Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1/A Amendment No. 4 to Form S-1 Hff, Inc. HTML 1.22M
2: EX-5.1 Opinion of Dechert LLP HTML 15K
3: EX-10.1 Form of Holliday Fenoglio Fowler, L.P. Partnership HTML 147K
Agreement
8: EX-10.10 Form of Holliday Fenoglio Fowler, L.P. Profit HTML 24K
Participation Bonus Plan
9: EX-10.11 Form of Hff Securities, L.P. Profit Participation HTML 23K
Bonus Plan
4: EX-10.2 Form of Hff Securities L.P. Partnership Agreement HTML 163K
5: EX-10.7 Form of Employment Agreement for Gregory R. Conley HTML 56K
6: EX-10.8 Form of Employment Agreement for Nancy Goodson HTML 56K
7: EX-10.9 Hff, Inc. 2006 Omnibus Incentive Compensation Plan 23 87K
10: EX-21.1 Subsidiaries of the Registrant HTML 7K
11: EX-23.1 Consent of Ernst & Young LLP HTML 9K
12: EX-23.4 Consent of John Z. Kukral, Director Nominee HTML 9K
13: EX-23.5 Consent of Deborah H. McAneny, Director Nominee HTML 9K
14: EX-23.6 Consent of Lenore M. Sullivan, Director Nominee HTML 9K
15: EX-23.7 Consent of McHenry T. Tichenor, Jr. Director HTML 9K
Nominee
(Name, address including zip
code, and telephone number,
including area code, of agent
for service)
Copies to:
James A. Lebovitz, Esq.
Brian D. Short, Esq.
Dechert LLP
2929 Arch Street Philadelphia, PA19104-2808
(215) 994-4000
Alan D. Schnitzer, Esq.
Joshua Ford Bonnie, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue New York, NY10017-3954
(212) 455-2000
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Proposed Maximum
Title of Each Class of
Amount to be
Offering Price
Aggregate Offering
Amount of
Securities to be Registered
Registered(1)
Per Share
Price(2)(3)
Registration Fee(4)
Class A Common Stock, par
value $0.01 per share
16,445,000
$17.00
$279,565,000
$30,000
(1)
Includes 2,145,000 shares
subject to the underwriters’ option to purchase additional
shares.
(2)
Estimated solely for the purpose of
computing the registration fee pursuant to Rule 457(o)
under the Securities Act based on an estimate of the proposed
maximum aggregate offering price.
(3)
Includes shares subject to the
underwriters’ option to purchase additional shares.
(4)
$10,700 of this amount has already
been paid based on a earlier proposed maximum aggregate offering
price of $100,000,000. The difference of $19,300 is being paid
with this filing.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective.
This prospectus is not an offer to sell nor does it seek an
offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
This is an initial public offering of Class A common stock
of HFF, Inc.
All of the 14,300,000 shares of Class A common stock
are being sold by HFF, Inc.
Prior to this offering, there has been no market for our
Class A common stock. It is currently estimated that the
initial public offering price per share will be between $15.00
and $17.00 per share.
We have applied to list our Class A common stock on the New
York Stock Exchange under the symbol “HF.” See
“Underwriting” for a discussion of the factors to be
considered in determining the initial public offering price.
Investing in our Class A common stock involves
significant risks. See “Risk Factors” beginning on
page 15 to read about factors you should consider before
buying shares of our Class A common stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
Per Share
Total
Initial public offering price
$
$
Underwriting discount
$
$
Proceeds, before expenses, to HFF,
Inc.
$
$
To the extent that the underwriters sell more than
14,300,000 shares of our Class A common stock, the
underwriters have the option to purchase up to an additional
2,145,000 shares of Class A common stock from HFF,
Inc. at the public offering price less the underwriting discount.
The underwriters expect to deliver the shares of Class A
common stock in New York, New York
on ,
2007.
This summary highlights information contained elsewhere in
this prospectus. Before making an investment decision, you
should read the entire prospectus carefully, including the
section entitled “Risk Factors” and our consolidated
financial statements and related notes included elsewhere in
this prospectus.
