Market Overview

HFF, Inc. Reports Second Quarter 2018 Financial and Transaction Production Results

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HFF, Inc. (NYSE:HF) (the Company or HFF) reported today its financial
and production volume results for the second quarter of 2018. Based on
transaction volume, HFF is one of the leading and largest full-service
commercial real estate financial intermediaries, providing commercial
real estate and capital markets services to both the consumers and
providers of capital in the commercial real estate sector.

Second Quarter 2018 Highlights

  • Revenue was $153.7 million, an 11.9% increase year-over-year.
  • Net income was $24.3 million, as compared to $19.5 million in the
    prior year period.
  • Net income per diluted share grew 24.5% to $0.61, as compared to $0.49
    in the prior year period.
  • Adjusted EBITDA improved 21.2% to $39.8 million versus $32.9 million
    in the prior year period.

First Six Months of 2018 Highlights

  • Revenue was $285.3 million, a 3.3% increase year-over-year.
  • Net income was $41.4 million, as compared to $39.1 million in the
    prior year period.
  • Net income per diluted share increased 4.0% to $1.03, as compared to
    $0.99 during the prior year period.
  • Adjusted EBITDA contracted 7.3% to $60.5 million compared to $65.3
    million in the prior year period.

"We are pleased with the Company's second quarter 2018 results which
were driven by increased volumes in our debt and investment advisory
business. We remain confident in the industry's fundamental drivers and
HFF's market position, as we look beyond our second quarter results. We
believe the combination of our unique partnership culture, the synergies
and diversification afforded by our capital markets centric business
model, our strong balance sheet, and the strategic investments we
continue to make enable us to add value and provide best in class
services to our clients while positioning the Company for future
growth," said Mark Gibson, chief executive officer of HFF.

Results for the Second Quarter Ended June 30,
2018

The Company's revenues grew 11.9% to $153.7 million for the second
quarter of 2018, which represents an increase of $16.4 million compared
to the second quarter of 2017. The Company generated operating income of
$21.5 million during the second quarter of 2018, an increase of $2.1
million, or 11.0% when compared to the second quarter of 2017. This
increase in operating income is primarily due to the 11.9% increase in
revenues which was partially offset by (i) increases in the Company's
compensation-related costs and other expenses associated with the net
growth in headcount of 93 associates during the last twelve months, (ii)
an increase in non-cash stock compensation and (iii) increases in other
operating expenses due to the growth in transactional activity and the
increase in headcount.

Interest and other income, net, was $11.7 million in the second quarter
of 2018, compared to $13.0 million in the second quarter of 2017. This
decrease is primarily a result of lower income from the valuation of the
Company's mortgage servicing rights which was partially offset by an
increase in interest and other related income.

The Company reported net income for the quarter ended June 30, 2018 of
$24.3 million, an increase of approximately $4.9 million, or 25.1%, when
compared to net income of $19.5 million for the quarter ended June 30,
2017. For the quarter ended June 30, 2018, net income per diluted share
was $0.61 compared to $0.49 for the second quarter of 2017.

Adjusted EBITDA (a non-GAAP measure whose reconciliation to net income
can be found within this release) for the second quarter of 2018 grew
21.2% to $39.8 million, compared to $32.9 million in the second quarter
of 2017. The Adjusted EBITDA margin for the second quarter of 2018 was
25.9%, a 200 basis point increase compared to the Adjusted EBITDA margin
of 23.9% in the second quarter of 2017.

Results for the Six Months Ended June 30, 2018

The Company reported revenues of $285.3 million for the six months ended
June 30, 2018, which represents an increase of $9.2 million, or 3.3%
compared to revenues for the first six months of 2017 of $276.2 million.
The Company generated operating income of $24.2 million during the first
half of 2018, a decrease of $15.9 million, or 39.7% when compared to
operating income of $40.2 million for the first half of 2017. This
decrease in operating income is primarily due to (i) increases in the
Company's compensation-related costs and expenses associated with the
net growth in headcount of 93 associates during the last twelve months,
(ii) the payment of an additional compensation award in the first
quarter of 2018, (iii) an increase in non-cash stock compensation and
(iv) increases in other operating expenses due to the growth in
transactional activity and the increase in headcount. These cost
increases were partially offset by the 3.3% increase in revenue.

Interest and other income, net, totaled $26.9 million for the six months
ended June 30, 2018 compared to $23.8 million for the six months ended
June 30, 2017. This increase is primarily a result of higher income from
securitization compensation and interest and other related income
partially offset by a decrease in other agency related income.

The Company reported net income for the six month period ended June 30,
2018 of $41.4 million, an increase of approximately $2.3 million, or
5.9%, when compared to net income of $39.1 million for the six month
period ended June 30, 2017. For the six month period ended June 30,
2018, net income per diluted share was $1.03, or a 4.0% increase when
compared to $0.99 for the six month period ended June 30, 2017.

