
In connection with the Risk Transfer Agreement, the Company cannot reasonably estimatewill indemnify M&T-RCC’s loan loss exposure for each loan originated under the amountsRisk Transfer Agreement. The Company’s loss exposure is capped at 33.33% of the unpaid principal balance in excess of the collateral securing such loan. As of March 31, 2019, the Company’s maximum quantifiable loss exposure associated with the Company’s indemnification obligation is $123.8 million on $371.5 million of unpaid principal balances. The maximum quantifiable liability is not representative of the actual loss the Company may incur as the Company would only be liable for this amount in the event that all of the loans for which the Company indemnifies M&T-RCC were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement. There were no actual losses incurred under this arrangement during the three months ended March 31, 2019.
For loans that have been sold through the Risk Transfer Agreement, the Company records an indemnification accrual equal to the fair value of the guarantee obligations undertaken upon M&T-RCC’s sale of the loan. Subsequently, this accrual is amortized over the estimated life of the loan and recorded as an increase in capital markets services revenues within the consolidated statements of comprehensive income. The Company records a corresponding asset related to loan performance fee rights which will also be amortized over the estimated life of the loan. As of March 31, 2019, the guarantee obligations recorded within other noncurrent liabilities and corresponding asset recorded within other noncurrent assets were approximately $0.6 million.
17. Subsequent Events
The Company has evaluated subsequent events through the date these financial statements were issued and concluded that no subsequent events have occurred 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 capital markets advisors achieving the performance targets and the probability of each of the capital markets advisors signing an employment agreement. As of September 30, 2017 and December 31, 2016, $0.5 million and $0.1 million, respectively, have been accrued for these arrangements onrequire recognition in the consolidated balance sheet.
22
Item 2. Management’s Discussion and Analysis ofof Financial Condition and Resultsof Operations
The following discussion summarizes the financial position of the Company and its subsidiaries as of September 30, 2017,March 31, 2019, and the results of our operations for the three and nine month periodsmonths ended September 30, 2017,March 31, 2019, and should be read in conjunction with (i) the unaudited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form10-Q and (ii) the consolidated financial statements and accompanying notes to our Annual Report on Form10-K for the year ended December 31, 2016.2018.
Overview
Our Business
We are, based on transaction volume, one of the leading providers of commercial real estate and capital markets services to both the consumers and providers of capital in the commercial real estate industry and one of the largest full-service commercial real estate financial intermediaries in the country. We operate out of 2426 offices (23 in the United States and one in the United Kingdom) with approximately 9751,080 associates including approximately 373405 capital markets advisors.
Substantially all of our revenues are in the form of capital markets services fees collected from our clients, usually negotiated on atransaction-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 have the potential to create a diversified revenue stream within the commercial real estate sector.
We operate in one reportable segment, the commercial real estate financial intermediary segment, and offer debt placement, investment advisory, 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. Additionally, evolving global regulatory and compliance trends, including changes to the UK regulatory framework resulting from the UK’s exit from the European Union, may adversely affect our business and the economic and commercial real estate markets in which we do business.
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 which could therefore, result in decreased transactional volume.
23
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 advisory and loan originations and related servicing fees. If our debt placement and investment advisory 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 disruptions induring 2007 through 2010 to the global capital and credit markets, and in particular the domestic capital markets. While conditions in the most recent years have generally improved, theThe global and domestic credit and liquidity issues coupled with the global and domestic economic recession/slow down as well as other globalreductions in debt and domestic macro events beyond our control,equity allocations to commercial real estate reduced, and could reduce in the future reduce, the number of acquisitions, dispositions and loan originations, as well as the respective number of transactions, which could in turn adversely affect our capital markets services revenues including our servicing revenue. While conditions have generally improved, global and transaction volumes. This has had,domestic credit and mayliquidity issues, economic recessions or slowdowns and other global and domestic macro events beyond our control, could 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 caption “Risk Factors” in this Quarterly Report on Form 10-Q.
10-Q.On March 18, 2019, the Company entered into the Merger Agreement with Parent, Merger Sub and Merger LLC. The Merger Agreement provides, among other things, that, upon the terms and subject to the conditions set forth in the Merger Agreement, (i) Merger Sub will merge with and into the Company, with the Company as the surviving corporation, and (ii) following the completion of the Merger, the surviving corporation from the Merger will merge with and into Merger LLC, with Merger LLC surviving the Subsequent Merger and continuing as a wholly owned subsidiary of Parent. See Note 1 to the Company’s consolidated financial statements for further information regarding the Merger Agreement.