Unless we state otherwise, the terms “we,”“us,”“our,”“HFF,” and the
“Company,” refer to HFF, Inc., a newly formed Delaware
corporation, and its consolidated subsidiaries after giving
effect to the reorganization transactions to be completed prior
to the consummation of this offering as described in
“Organizational Structure”; prior to the
reorganization transactions, these terms refer to HFF Holdings
(as such term is defined below) and its consolidated
subsidiaries. Unless the context otherwise requires, references
to (1) “HFF Holdings” refer solely to HFF
Holdings LLC, a Delaware limited liability company that is
currently the holding company for our consolidated subsidiaries,
and not to any of its subsidiaries, (2) “HFF LP”
refer to Holliday Fenoglio Fowler, L.P., a Texas limited
partnership, (3) “HFF Securities” refer to HFF
Securities L.P., a Delaware limited partnership and registered
broker-dealer, (4) “Holliday GP” refer to
Holliday GP Corp., a Delaware corporation and the general
partner of HFF LP and HFF Securities, (5) “HoldCo
LLC” refer to HFF Partnership Holdings LLC, a Delaware
limited liability company and a wholly-owned subsidiary of HFF,
Inc. and (6) “Holdings Sub” refer to HFF LP
Acquisition LLC, a Delaware limited liability company and
wholly-owned subsidiary of HFF Holdings. Our business operations
are conducted by HFF LP and HFF Securities which are sometimes
referred to in this prospectus as the “Operating
Partnerships.” Unless we state otherwise, the information
in this prospectus gives effect to the reorganization
transactions described in “Organizational Structure.”
The term “Predecessor” refers to HFF LP prior to its
acquisition from Lend Lease by HFF Holdings on June 16,2003. The term “‘Successor” refers to HFF
Holdings after the date of such acquisition.
HFF
We are a leading provider of commercial real estate and capital
markets services to the U.S. commercial real estate
industry based on transaction volume and are one of the largest
private full-service commercial real estate financial
intermediaries in the country. We operate out of 18 offices
nationwide with more than 130 transaction professionals and
approximately 270 support associates. In 2005, we advised on
approximately $32 billion of completed commercial real
estate transactions, more than a 40% increase compared to the
approximately $22 billion of completed transactions we
advised on in 2004.
Our fully-integrated national capital markets platform, coupled
with our knowledge of the commercial real estate markets, allows
us to effectively act as a “one-stop shop” for our
clients, providing a broad array of capital markets services
including:
•
Debt placement;
•
Investment sales;
•
Structured finance;
•
Private equity, investment banking and advisory services;
•
Note sale and note sales advisory services; and
•
Commercial loan servicing.
Substantially all of our revenues are in the form of capital
market services fees collected from our clients, usually
negotiated on a
transaction-by-transaction
basis. We believe that our multiple product offerings, diverse
client mix, expertise in a wide range of property types and our
national platform create a stable and diversified revenue
stream. Furthermore, we believe our business mix, operational
expertise and the leveragability of our platform have enabled us
to achieve profit margins that are among the highest of our
public company peers. Our revenues and net income were
$205.8 million and $46.8 million, respectively, for
the year ended December 31, 2005, compared to
$143.7 million and $28.1 million, respectively, for
the year ended December 31, 2004. For the
nine months ended September 30, 2006, our revenues and net
income were $156.5 million and $31.7 million,
respectively.
We have established strong relationships with our clients. Our
clients are both users of capital, such as property owners, and
providers of capital, such as lenders and equity investors. Many
of our clients act as both users and providers of capital in
different transactions, which enables us to leverage our
existing relationships and execute multiple transactions across
multiple services with the same clients.
We believe we have a reputation for high ethical standards,
dedicated teamwork and a strong focus on serving the interests
of our clients. We take a long-term view of our business and
client relationships, and our culture and philosophy are firmly
centered on putting the client’s interests first.
Furthermore, through their ownership of HFF Holdings,
approximately 40 of our senior transaction professionals will in
the aggregate own a majority interest in the Operating
Partnerships following this offering. We believe this further
aligns their individual interests with those of the Company.
Our
Competitive Strengths
We attribute our success and distinctiveness to our ability to
leverage a number of key competitive strengths, including:
•
People, Expertise and Culture. We and our
predecessor companies have been in the commercial real estate
business for over 25 years, and our transaction
professionals have significant expertise and long-standing
relationships with our clients. The transaction history
accumulated among our transaction professionals ensures a high
degree of market knowledge on a macro level, intimate knowledge
of local commercial real estate markets, long-term relationships
with the most active investors, and a comprehensive
understanding of capital markets products. In addition, our
culture is governed by our commitment to high ethical standards,
putting the client’s interest first and treating clients
and our own associates fairly and with respect.
•
Integrated Capital Markets Services
Platform. In the increasingly competitive
commercial real estate and capital markets industry, we believe
our key differentiator is our ability to analyze all commercial
real estate product types and markets as well as our ability to
provide clients with comprehensive analysis, advice and
execution expertise on all types of debt and equity capital
markets solutions.