Adjusted EBITDA for the six month period ended June 30, 2018 was $60.5
million, which represents a decrease of $4.8 million, or 7.3%, when
compared to $65.3 million in the comparable period in 2017. This
decrease in Adjusted EBITDA is primarily attributable to the decrease in
operating income. The Adjusted EBITDA margin for the six month period
ended June 30, 2018 was 21.2%, a 240 basis point decrease, compared to
an Adjusted EBITDA margin of 23.6% in the comparable period in 2017.

       
Condensed Consolidated Operating Results
(dollars in thousands, except per share data)
(Unaudited)
 
 
For the Three Months Ended Jun. 30, For the Six Months Ended Jun. 30,
2018 2017 2018 2017
 
Revenue $ 153,731 $ 137,364 $ 285,349 $ 276,170
 
Operating expenses:
Cost of services 85,604 79,290 164,248 159,421
Operating, administrative and other 40,785 34,645 85,571 68,889
Depreciation and amortization   5,813     4,032     11,294     7,699  
Total expenses 132,202 117,967 261,113 236,009
 
Operating income 21,529 19,397 24,236 40,161
 
Interest and other income, net 11,743 13,042 26,914 23,836
Interest expense (4 ) (5 ) (9 ) (12 )
(Increase) decrease in payable under the tax receivable agreement                
Income before income taxes 33,268 32,434 51,141 63,985
 
Income tax expense 8,929 12,972 9,734 24,867
       
Net income $ 24,339   $ 19,462   $ 41,407   $ 39,118  
 
Earnings per share - basic $ 0.62 $ 0.50 $ 1.06 $ 1.01
Earnings per share - diluted $ 0.61 $ 0.49 $ 1.03 $ 0.99
Weighted average shares outstanding - basic 39,249,872 38,694,339 39,146,258 38,616,920
Weighted average shares outstanding - diluted 40,092,088 39,487,689 40,147,571 39,327,455
 
Adjusted EBITDA $ 39,829 $ 32,850 $ 60,535 $ 65,307
 

Production Volume and Loan Servicing Summary

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

Second Quarter Production Volume Results

               
Unaudited Production Volume by Platform
(dollars in thousands)
For the Three Months Ended June 30,
By Platform   2018 2017 Change

Production
Volume

 

# of
Trans.

Production
Volume

 

# of
Trans.

Production
Volume

  % chg.

# of
Trans.

  % chg.
Debt Placement $ 13,419,624 377 $ 12,417,963 336 $ 1,001,661 8.1 % 41 12.2 %
Investment Advisory 8,580,454 199 6,724,135 162 1,856,319 27.6 % 37 22.8 %
Equity Placement 796,674 38 2,124,261 36 (1,327,587 ) -62.5 % 2 5.6 %
Loan Sales   80,479   7   100,429   8   (19,950 ) -19.9 % (1 ) -12.5 %
Total Transaction Volume $ 22,877,231   621 $ 21,366,788   542 $ 1,510,443   7.1 % 79   14.6 %
Average Transaction Size $ 36,839 $ 39,422 $ (2,583 ) -6.6 %
 

Loan
Balance

 

# of
Loans

Loan Balance  

# of
Loans

Loan Balance   % chg.

# of
Loans

  % chg.
Loan Servicing Portfolio Balance $ 74,988,523 3,191 $ 62,166,805 2,847 $ 12,821,718 20.6 % 344 12.1 %
 

Production volumes for the second quarter of 2018 totaled approximately
$22.9 billion on 621 transactions representing a 7.1% increase in
production volume and a 14.6% increase in the number of transactions
when compared to the production volumes of approximately $21.4 billion
on 542 transactions for the second quarter of 2017. The average
transaction size for the second quarter of 2018 was $36.8 million, which
is approximately 6.6% lower than the comparable figure of approximately
$39.4 million for the second quarter of 2017.

  • Debt Placement production volume was approximately $13.4 billion in
    the second quarter of 2018, representing an increase of 8.1% over the
    second quarter of 2017 volume of approximately $12.4 billion.
  • Investment Advisory production volume increased 27.6% to approximately
    $8.6 billion in the second quarter of 2018 from the second quarter of
    2017 volume of approximately $6.7 billion.
  • Equity Placement production volume was approximately $0.8 billion in
    the second quarter of 2018, a decrease of 62.5% from the second
    quarter of 2017 volume of approximately $2.1 billion.
  • Loan Sales production volume was approximately $80.5 million for the
    second quarter of 2018, a decrease of 19.9% from the $100.4 million of
    volume in second quarter 2017.
  • The principal balance of the Company's Loan Servicing portfolio
    reached $75.0 billion at the end of the second quarter of 2018,
    representing an increase of approximately $12.8 billion, or 20.6%,
    from $62.2 billion at the end of the second quarter of 2017.