24
Results of Operationsoperations for the three months ended March 31, 2019 and 2018
Following is a discussion of our results of operations for the three months ended September 30, 2017March 31, 2019 and September 30, 2016.2018. The table included in the period comparisons below provides summaries of our results of operations. Theperiod-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 Form10-K for the year ended December 31, 2016.2018.
| Three Months Ended March 31, |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||
For the Three Months Ended September 30, |
| 2019 |
|
| 2018 |
|
| Total |
|
| Total |
| ||||||||||||||||||||||||||||||||||||
2017 | 2016 |
|
|
|
|
| % of |
|
|
|
|
|
| % of |
|
| Dollar |
|
| Percentage |
| |||||||||||||||||||||||||||
Dollars | % of Revenue | Dollars | % of Revenue | Total Dollar Change | Total Percentage Change |
| Dollars |
|
| Revenue |
|
| Dollars |
|
| Revenue |
|
| Change |
|
| Change |
| |||||||||||||||||||||||||
(dollars in thousands, unless percentages) |
| (in thousands, unless percentages) |
| |||||||||||||||||||||||||||||||||||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Capital markets services revenue | $ | 142,857 | 96.5 | % | $ | 122,349 | 96.7 | % | $ | 20,508 | 16.8 | % |
| $ | 153,366 |
|
|
| 96.3 | % |
| $ | 125,458 |
|
|
| 95.3 | % |
| $ | 27,908 |
|
|
| 22.2 | % | ||||||||||||
Interest on mortgage notes receivable | 4,325 | 2.9 | % | 3,098 | 2.4 | % | 1,227 | 39.6 | % |
|
| 4,589 |
|
|
| 2.9 | % |
|
| 5,244 |
|
|
| 4.0 | % |
|
| (655 | ) |
|
| (12.5 | )% | |||||||||||||||
Other | 840 | 0.6 | % | 1,088 | 0.9 | % | (248 | ) | (22.8 | )% |
|
| 1,227 |
|
|
| 0.8 | % |
|
| 916 |
|
|
| 0.7 | % |
|
| 311 |
|
|
| 34.0 | % | ||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||
Total revenues | 148,022 | 100.0 | % | 126,535 | 100.0 | % | 21,487 | 17.0 | % |
|
| 159,182 |
|
|
| 100.0 | % |
|
| 131,618 |
|
|
| 100.0 | % |
|
| 27,564 |
|
|
| 20.9 | % | |||||||||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Cost of services | 84,020 | 56.8 | % | 71,348 | 56.4 | % | 12,672 | 17.8 | % |
|
| 90,271 |
|
|
| 56.7 | % |
|
| 78,644 |
|
|
| 59.8 | % |
|
| 11,627 |
|
|
| 14.8 | % | |||||||||||||||
Personnel | 15,109 | 10.2 | % | 11,733 | 9.3 | % | 3,376 | 28.8 | % |
|
| 20,289 |
|
|
| 12.7 | % |
|
| 22,064 |
|
|
| 16.8 | % |
|
| (1,775 | ) |
|
| (8.0 | )% | |||||||||||||||
Occupancy | 3,959 | 2.7 | % | 3,678 | 2.9 | % | 281 | 7.6 | % |
|
| 4,160 |
|
|
| 2.6 | % |
|
| 3,813 |
|
|
| 2.9 | % |
|
| 347 |
|
|
| 9.1 | % | |||||||||||||||
Travel and entertainment | 4,294 | 2.9 | % | 3,710 | 2.9 | % | 584 | 15.7 | % |
|
| 5,918 |
|
|
| 3.7 | % |
|
| 6,382 |
|
|
| 4.8 | % |
|
| (464 | ) |
|
| (7.3 | )% | |||||||||||||||
Supplies, research and printing | 2,269 | 1.5 | % | 2,102 | 1.7 | % | 167 | 7.9 | % |
|
| 2,316 |
|
|
| 1.5 | % |
|
| 2,191 |
|
|
| 1.7 | % |
|
| 125 |
|
|
| 5.7 | % | |||||||||||||||
Other | 13,725 | 9.3 | % | 9,703 | 7.7 | % | 4,022 | 41.5 | % |
|
| 17,372 |
|
|
| 10.9 | % |
|
| 15,817 |
|
|
| 12.0 | % |
|
| 1,555 |
|
|
| 9.8 | % | |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 123,376 | 83.3 | % | 102,274 | 80.8 | % | 21,102 | 20.6 | % |
|
| 140,326 |
|
|
| 88.2 | % |
|
| 128,911 |
|
|
| 97.9 | % |
|
| 11,415 |
|
|
| 8.9 | % | |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||
Operating income | 24,646 | 16.7 | % | 24,261 | 19.2 | % | 385 | 1.6 | % |
|
| 18,856 |
|
|
| 11.8 | % |
|
| 2,707 |
|
|
| 2.1 | % |
|
| 16,149 |
|
|
| 596.6 | % | |||||||||||||||
Interest and other income, net | 12,209 | 8.2 | % | 9,053 | 7.2 | % | 3,156 | 34.9 | % |
|
| 14,211 |
|
|