•
Independent Objective Advice. Unlike many of
our competitors, we do not currently offer services that compete
with services provided by our clients such as leasing or
property management, nor do we currently engage in principal
capital investing activities. This allows us to offer
independent objective advice to our clients.
•
Extensive Cross-Selling Opportunities. As some
participants in the commercial real estate market are frequently
buyers, sellers, lenders and borrowers at various times, our
relationships with these participants across all aspects of
their business provides us with multiple revenue opportunities
throughout the life cycle of their commercial real estate
investments. In addition, we often provide more than one service
in a particular transaction, such as in an investment sale or
note sale assignment where we not only represent the seller of a
commercial real estate investment but also represent the buyer
in arranging acquisition financing.
•
Broad and Deep Network of Relationships. We
have developed broad and deep-standing relationships with the
users and providers of capital in the industry and have
completed multiple transactions for many of the top
institutional commercial real estate investors in the
U.S. Importantly, our transaction professionals, analysts
and closing specialists foster relationships with their
respective counterparts within each client’s organization.
This provides, in our opinion, a deeper relationship with our
firm relative to our competitors.
•
Proprietary Transaction Database. We believe
that the extensive volume of commercial real estate transactions
that we advise on throughout the U.S. and across multiple
property types and capital market service lines provides our
transaction professionals with valuable, real-time market
information. We maintain a proprietary database on over
4,800 clients as well as databases that track key terms and
provisions of all closed and pending transactions for which we
are involved as well as historic and current
flows and the pricing of debt, structured finance, investment
sales, note sales and equity transactions. We believe this
information strengthens our competitive position by enhancing
the advice we provide to clients and improving the probability
of successfully closing a transaction.
Our
Strategic Growth Plan
We seek to improve our market position by focusing on the
following strategic growth initiatives:
•
Expand Our Geographic Footprint. We believe
that opportunities exist to establish and increase our presence
in several key domestic and, potentially, international markets.
While our transaction professionals, located in 18 offices
throughout the U.S., advised clients on transactions in 44
states (and the District of Columbia) and in more than 500
cities in 2005, there are a number of major metropolitan areas
where we do not maintain an office, and we have no overseas
offices. We expect to achieve future strategic geographic
expansion through a combination of recruitment of key
transaction professionals, organic growth and possible
acquisitions of smaller local and regional firms across all
services in both new and existing markets. However, in all cases
our strategic growth will be focused on serving our
clients’ interests and predicated on finding the most
experienced professionals in the market who have the highest
integrity, work ethic and reputation, while fitting into our
culture and sharing our philosophy and the way we conduct our
business.
•
Increase Market Share Across Each of Our
Services. We have achieved significant growth in
each of the services we provide through our integrated capital
markets platform. We believe that we have the opportunity to
continue to increase our market share in each of the various
services we provide to our clients by penetrating deeper into
our national, regional and local client relationships. We also
intend to increase our market share by selectively hiring
transaction professionals in our existing offices and in new
locations, predicated on finding the most experienced
professionals in the market who have the highest integrity, work
ethic and reputation, while fitting into our culture and sharing
our philosophy and the way we conduct our business.
•
Continue to Capitalize on Cross-Selling
Opportunities. Participants in the commercial
real estate market increasingly are buyers, sellers, lenders and
borrowers at various times. We believe our relationships with
all of these participants across all aspects of their businesses
provide us with multiple revenue opportunities throughout the
lifecycle of their commercial real estate investments. Our
clients typically execute transactions throughout the
U.S. utilizing the wide spectrum of our services. By
maintaining close relationships with these clients, we intend to
continue to generate significant repeat business across all of
our business lines.
Selected
Risk Factors
We face a number of competitive challenges and potential risks.
See “Risk Factors” for a discussion of the factors you
should consider before buying shares of our Class A common
stock. Some of the more significant challenges and risks include:
•
General Economic Conditions and Commercial Real Estate Market
Conditions. Negative economic conditions, changes
in interest rates, disruptions in capital markets, and declines
in the demand for commercial real estate and related services in
international or domestic markets or in significant markets in
which we do business could have a material adverse effect on our
business, results of operations
and/or
financial condition.
•
Retention of Qualified and Experienced Transaction
Professionals and Employees. Our most important
asset is our people, and our continued success is highly
dependent upon the efforts of our transaction professionals and
other important associates, including our analysts and
production coordinators as well as our key servicing and company
overhead support associates. Our transaction professionals
generate a significant majority of our revenues. If any of these
key transaction professionals or other important associates
leave, or if we are unable to attract other qualified
transaction professionals, our business, financial condition and
results of operations may suffer.