Six Month Production Volume Results

               
Unaudited Production Volume by Platform
(dollars in thousands)
For the Six Months Ended June 30,
By Platform   2018 2017 Change

Production
Volume

 

# of
Trans.

Production
Volume

 

# of
Trans.

Production
Volume

  % chg.

# of
Trans.

  % chg.
Debt Placement $ 23,802,836 702 $ 23,648,041 665 $ 154,795 0.7 % 37 5.6 %
Investment Advisory 14,598,557 363 15,369,470 338 (770,913 ) -5.0 % 25 7.4 %
Equity Placement 1,913,631 76 3,487,674 62 (1,574,043 ) -45.1 % 14 22.6 %
Loan Sales   160,343   12   114,704   9   45,639   39.8 % 3 33.3 %
Total Transaction Volume $ 40,475,367   1,153 $ 42,619,889   1,074 $ (2,144,522 ) -5.0 % 79 7.4 %
Average Transaction Size $ 35,104 $ 39,683 $ (4,579 ) -11.5 %
 
Loan Balance  

# of
Loans

Loan Balance  

# of
Loans

Loan Balance   % chg.

# of
Loans

  % chg.
Loan Servicing Portfolio Balance $ 74,988,523 3,191 $ 62,166,805 2,847 $ 12,821,718 20.6 % 344 12.1 %
 

Production volumes for the six months ended June 30, 2018 totaled
approximately $40.5 billion on 1,153 transactions, representing a 5.0%
decrease in production volume and a 7.4% increase in the number of
transactions when compared to the production volumes of approximately
$42.6 billion on 1,074 transactions for the comparable period in 2017.
The average transaction size for the six months ended June 30, 2018 was
$35.1 million, which is approximately 11.5% lower than the comparable
figure of approximately $39.7 million for the six months ended June 30,
2017.

Employment Comments

Consistent with its strategic growth initiatives, the Company continued
to expand its total employment and production ranks to the highest
levels since the Company went public in January 2007. The Company's
total employment reached 1,037 associates as of June 30, 2018, which
represents a net increase of 93, or 9.9%, over the comparable total of
944 associates as of June 30, 2017. HFF's total number of capital
markets advisors was 385 as of June 30, 2018, which represents a net
increase of 28, or 7.8% over the comparable total of 357 capital markets
advisors as of June 30, 2017. Over the past twelve months, the Company
continued to add capital markets advisors to existing lines of business
and product specialties through the promotion and recruitment of
associates in 14 of the Company's 26 offices.

Non-GAAP Financial Measures

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

Earnings Conference Call

The Company's management will hold a conference call to discuss second
quarter 2018 financial results on July 26, 2018 at 6:00 p.m. Eastern
Time.
To listen, participants should dial 844-420-8188 (U.S.
callers) or 478-219-0768 (international callers)
approximately 10
minutes prior to the start of the call and enter the conference ID
number 9697189. A replay will become available after 9:00 p.m.
Eastern Time
on July 26, 2018 and will continue through
August 2, 2018, by dialing 855-859-2056 (U.S. callers) or 404-537-3406
(international callers)
and entering participant code 9697189.

The live broadcast of the Company's quarterly conference call will be
available online on the HFF website at www.hfflp.com
on July 26, 2018 beginning at 6:00 p.m. Eastern Time. A recording of the
broadcast will be available for replay on the Company's website for one
year. Related presentation materials will be posted to the "Investor
Relations" section of the Company's website prior to the call. The
presentation materials will be available in Adobe Acrobat format.

About HFF, Inc.

Through its subsidiaries, Holliday Fenoglio Fowler, L.P., HFF Real
Estate Limited, HFF Securities L.P. and HFF Securities Limited, HFF
operates out of 26 offices and is one of the leading and largest
full-service commercial real estate financial intermediaries, providing
commercial real estate and capital markets services to both the
consumers and providers of capital in the commercial real estate sector.
The Company offers clients a fully-integrated capital markets platform
including debt placement, investment advisory, equity placement, funds
marketing, M&A and corporate advisory, loan sales and commercial loan
servicing.

Certain statements in this earnings press release are
"forward-looking statements" within the meaning of the federal
securities laws. Statements about our beliefs and expectations and
statements containing the words "may," "could," "would," "should,"
"believe," "expect," "anticipate," "plan," "estimate," "target,"
"project," "intend" and similar expressions constitute forward-looking
statements.
These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the
Company's actual results and performance in future periods to be
materially different from any future results or performance suggested in
forward-looking statements in this earnings press release. Investors,
potential investors and other readers are urged to consider these
factors carefully in evaluating the forward-looking statements and are
cautioned not to place undue reliance on such forward-looking statements.