| 8.9 | % |
|
| 15,171 |
|
|
| 11.5 | % |
|
| (960 | ) |
|
| (6.3 | )% | |||||||||||||||
Interest expense | (5 | ) | (0.0 | )% | (9 | ) | (0.0 | )% | 4 | (44.4 | )% |
|
| (1 | ) |
|
| (0.0 | )% |
|
| (5 | ) |
|
| (0.0 | )% |
|
| 4 |
|
|
| (80.0 | )% | |||||||||||||
(Increase) decrease in payable under tax receivable agreement | 479 | 0.3 | % | (1,025 | ) | (0.8 | )% | 1,504 | (146.7 | )% | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||
(Increase) decrease in payable under the tax receivable agreement |
|
| — |
|
|
| 0.0 | % |
|
| — |
|
|
| 0.0 | % |
|
| — |
|
|
| 0.0 | % | ||||||||||||||||||||||||
Income before income taxes | 37,329 | 25.2 | % | 32,280 | 25.5 | % | 5,049 | 15.6 | % |
|
| 33,066 |
|
|
| 20.8 | % |
|
| 17,873 |
|
|
| 13.6 | % |
|
| 15,193 |
|
|
| 85.0 | % | |||||||||||||||
Income tax expense | 15,726 | 10.6 | % | 12,260 | 9.7 | % | 3,466 | 28.3 | % |
|
| 5,256 |
|
|
| 3.3 | % |
|
| 805 |
|
|
| 0.6 | % |
|
| 4,451 |
|
|
| 552.9 | % | |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||
Net income | $ | 21,603 | 14.6 | % | $ | 20,020 | 15.8 | % | $ | 1,583 | 7.9 | % |
| $ | 27,810 |
|
|
| 17.5 | % |
| $ | 17,068 |
|
|
| 13.0 | % |
| $ | 10,742 |
|
|
| 62.9 | % | ||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA (1) | $ | 38,627 | 26.1 | % | $ | 33,105 | 26.2 | % | $ | 5,522 | 16.7 | % |
| $ | 37,386 |
|
|
| 23.5 | % |
| $ | 20,706 |
|
|
| 15.7 | % |
| $ | 16,680 |
|
|
| 80.6 | % | ||||||||||||
|
|
|
|
|
(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 anon-cash charge, (v) income recognized on the initial recording of mortgage servicing rights that are acquired with no initial consideration and the inherent value of servicing rights, which arenon-cash income amounts, 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 comprehensive 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 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. |
25
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 September 30, 2017March 31, 2019 and 2016:
Adjusted EBITDA for the Company is calculated as follows:
(dollars in thousands)2018:
Adjusted EBITDA for the Company is calculated as follows: | Adjusted EBITDA for the Company is calculated as follows: |
| ||||||||||||||
(dollars in thousands) | (dollars in thousands) |
| ||||||||||||||
For the Three Months Ended September 30, |
| Three Months Ended March 31, |
| |||||||||||||
2017 | 2016 |
| 2019 |
|
| 2018 |
| |||||||||
Net income | $ | 21,603 | $ | 20,020 |
| $ | 27,810 |
|
| $ | 17,068 |
| ||||
Add: |
|
|
|
|
|
|
|
| ||||||||
Interest expense | 5 | 9 |
|
| 1 |
|
|
| 5 |
| ||||||
Income tax expense | 15,726 | 12,260 |
|
| 5,256 |
|
|
| 805 |
| ||||||
Depreciation and amortization | 4,563 | 3,063 |
|
| 6,127 |
|
|
| 5,481 |
| ||||||
Stock-based compensation (a) | 4,297 | 2,905 |
|
| 5,850 |
|
|
| 5,752 |
| ||||||
Initial recording of mortgage servicing rights | (7,088 | ) | (6,177 | ) |
|
| (7,658 | ) |
|
| (8,405 | ) | ||||
Increase (decrease) in payable under the tax receivable agreement | (479 | ) | 1,025 |
|
| — |
|
|
| — |
| |||||
|
| |||||||||||||||
Adjusted EBITDA | $ | 38,627 | $ | 33,105 |
| $ | 37,386 |
|
| $ | 20,706 |
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Revenues.Our total revenues were $148.0$159.2 million for the three months ended September 30, 2017March 31, 2019 compared to $126.5$131.6 million for the same period in 2016,2018, an increase of $21.5$27.6 million, or 17.0%20.9%. Revenues increasedprimarily due to a 12.1%44.4% increase in total production volume as compared to the third quarter of 2016.
three months ended March 31, 2018.