Preservation of Our Business Philosophy and
Culture. We are deeply committed to maintaining
our business philosophy and culture. The effects of becoming a
public company, including potential changes in our compensation
structure, could adversely affect our culture.
•
Control by HFF Holdings of the voting power in HFF,
Inc. After the offering, HFF Holdings will have a
number of votes in HFF, Inc. that is equal to the total number
of shares of Class A common stock for which the partnership
units that HFF Holdings holds in the Operating Partnerships are
exchangeable. As a result, because HFF Holdings will have a
majority of the voting power in HFF, Inc., following the
offering HFF Holdings will have the ability to elect all of the
members of our board of directors and thereby to control our
management and affairs.
•
Tax Benefits. Although we expect our structure
to produce significant tax benefits as a result of the initial
sale to us of interests in the Operating Partnerships and
subsequent exchanges of interests in the Operating Partnerships,
we will be required to pay HFF Holdings for 85% of those tax
benefits. We may need to incur debt to finance payments under
the tax receivable agreement to the extent our cash resources
are insufficient to meet our obligations under the tax
receivable agreement as a result of timing discrepancies or
otherwise.
•
Transformation into a public company. Our
business has historically operated as a privately-owned company,
and we expect to incur significant additional legal, accounting,
reporting and other expenses as a result of having publicly
traded common stock. Additionally, the demands associated with
being a public company may disrupt regular operations of our
business by diverting attention of some of our most active
senior transaction professionals away from revenue producing
activities to management and administrative oversight.
HFF, Inc. was incorporated in Delaware in November, 2006. Our
principal executive offices are located at 429 Fourth
Avenue, Suite 200, Pittsburgh, Pennsylvania15219, and our
telephone number is
(412) 281-8714.
Prior to the closing of this offering, we will effect the
reorganization described in “Organizational Structure”
beginning on page 26. The diagram below depicts our current
organizational structure:
Current
Organizational Structure
(a)
Approximately 40 of our senior transaction professionals.
Following the reorganization and this offering, HFF, Inc. will
be a holding company and hold partnership units in the Operating
Partnerships and all of the outstanding shares of Holliday GP.
As the owner of Holliday GP, the sole general partner of the
Operating Partnerships, HFF, Inc. will operate and control all
of the business and affairs of the Operating Partnerships. HFF,
Inc. will consolidate the financial results of the Operating
Partnerships, and the ownership interest of HFF Holdings in the
Operating Partnerships will be treated as a minority interest in
HFF, Inc.’s consolidated financial statements. HFF Holdings
and HFF, Inc., through their wholly-owned subsidiaries, will be
the only limited partners of the Operating Partnerships after
this offering. The diagram below depicts our organizational
structure immediately following this offering.
Post –
IPO Organizational Structure
(a)
Approximately 40 of our senior transaction professionals.
Immediately following this offering, HFF, Inc. will hold
partnership units in the Operating Partnerships representing
approximately 39% of the total number of partnership units of
each of the Operating Partnerships, or approximately 45% if the
underwriters exercise in full their option to purchase
additional shares, and HFF Holdings will hold partnership units
in the Operating Partnerships representing approximately 61% of
the total number of partnership units of each of the Operating
Partnerships, or approximately 55% if the underwriters exercise
in full their option to purchase additional shares. Accordingly,
immediately following this offering, public stockholders will
own approximately 39% of the equity in our business and HFF
Holdings will own approximately 61% of the equity in our
business. If the underwriters exercise in full their option to
purchase additional shares, immediately following this offering,
public stockholders will own approximately 45% of the equity in
our business and HFF Holdings will own approximately 55% of the
equity in our business. In addition, our public stockholders
will have approximately 39% of the voting power in HFF, Inc., or
approximately 45% if the underwriters exercise in full their
option to purchase additional shares, and HFF Holdings will have
approximately 61% of the voting power in HFF, Inc., or
approximately 55% if the underwriters exercise in full their
option to purchase additional shares.
14,300,000 shares (or 36,800,000 shares if HFF
Holdings exchanges all of its partnership units in the Operating
Partnerships for newly-issued shares of Class A common
stock)
Class B common stock
1 share
Option to purchase additional shares
If the underwriters sell more shares than the total number set
forth above, the underwriters have an option to buy up to an
additional 2,145,000 shares from us to cover such sales.
They may exercise that option for 30 days.