Any forward-looking statements speak only as of the date of this
earnings press release and, except to the extent required by applicable
securities laws, the Company expressly disclaims any obligation to
update or revise any of them to reflect actual results, any changes in
expectations or any change in events.
If the Company does update
one or more forward-looking statements, no inference should be drawn
that it will make additional updates with respect to those or other
forward-looking statements.
Factors that could cause results to
differ materially include, but are not limited to: (1) general economic
conditions and commercial real estate market conditions, including the
recent conditions in the global markets and, in particular, the U.S.
debt markets; (2) the Company's ability to retain and attract capital
markets advisors; (3) the Company's ability to retain its business
philosophy and partnership culture; (4) competitive pressures; (5) the
Company's ability to integrate and sustain its growth; and (6) other
factors discussed in the Company's public filings, including the risk
factors included in the Company's most recent Annual Report on Form 10-K.

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

 
HFF, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
(Unaudited)
   
June 30, December 31,
2018 2017
ASSETS
Cash and cash equivalents $     226,059 $ 272,801
Restricted Cash 2,656 4,001
Accounts receivable, receivable from affiliate and prepaids 30,416 19,825
Mortgage notes receivable 251,540 450,821
Property, plant and equipment, net 17,348 17,897
Deferred tax asset, net 44,569 50,874
Intangible assets, net 73,042 67,525
Other noncurrent assets       6,132     8,461  
Total assets $     651,762   $ 892,205  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse line of credit $ 250,546 $ 450,255
Accrued compensation, accounts payable and other current liabilities 63,750 81,439
Long-term debt (includes current portion) 269 405
Deferred rent credit and other liabilities 12,245 12,700
Payable under the tax receivable agreement       60,939     60,939  
Total liabilities 387,749 605,738

Class A Common Stock, par value $0.01 per share, 175,000,000
shares authorized,
39,113,015 and 38,579,544 shares
outstanding, respectively

391 387
Additional paid in capital 147,198 144,304
Accumulated other comprehensive loss (148 ) 171
Treasury stock (1,325 ) (4,971 )
Retained earnings       117,897     146,576  
Total equity       264,013     286,467  
Total liabilities and stockholders' equity $     651,762   $ 892,205  
 

Adjusted EBITDA Reconciliation

The Company defines Adjusted EBITDA as net income before (i) interest
expense, (ii) income tax expense, (iii) depreciation and amortization,
(iv) stock-based compensation expense, which is a non-cash charge, (v)
income recognized on the initial recording of mortgage servicing rights
that are acquired with no initial consideration and the inherent value
of servicing rights, which are non-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 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 to be
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.

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 an unaudited reconciliation of consolidated net
income to Adjusted EBITDA for the Company for the three and six months
ended June 30, 2018 and 2017:

       
Adjusted EBITDA for the Company is calculated as follows:
(dollars in thousands)
 
For the Three Months Ended June 30, For the Six Months Ended June 30,
2018 2017 2018 2017
 
Net income $ 24,339 $ 19,462 $ 41,407 $ 39,118
Add:
Interest expense 4 5 9 12
Income tax expense 8,929 12,972 9,734 24,867
Depreciation and amortization 5,813 4,032 11,294 7,699
Stock-based compensation (a) 6,794 4,846 12,546 8,752
Valuation of mortgage servicing rights (6,050 ) (8,467 ) (14,455 ) (15,141 )
Increase (decrease) in payable under the tax receivable agreement   -     -     -     -  
Adjusted EBITDA $ 39,829   $ 32,850   $ 60,535   $ 65,307  
 
(a) Amounts do not reflect expense associated with the stock
component of estimated incentive payouts under the Company's firm
profit participation plan, office profit participation plans and
executive bonus plan that are anticipated to be paid in respect of
the applicable year. Such expense is recorded as incentive
compensation expense within personnel expenses in the Company's
consolidated statements of income during the year to which the
expense relates. Following the award, if any, of the related
incentive payout, the stock component expense is reclassified as
stock compensation costs within personnel expenses. See Note 2 to
the Company's consolidated financial statements included in the
quarterly report on Form 10-Q for the three and six months ended
June 30, 2018 to be filed with the Securities and Exchange
Commission for further information regarding the Company's
accounting policies relating to its firm profit participation plan,
office profit participation plans and executive bonus plan. See Note
3 to the Company's consolidated financial statements included in the
quarterly report on Form 10-Q for the three and six months ended
June 30, 2018 to be filed with the Securities and Exchange
Commission for further information regarding the Company's
accounting policies relating to its stock compensation.

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