The revenues we generated from capital markets services for the three months ended September 30, 2017March 31, 2019 increased approximately $20.5$27.9 million, or 16.8%22.2%, to $142.9$153.4 million from $122.3$125.5 million for the same period in 2016.2018. The increase is primarily attributable to a 12.1%44.4% increase in the total production volume and an increase in the number of transactions, partially offset by a reduction in the average basis points per transaction during the third quarter of 2017three months ended March 31, 2019 compared to the third quarter of 2016.three months ended March 31, 2018.
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Total Operating Expenses. Our total operating expenses were $140.3 million for the three months ended March 31, 2019 compared to $128.9 million for the same period in 2016, a decrease of $0.2 million.
Total Operating Expenses.Our total operating expenses were $123.4 million for the three months ended September 30, 2017 compared to $102.3 million for the same period in 2016,2018, an increase of $21.1$11.4 million, or approximately 20.6%8.9%. Expenses increased primarily due to increased costhigher costs of services primarily from an increase in capital markets services revenue. Additionally, personnel, occupancy, travel and entertainment, and other operating costsassociated with additional commission expenses on increased most of which is due to the increase in headcount.
revenues.
Cost of services for the three months ended September 30, 2017March 31, 2019 increased $12.7$11.6 million, or 17.8%14.8%, to $84.0$90.3 million from $71.3$78.6 million for the same period in 2016.2018. The increase is primarily the result of the increase in commissionsadditional commission and other incentive compensation directly related tocompensation-related expenses associated with the increasegrowth in capital markets services revenuesrevenue and higher salary and fringe benefit costs from increased headcount.headcount. Cost of services as a percentage of capital markets services revenues was approximately 58.8%58.9% and 58.3%62.7% for the three month periodsmonths ended September 30, 2017March 31, 2019 and September 30, 2016,2018, respectively.
Net Income.Our net income for the three months ended September 30, 2017March 31, 2019 was $21.6$27.8 million, an increase of approximately $1.6$10.7 million versus $20.0$17.1 million for the same fiscal period in 2016.2018. This increase is primarily dueattributable to the $15.2 million increase in operating income and interest and otherbefore income net.taxes for the three months ended March 31, 2019 compared to the prior period.
rights which were partially offset by increases in interest and other related income.
Following is a discussion of our results of operations for the nine months ended September 30, 2017 and September 30, 2016. The table included in the period comparisons below provides summaries of our results of operations. Theperiod-to-period$5.1 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 Form10-Kmillion. for the year ended December 31, 2016.
For the Nine Months Ended September 30, | ||||||||||||||||||||||||
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Capital markets services revenue | $ | 409,285 | 96.5 | % | $ | 349,887 | 96.7 | % | $ | 59,398 | 17.0 | % | ||||||||||||
Interest on mortgage notes receivable | 12,041 | 2.8 | % | 9,274 | 2.6 | % | 2,767 | 29.8 | % | |||||||||||||||
Other | 2,866 | 0.7 | % | 2,569 | 0.7 | % | 297 | 11.6 | % | |||||||||||||||
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Total revenues | 424,192 | 100.0 | % | 361,730 | 100.0 | % | 62,462 | 17.3 | % | |||||||||||||||
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Cost of services | 243,441 | 57.4 | % | 206,336 | 57.0 | % | 37,105 | 18.0 | % | |||||||||||||||
Personnel | 44,731 | 10.5 | % | 39,715 | 11.0 | % | 5,016 | 12.6 | % | |||||||||||||||
Occupancy | 12,331 | 2.9 | % | 10,408 | 2.9 | % | 1,923 | 18.5 | % | |||||||||||||||
Travel and entertainment | 14,003 | 3.3 | % | 12,211 | 3.4 | % | 1,792 | 14.7 | % | |||||||||||||||
Supplies, research and printing | 6,065 | 1.4 | % | 5,993 | 1.7 | % | 72 | 1.2 | % | |||||||||||||||
Other | 38,814 | 9.2 | % | 28,480 | 7.9 | % | 10,334 | 36.3 | % | |||||||||||||||
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Total operating expenses | 359,385 | 84.7 | % | 303,143 | 83.8 | % | 56,242 | 18.6 | % | |||||||||||||||
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Operating income | 64,807 | 15.3 | % | 58,587 | 16.2 | % | 6,220 | 10.6 | % | |||||||||||||||
Interest and other income, net | 36,045 | 8.5 | % | 24,109 | 6.7 | % | 11,936 | 49.5 | % | |||||||||||||||
Interest expense | (17 | ) | (0.0 | )% | (33 | ) | (0.0 | )% | 16 | (48.5 | )% | |||||||||||||