Use of proceeds
We estimate that our net proceeds from this offering, after
deducting underwriting discounts and estimated offering
expenses, will be approximately $209.0 million, or
approximately $240.9 million if the underwriters exercise
in full their option to purchase additional shares. We will use
these proceeds, as well as any proceeds received from the
exercise of the underwriters’ option to purchase additional
shares, to purchase from HFF Holdings all of the shares of
Holliday GP and partnership units representing approximately 39%
of each of the Operating Partnerships, or partnership units
representing approximately 45% of each of the Operating
Partnerships if the underwriters exercise in full their option
to purchase additional shares. HFF Holdings will use
approximately $56.3 million of the sale proceeds to repay
all outstanding borrowings under HFF LP’s credit agreement,
based on amounts outstanding under the credit agreement on
January 1, 2007. Accordingly, we will not retain any of the
proceeds from this offering.
Voting rights
Each share of our Class A common stock will entitle its
holder to one vote on all matters to be voted on by stockholders
generally.
HFF Holdings will be issued one share of our Class B common
stock. Class B common stock has no economic rights but will
entitle the holder to a number of votes that is equal to the
total number of shares of Class A common stock for which
the partnership units that HFF Holdings holds in the Operating
Partnerships as of the relevant record date for the HFF, Inc.
stockholder action are exchangeable.
See “Description of Capital Stock.”
Holders of our Class A common stock and Class B common
stock will vote together as a single class on all matters
presented to our stockholders for their vote or approval, except
as otherwise required by applicable law.
Dividends
We do not currently intend to pay a quarterly cash dividend. If
we do declare a dividend in the future, the Class B common
stock will not be entitled to dividend rights.
HFF, Inc. will be a holding company and will have no material
assets other than its ownership of partnership units in the
Operating Partnerships. If we declare a dividend at some point
in the future, we intend to cause the Operating Partnerships to
make distributions to HFF, Inc. in an amount sufficient to cover
any such dividends. If the Operating Partnerships make such
distributions, HFF Holdings will be
entitled to ratably receive equivalent distributions on its
partnership units in the Operating Partnerships.
New York Stock Exchange symbol
HF
Risk factors
Please read “Risk Factors” and other information
included in this prospectus for a discussion of factors you
should carefully consider before deciding to invest in our
Class A common stock.
Class A common stock outstanding and other information
based thereon in this prospectus does not reflect:
•
2,145,000 shares of Class A common stock issuable upon
exercise of the underwriters’ option to purchase additional
shares;
•
210,940 shares of our Class A common stock that will
underlie awards we expect to grant under our proposed stock
incentive plan at the time of this offering. A $1.00 increase
(decrease) in the assumed offering price of $16.00 per
share would decrease (increase) the amount of shares underlying
these awards by approximately 15,000 shares. See
“Management — Omnibus Incentive Compensation
Plan;” and
•
3,289,060 additional shares of our Class A common stock
expected to be available for future grant under our proposed
stock incentive plan after the consummation of this offering.
See “Management — Omnibus Incentive Compensation
Plan.”
Unless we specifically state otherwise, all information in this
prospectus assumes that our Class A common stock will be
sold at $16.00 per share (the midpoint of the price range
on the cover of this prospectus).
The following tables present summary consolidated financial data
as of and for the dates and periods indicated for HFF Holdings.
We derived the summary consolidated financial data set forth
below as of and for the years ended December 31, 2005 and
2004 and as of and for the nine months ended September 30,2006 from the audited consolidated financial statements of HFF
Holdings, which have been audited by Ernst & Young LLP,
our independent registered public accounting firm, and are
included elsewhere in this prospectus. We derived the summary
consolidated financial data set forth below for the nine months
ended September 30, 2005 from the unaudited consolidated
financial statements of HFF Holdings, which are included
elsewhere in this prospectus.
The summarized unaudited pro forma financial data as of
September 30, 2006 and for the year ended December 31,2005 and the nine months ended September 30, 2006 have been
prepared to give pro forma effect to all of the reorganization
transactions described in “Organizational Structure”
and the sale of shares in this offering, and the application of
the net proceeds from this offering, as if they had been
completed as of January 1, 2005 with respect to the
unaudited condensed consolidated pro forma statements of income
and as of September 30, 2006 with respect to the unaudited
pro forma statement of financial condition data. This data is
subject, and gives effect, to the assumptions and adjustments
described in the notes accompanying the unaudited pro forma
financial statements included elsewhere in this prospectus. The
summary unaudited pro forma financial data is presented for
informational purposes only and should not be considered
indicative of actual results of operations that would have been
achieved had the reorganization transactions and this offering
been consummated on the dates indicated, and do not purport to
be indicative of statements of financial condition data or
results of operations as of any future date or for any future
period.