(Increase) decrease in payable under tax receivable agreement | 479 | 0.1 | % | (1,025 | ) | (0.3 | )% | 1,504 | (146.7 | )% | ||||||||||||||
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Income before income taxes | 101,314 | 23.9 | % | 81,638 | 22.6 | % | 19,676 | 24.1 | % | |||||||||||||||
Income tax expense | 40,593 | 9.6 | % | 31,896 | 8.8 | % | 8,697 | 27.3 | % | |||||||||||||||
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Net income | $ | 60,721 | 14.3 | % | $ | 49,742 | 13.8 | % | $ | 10,979 | 22.1 | % | ||||||||||||
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Adjusted EBITDA (1) | $ | 103,934 | 24.5 | % | $ | 85,798 | 23.7 | % | $ | 18,136 | 21.1 | % | ||||||||||||
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Adjusted EBITDA for the Company is calculated as follows:
(dollars in thousands)
For the Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Net income | $ | 60,721 | $ | 49,742 | ||||
Add: | ||||||||
Interest expense | 17 | 33 | ||||||
Income tax expense | 40,593 | 31,896 | ||||||
Depreciation and amortization | 12,262 | 8,625 | ||||||
Stock-based compensation (a) | 13,049 | 8,941 | ||||||
Initial recording of mortgage servicing rights | (22,229 | ) | (14,464 | ) | ||||
Increase (decrease) in payable under the tax receivable agreement | (479 | ) | 1,025 | |||||
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Adjusted EBITDA | $ | 103,934 | $ | 85,798 | ||||
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Revenues.Our total revenues were $424.2 million for the nine months ended September 30, 2017 compared to $361.7 million for the same period in 2016, an increase of $62.5 million, or 17.3%. Revenues increased primarily due to a 16.7% increase in total production volumes as compared to the first nine months of 2016.
Total Operating Expenses.Our total operating expenses were $359.4 million for the nine months ended September 30, 2017 compared to $303.1 million for the same period in 2016, an increase of $56.3 million, or 18.6%. Expenses increased primarily due to increased cost of services and other costs resulting primarily from an increase in capital markets services revenue and increased headcount.
Net Income.Our net income for the nine months ended September 30, 2017 was $60.7 million, an increase of approximately $11.0 million versus $49.7 million for the same fiscal period in 2016. This increase is primarily due to the increased revenues as discussed above.
Financial Condition
Total assets increased by $589.7 million to $1.2$1.4 billion at September 30, 2017March 31, 2019 from $716.7$858.1 million at December 31, 2016,2018 primarily due to an increase in mortgage notes receivable of $445.3 $615.5million due to a higher numberassociated with an increase in the principal balance of loans pending sale to Freddie Mac at September 30, 2017,March 31, 2019, compared to December 31, 2016, an increase2018 as well as $35.0 million related to right-of-use assets associated with the adoption of ASC Topic 842, Leases. Partially offsetting the increases was a reduction in intangible assets, net of $13.5 million, an increase in goodwill of $4.7 million, and an increase in other noncurrent assets of $4.0 million. These increases in assets were partially offset by a decrease of cash and cash equivalents and restricted cash of $13.8$66.8 million primarily related to a dividend payment of $68.7 million and a decrease in deferred tax asset, net of $16.9 million.annual incentive compensation distributions, which were offset by cash flows from operations.
Total liabilities increased by $634.8 million to $908.2 million$1.1 billion at September 30, 2017March 31, 2019 from $480.1$507.5 million at December 31, 2016, primarily due2018. The growth was attributable to an increase in amounts outstanding under the warehouse lines of credit of $443.3$612.9 million due to a higher number of loans pending salean increase in the principal balance outstanding related to our Freddie Mac business at September 30, 2017,March 31, 2019, compared to December 31, 2016. This2018. The
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Company also recorded a net increase related to lease obligations of $35.0 million related to the adoption of ASC Topic 842, Leases which was partiallysomewhat offset by a decreasereduction of $17.9 million in other current liabilities of $5.4 million primarily from the payment of federal, stateaccrued compensation and local income taxes and a decrease in payable under the tax receivable agreement of $11.7 million.related 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 pursuant topayments under the tax receivable agreement and payment of commissions and bonuses to employees.