The summary consolidated financial data presented below is not
indicative of our results for any future period. In
management’s opinion, the unaudited information has been
prepared on substantially the same basis as the consolidated
financial statements appearing elsewhere in this prospectus and
includes all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the unaudited
consolidated data. The summary consolidated financial data set
forth below should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in
this prospectus, “Unaudited Pro Forma Financial
Information,”“Selected Historical Financial
Data” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operation.”
We have historically operated as two limited liability companies
(HFF Holdings and Holdings Sub), a corporation (Holliday GP) and
two limited partnerships (HFF LP and HFF Securities), which two
partnerships we refer to as the Operating Partnerships. As a
result, our income has been subject to limited U.S. federal
income taxes, and our income and expenses have been passed
through and reported on the individual tax returns of the
members of HFF Holdings. Income taxes shown on our consolidated
statements of income are attributable to taxes incurred at the
state and local level. Following this offering, HFF, Inc. will
be subject to additional entity-level taxes that will be
reflected in our consolidated financial statements. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operation — Key Financial
Measures and Indicators — Costs and
Expenses — Income Tax Expense” and
“Unaudited Pro Forma Financial Information.”
For the purposes of the HFF, Inc. pro forma net income per share
of Class A common stock calculation, the weighted average shares
of Class A common stock outstanding, basic and diluted, are
calculated based on:
Weighted average shares of
Class A common stock outstanding
14,313
14,329
14,313
14,368
The partnership units of Operating Partnerships exchangeable
into shares of Class A common stock pursuant to the
Exchange Right are not included in the calculation of weighted
average shares of Class A common stock outstanding as they
are anti-dilutive.
HFF, Inc. pro forma basic and net diluted net income per share
of Class A common stock are calculated as follows:
Net income available to holders of
shares of Class A common stock
$
11,088
$
11,088
$
8,248
$
8,248
Basic and diluted weighted average
shares of Class A common stock outstanding
14,313
14,329
14,313
14,368
Basic and diluted net income per
share of Class A common stock
$
0.77
$
0.77
$
0.58
$
0.57
The share of Class B common stock has no right to receive
dividends or distributions from HFF, Inc. The share of
Class B common stock does not share in the earnings of HFF,
Inc. and no earnings are allocable to such class. Accordingly,
pro forma basic and diluted net income per share of Class B
common stock have not been presented.
(d)
We define EBITDA as net income (loss) before interest expense,
income taxes, depreciation and amortization, and income reported
to the minority interest. We use EBITDA in our business
operations to, among other things, evaluate the performance of
our business, develop budgets and measure our performance
against those budgets. We also believe that analysts and
investors use EBITDA as a supplemental measure to evaluate a
company’s overall operating performance. However, EBITDA
has material limitations as an analytical tool and you should
not consider this in isolation, or as a substitute for analysis
of our results as reported under GAAP. We find it as a useful
tool to assist us in evaluating performance because it
eliminates items related to capital structure and taxes. The
items that we have eliminated from net income in determining
EBITDA are interest expense, income taxes, depreciation of fixed
assets, amortization of intangible assets and income reported to
the minority interest. However, some of these eliminated items
are significant to our business. For example, (i) interest
expense is a necessary element of our costs and ability to
generate revenue because we incur interest expense related to
any outstanding indebtedness, (ii) payment of income taxes
is a necessary element of our costs, (iii) depreciation is
a necessary element of our costs and (iv) income reported
to minority interest based upon HFF Holding’s ownership
interest in the Operating Partnerships. Any measure that
eliminates components of our capital structure and costs
associated with carrying significant amounts of fixed assets on
our balance sheet has material limitations as a performance
measure. In light of the foregoing limitations, we do not rely
solely on EBITDA as a performance measure and also consider our
GAAP results. EBITDA is not a measurement of our financial
performance under GAAP and should not be considered as an
alternative to net income, operating income or any other
measures derived in accordance with GAAP. Because EBITDA is not
The purchase of our Class A common stock involves a high
degree of risk. The risks described below comprise the material
risks of which we are aware. You should consider these risks
carefully before making a decision to invest in our Class A
common stock. In addition, there may be risks of which we are
currently unaware, or that we currently regard as immaterial
based on the information available to us, that later prove to be
material. These risks may adversely affect our business,
financial condition and operating results. As a result, the
trading price of our Class A common stock could decline and
you could lose some or all of your investment.
Risks
Related to Our Business
General
economic conditions and commercial real estate market
conditions, both globally and
domestically, can have a negative impact on our
business.