First NineThree Months of 20172019
Cash and cash equivalents and restricted cash decreased $13.8$66.8 million in the ninethree months ended September 30, 2017.March 31, 2019. Net cash of $63.2$23.1 million was provided by operating activities primarily resulting from $60.7for the three months ended March 31, 2019 compared to net cash used in operating activities of $1.9 million of net income and a $7.3 millionin the three months ended March 31, 2018. The increase in accrued compensation and relatedcash flows from operating activities was primarily attributable to increased income before income taxes which was partially offset by uses of cash from an $11.2 million payment underover the tax receivable agreement and a $5.8 million decrease in other accrued liabilities.prior year period. Investing activities used $10.6$6.6 million of cash resulting from $6.2a $3.8 million forpayment related to the purchase of businessesCompany’s investment in the Kensington joint venture arrangement and $4.4 million for investing incapital expenditures related to property and equipment. Financing activities used $66.3$83.3 million primarily dueprincipally related to a $60.0$68.7 million dividend payment that we made to holders of our Class A common stock on February 21, 2017.27, 2019. Additionally, payments on certain capital leases used $0.4 million and $5.9$14.5 million was used to purchase shares of Class A common stock in connection with the minimum employee statutory tax withholdings.
First NineThree Months of 20162018
Cash and cash equivalents and restricted cash decreased $42.1$84.0 million in the ninethree months ended September 30, 2016.March 31, 2018. Net cash of $34.3$1.9 million was used in operating activities compared to net cash provided by operating activities of $13.1 million in the three-month period ended March 31, 2017. The reduction in cash flows from operating activities was primarily resulting from $49.7 million ofrelated to reduced net income which was partially offset by uses of cash from a $10.8 million payment underin the tax receivable agreement, $9.6 million decrease incurrent year period as well as additional payments related to accrued compensation and related taxes a $10.1 million decrease inand other accrued liabilities, a $1.9liabilities. Investing activities used $0.5 million increase in prepaid taxes, prepaid expenses and other current assets and a $3.3 million increase in other noncurrent assets. Cash of $4.0 million was used for investingcash resulting from investments in property and equipment. Financing activities used $72.3$81.9 million primarily dueprincipally related to a $68.4$67.8 million dividend payment that we made to holders of our Class A common stock on February 19, 2016.21, 2018. Additionally, payments on certain capital leases used $0.4 million, $3.0$14.1 million was used to purchase shares of Class A common stock in connection with the minimum employee statutory tax withholdings and we recognized a $0.6 million incremental tax benefit related to share-based award activities.withholdings.
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 September 30, 2017,March 31, 2019, our cash and cash equivalents of approximately $221.8$235.2 million were invested or held in a mix of money market funds and bank demand deposit accounts at three 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 compliance with regulatory net capital requirements.
OverDuring the nine month periodthree months ended September 30, 2017,March 31, 2019, we generated approximately $63.2$23.1 million of cash from 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 ninethree months ended September 30, 2017,March 31, 2019, we incurred approximately $359.4$140.3 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 ninethree months ended September 30, 2017,March 31, 2019, approximately 60.0%57.0% 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.
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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 $99.7$50.3 million, of which approximately $11.3$8.3 million is anticipated to be paid in 2018.2019.
Our liquidity needs related to our long termlong-term obligations are primarily related to our facility leases. For the ninethree months ended September 30, 2017,March 31, 2019, we incurred approximately $12.3$4.2 million in occupancy expensesexpenses.
On July 2, 2018, the Company entered into a Risk Transfer Agreement with M&T-RCC. Through this agreement the Company sources certain loans to M&T-RCC who then funds such loans through M&T RCC’s Fannie Mae DUS® platform. We are required to share the risk of loss on loans sold through M&T-RCC’s Fannie Mae DUS® platform under the terms of the Risk Transfer Agreement. For each loan originated under the Risk Transfer Agreement, we deposit a portion of the original principal balance to serve as collateral for future loan losses. Our loss exposure is capped at 33.33% of the unpaid principal balance in excess of the collateral securing such loan. As of March 31, 2019, the Company’s maximum quantifiable loss exposure associated with our indemnification obligation was $123.8 million. The maximum quantifiable liability is not representative of the actual loss we may incur as we would only be liable for this amount in the event that all of the loans that we indemnify for M&T-RCC were to default and approximately $17,000 in interest expense.all of the collateral underlying these loans was determined to be without value at the time of settlement.