We have experienced in past years, and expect in the future to
be negatively impacted by, periods of economic slowdowns,
recessions and disruptions in the capital markets, including
international, national, regional and local markets, and
corresponding declines in the demand for commercial real estate
and related services, within one or more of the markets in which
we operate. Historically, commercial real estate markets, and in
particular the U.S. commercial real estate market, have
tended to be cyclical and related to the condition of the
economy as a whole and to the perceptions of the market
participants as to the relevant economic outlook. Negative
economic conditions, changes in interest rates, disruptions in
capital markets and declines in the demand for commercial real
estate and related services in international or domestic markets
or in significant markets in which we do business could have a
material adverse effect on our business, results of operations
and/or
financial condition, including as a result of the following
factors.
For example:
•
Slowdowns in economic activity could cause tenant demand for
space to decline, which would adversely affect the operation and
income of commercial real estate properties and thereby affect
investor demand and the supply of capital for debt and equity
investments in commercial real estate.
•
Declines in the regional or local demand for commercial real
estate, or significant disruptions in other segments of the real
estate market, could adversely affect our results of operations.
During 2005, approximately 19%, 14%, 9% and 10% of our capital
market services revenues was derived from transactions involving
commercial real estate located in Texas, California, Florida and
the region consisting of the District of Columbia, Maryland and
Virginia, respectively. As a result, a significant portion of
our business is dependent on the economic conditions in general
and the markets for commercial real estate in these areas,
which, like other commercial real estate markets, have
experienced price volatility or economic downturns in the past.
•
Significant fluctuations in interest rates as well as steady and
protracted increases or decreases of interest rates could
adversely effect 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 reduce the number of
acquisitions, dispositions and loan originations, as well as the
respective transaction volumes, which could also adversely
affect our servicing revenue. All of the above could cause
prices to decrease due to the reduced amount of financing
available as well as the increased cost of obtaining financing
and could lead to a decrease in purchase and sale activity.
•
Significant disruptions or changes in capital market flows,
regardless of their duration, could adversely affect the supply
and/or
demand for capital from investors for commercial real estate
investments. In particular, while commercial real estate is now
viewed as an accepted asset 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.
These and other types of events could lead to a general decline
in transaction activity, which would likely lead to a reduction
in fees and commissions relating to such transactions, as well
as a significant reduction in our loan servicing activities as a
result of increased delinquencies and the lack of additional
loans that we would have
otherwise added to our servicing portfolio. These effects would
likely cause us to realize lower revenues from our transaction
service fees, including debt placement fees and investment sales
commissions, which fees usually are tied to the transaction
value and are payable upon the successful completion of a
particular transaction, and from our loan servicing revenues due
to reduced financing and refinancing transactions as well as
higher delinquencies.
If we
are unable to retain and attract qualified and experienced
transaction professionals and associates, our growth may be
limited and our business and operating results could
suffer.
Our most important asset is our people, and our continued
success is highly dependent upon the efforts of our transaction
professionals and other associates, including our analysts and
production coordinators as well as our key servicing and company
overhead support associates. Our transaction professionals
generate a significant majority of our revenues. If any of these
key transaction professionals or other important associates
leave, or if we lose a significant number of transaction
professionals, or if we are unable to attract other qualified
transaction professionals, our business, financial condition and
results of operations may suffer. We have experienced in the
past, and expect to experience in the future, the negative
impact of the inability to retain and attract associates,
analysts and experienced transaction professionals.
Additionally, such events may have a disproportionate adverse
effect to our operations if they occur in geographic areas where
substantial amounts of our capital market services revenues are
generated. See “— General Economic Conditions and
Commercial Real Estate Market Conditions.”
As part of our transformation to a public company, we may also
face additional retention pressures as a result of reductions in
distributions from HFF Holdings to approximately 40 of our most
valuable transaction professionals who are the members of HFF
Holdings. Following the termination of their employment
contracts and expiration of their lock-ups, we may not be able
to retain these members of HFF Holdings. Even if we are able to
retain them, we may not be able to retain them at compensation
levels that will allow us to achieve our target ratio of
compensation
expense-to-operating
revenue. Following this offering, we intend to use a combination
of cash compensation, equity, equity-based incentives and other
employee benefits rather than solely cash compensation to
motivate and retain our transaction professionals. Our
compensation mechanisms as a public company may not be
effective, especially if the market price of our Class A
common stock declines.
In addition, our competitors may attempt to recruit our
transaction professionals. The employment arrangements,
non-competition agreements and retention agreements we have
entered into with respect to the members of HFF Holdings or may
enter into with our key associates may not prevent our
transaction professionals and other key associates from
resigning or competing against us. See
“Management — Employment Agreements.” Any
such arrangements and agreements will expire after a certain
period of time, at which point each such person would be free to
compete against us and solicit our clients and employees.