We are a party to an uncommitted $600 million financing arrangement with PNC which can be increased to $800 million an unlimited number of times per year for a period of 30 calendar days andthat has a maximum capacity of $1.5$1.0 billion. We also have an uncommitted $150 million financing arrangement with Huntington that can be increased to $175 million three times in aone-year period for 45 calendar days and may be increased to $175 million from October 1, 2017 through February 15, 2018 to fund our Freddie Mac loan closings.. Pursuant to these arrangements, PNC or Huntington funds the multifamily Freddie Mac loan closings in accordance with the Freddie Mac Program on atransaction-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 financing arrangements are only for the purpose of supporting our participation in the Freddie Mac Program and cannot be used for any other purpose. On October 2, 2017, HFF LP entered into an extended funding agreement with Freddie Mac whereby Freddie Mac can extendThe PNC arrangement was amended during the required purchase date for each mortgage that has an Original Funding Date (as defined in the agreement) occurring within the fourthfirst quarter of 2017, to February 15, 2018. In connection with the extended funding agreement with Freddie Mac, PNC agreed2018 to increase the maximum capacity of its financing arrangementfrom $600 million to $2.0$1.0 billion. The maximum capacity under the PNC arrangement will revert to $1.5 billion after the expiration of the extended funding agreement. As of September 30, 2017,March 31, 2019, we had outstanding borrowings of $734.2$961.3 million under the PNC/Huntington arrangements.Non-cash activity totaling $443.3$612.9 million increased these financing arrangements during the nine month periodthree months ended September 30, 2017 andnon-cash activity of $505.9 million increased these financing arrangement during the nine month period ended September 30, 2016.March 31, 2019. 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 the Freddie Mac 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 EstimatesPolicies
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/orand 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/orand 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.
Goodwill. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Goodwill is required to be tested for impairment at least annually. The Company performs its annual impairment test as of October 1st or more frequently when indicators of impairment are present. The goodwill impairment test involves comparing the fair value of a reporting unit to its carrying value, including goodwill. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The Company uses a combination of a discounted cash flow model (“DCF model”) and a market approach to determine the current fair values of the reporting units. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including capital market information and market share, sales volume and pricing, costs of services, working capital changes and discount rates. The fair value of goodwill is considered a level 3 asset within the fair value hierarchy.
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Intangible Assets.Our intangibleIntangible assets primarily include mortgage servicing rights under agreements with third party lenders. third-party lenders, non-competition agreements and customer relationships. 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, we determine 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. Management estimates a market participant’s cost of servicing by analyzing the limited market activity and considering our 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, we have consistently experienced a low level of loan runoff. The estimated value of the servicing rights is impacted by changes in these assumptions. As of September 30, 2017,March 31, 2019, the fair value and net book value of the servicing rights were $66.3$92.5 million and $49.4$74.1 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 134%88%, the discount rate increased 88%57% or if there is a 11%16% 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 potential 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.impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
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, we consider 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 $95.7$35.9 million at September 30, 2017March 31, 2019 is comprised mainly of a $106.5$47.1 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 $106.5 million represents annualpre-tax deductions on the Section 754 basis step up and payments under the tax receivable agreement of approximately $36.4$38.5 million in 2017,2019, then increasing to $52.6$46.0 million in 2021 and then decreasing over the next nineeight years to approximately $0.1 million in 2030.by 2029. In order to realize the anticipatedpre-tax benefit of approximately $36.4$38.5 million in 2017,2019, the Company needs to generate approximately $318$418 million in revenue, assuming a constant cost structure. In the event that the Company cannot realize the annualpre-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 yearsindefinitely 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 comprehensive 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.
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). Lease terms generally range from three to eleven 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 capital markets advisors whereby these capital markets advisors 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 capital markets advisors 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 2017 through 2019. We begin to accrue for these payments when it is deemed probable that payments will be made; therefore, on a quarterly basis, we evaluate the probability of each of the capital markets advisors achieving the performance targets and the probability of each of the capital markets advisors signing an employment agreement, if applicable. As of September 30, 2017, $0.5 million is accrued for these arrangements.
Firm and Office Profit Participation Plans and Executive Bonus Plan.The Company’s firm and office profit participation plans and executive bonus plan provide for payments in cash and share-based awards if certain performance targets are achieved during the year. 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 year, such that the total expense measured for
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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 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 profit participation plans have been approved by the Company’s board of directors, the employees of the Company understand the requirements to earn the award, the number of shares is not determined before the grant date and, finally, if the performance metrics are not met during the performance year, the award is not earned and therefore forfeited. Prior to the grant date, the share-based component expense is recorded as incentive compensation within personnel expenses in the Company’s consolidated statements of comprehensive income. 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 firm and office profit participation bonus plans and executive bonus plan.
Other Critical Accounting Policies
A summary of other significant accounting policies is discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 to the consolidated financial statements contained in our Annual Report on Form10-K for the year ended December 31, 2016.
The preparation of the financial statements in accordance with U.S. generally accepted accounting principles requires us to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities. Significant areas of uncertainty that require judgments, estimates and assumptions include the accounting for derivatives, retirement plans, income taxes, environmental and other contingencies as well as asset impairment, inventory valuation and collectability of accounts receivable. We use historical and other information that we consider to be relevant to make these judgments and estimates. However, actual results may differ from those estimates and assumptions that are used to prepare our financial statements.
Certain Information ConcerningOff-Balance Sheet Arrangements
We do not currently invest in anyoff-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support,support. Other than the risk-sharing obligations under the Risk Transfer Agreement disclosed previously in this Quarterly Report on Form 10-Q, we do not have any off-balance sheet arrangements 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 aquarter-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/orand Deflation
Inflation and/or deflation, or both, could significantly affect our compensation costs, particularly those not directly tied to our capital markets advisors’ 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 Form10-Q.
Recent Accounting Pronouncements
In December 2016, the FASB issued update2016-19 – “Technical Corrections and Improvements”, which covers a wide range of topics in theFor information regarding Recent Accounting Standards Codification (ASC). The amendments in this update represent changes to clarify, correct errors, or make minor improvements to the ASC, making it easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments generally fall into onePronouncements, see Note 1 of the following categories: amendments relatednotes to differences between original guidance and the ASC, guidance clarification and reference corrections, simplification, or minor improvements. Most of the amendments in this update do not require transition guidance and are effective upon issuance of this update.
In March 2016, the FASB issued changes to the accounting for equity compensation. This update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This update also permits an entity to make an election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. This update was effective for the Company beginning in fiscal year 2017 and the Company made an election to change its accounting for forfeitures from the previously-required estimation method to recognizing forfeitures when they occur. The Company recognized $0.6 million as a reduction in retained earnings on January 1, 2017 as a result of eliminating the estimated forfeiture rate on unvested RSUs.
In February 2016, the FASB issued new guidance on the accounting for leases. This new guidance will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The new lease accounting requirements are effective for the Company’s 2019 fiscal year with a modified retrospective transition approach required, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In May 2014, the FASB issued ASUNo. 2014-09, “Revenue from Contracts with Customers,” which is required to be adopted by the Company in fiscal year 2018. This ASU supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. The standard implements a five-step model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method).
We will adopt the new standard effective January 1, 2018, and plan to use the modified retrospective approach. We have conducted our initial analyses, developed project management procedures, assessed for adjustments to existing accounting policies, and completed detailed contract reviews to support an evaluation of the standard’s impact on our consolidated financial statements. As we complete our overall assessment, we are also identifying any needed changes to our business processes, systems and controls to support the new revenue recognition and disclosure requirements. Based on our evaluation to date, we expect the timing of revenue recognition for our equity placement services to be accelerated. We expect revenue recognition disclosures to include additional detail in accordance with the new requirements. However, we do not expect the adoption of this accounting guidance to have a significant impact on our consolidated financial statements.
In January 2017, FASB issued ASUNo. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU eliminates Step 2 from the goodwill impairment test. This ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those years, with early adoption permitted. We are evaluating the effect that ASU2017-04 will have on our goodwill assessment process, but do not believe the adoption of ASU2017-04 will have a material impact on our consolidated financial statements, and related disclosures.
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Item 3. Quantitative and QualitativeQualitative 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.
Foreign Currency Exchange Rate Risk
We may be subject to exposures to changes in foreign currency exchange rates. Our risk management objective is to reduce our exposure to the effects of changes in exchange rates and we may manage our exposure to changes in foreign currency exchange rates by entering into foreign currency forward contracts. We did not engage in foreign currency hedging transactions during the three months ended March 31, 2019 and 2018.
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 Rule13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form10-Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of September 30, 2017,March 31, 2019, 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 monththree-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.
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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. In accordance with ASC Topic 450, Contingencies, a reserve for estimated losses is recorded when the amount is probable and can be reasonably estimated. 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.
There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
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 Form10-K for the year ended December 31, 2016,2018, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form10-K and this Quarterly Report on Form 10-Q 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/orand 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.
None.
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A. Exhibit Index
A. | Exhibits |
Exhibit Number | Description | |
2.1 | ||
10.1 | ||
10.2 | ||
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 | ||
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 |
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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, 2019 | |||||||
By: | /s/ Mark D. Gibson | ||||||
Mark D. Gibson | |||||||
Chief Executive Officer, | |||||||
Director and Executive Managing Director | |||||||
(Principal Executive Officer) | |||||||
Dated: | By: | /s/ Gregory R. Conley | |||||
Gregory R. Conley | |||||||
Chief Financial Officer | |||||||
(Principal Financial and Accounting Officer) |
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