A significant component of our growth has also occurred through
the recruiting and hiring of key experienced transaction
professionals. Any future growth through recruiting these
professionals will be partially dependent upon the continued
availability of attractive candidates fitting the culture of our
firm at advantageous terms and conditions. However, individuals
whom we would like to hire may not be available upon
advantageous terms and conditions. In addition, the hiring of
new personnel involve risks that the persons acquired will not
perform in accordance with expectations and that business
judgments concerning the value, strengths and weaknesses of
persons acquired will prove incorrect.
Our
business could be hurt if we are unable to retain our business
philosophy and partnership culture as a result of becoming a
public company, and efforts to retain our philosophy and culture
could adversely affect our ability to maintain and grow our
business.
We are deeply committed to maintaining this philosophy and
culture which we have built. Our Mission and Vision Statement
defines our business philosophy as well as the emphasis that we
place on our clients, our people and our culture. We seek to
reinforce to each of our associates our commitment to our
clients, our culture and values by sharing with everyone in the
firm what is expected from each of them. We strive to maintain a
work environment that reinforces our owner-operator culture and
the collaboration, motivation, alignment of interests and sense
of ownership and reward those associates based on their
value-added performance who adhere to this culture. The effects
of becoming a public company, including potential changes in our
compensation structure, could adversely
affect this culture. If we do not continue to develop and
implement the right processes and tools to manage our changing
enterprise and maintain this culture, our ability to compete
successfully and achieve our business objectives could be
impaired, which could negatively impact our business, financial
condition and results of operations.
In addition, in an effort to preserve our strong partnership
culture, our process for hiring new transaction professionals is
lengthy and highly selective. In the past, we have interviewed a
significant number of individuals for each transaction
professional that we hired, and we have in the past and may in
the future subordinate our growth plans to our objective of
hiring transaction professionals whom we think will adhere to
and contribute to our culture. Our ability to maintain and grow
our business could suffer if we are not able to identify, hire
and retain new transaction professionals meeting our high
standards, which could negatively impact our business, financial
condition and results of operations.
We
have numerous significant competitors and potential future
competitors, some of which may have greater resources than we
do, and we may not be able to continue to compete
effectively.
We compete across a variety of businesses within the commercial
real estate industry. In general, with respect to each of our
businesses, we cannot give assurance that we will be able to
continue to compete effectively or maintain our current fee
arrangements or margin levels or that we will not encounter
increased competition. Each of the services we provide to our
clients is highly competitive on an international, national,
regional and local level. Depending on the product or service,
we face competition from, including but not limited to,
commercial real estate service providers, private owners and
developers, institutional lenders, insurance companies,
investment banking firms and investment managers, some of whom
are clients and many of whom may have greater financial
resources than we do. In addition, future changes in laws and
regulations could lead to the entry of other competitors. Many
of our competitors are local, regional, national or
international firms. Although some are substantially smaller
than we are, some of these competitors are larger on a local,
regional, national or international basis. We may face increased
competition from even stronger competitors in the future due to
a trend toward consolidation. In recent years, there has been
substantial consolidation and convergence among companies in our
industry. We are also subject to competition from other large
national and multi-national firms as well as regional and local
firms that have similar service competencies to ours. Our
existing and future competitors may choose to undercut our fees,
increase the levels of compensation they are willing to pay to
their employees and either recruit our employees or cause us to
increase our level of compensation necessary to retain our own
employees or recruit new employees. These occurrences could
cause our revenue to decrease or negatively impact our target
ratio of
compensation-to-operating
revenue, both of which could have an adverse effect on our
business, financial condition and results of operations.
We
could be adversely affected if the Terrorism Risk Insurance Act
of 2002 is not renewed beyond 2007, or is adversely amended, or
if insurance for other natural or manmade disasters is
interrupted or constrained.
Our business could be adversely affected if the Terrorism Risk
Insurance Act of 2002, or TRIA, is not renewed beyond 2007, or
is adversely amended, or if insurance for other natural and
manmade disasters is interrupted or constrained. In response to
the tightening of supply in certain insurance and reinsurance
markets resulting from, among other things, the
September 11, 2001 terrorist attack, the Terrorism Risk
Insurance Act of 2002 was enacted to ensure the availability of
commercial insurance coverage for terrorist acts in the United
States. This law established a federal assistance program
through the end of 2005 to help the commercial property and
casualty insurance industry cover claims related to future
terrorism-related losses and required that coverage for
terrorist acts be offered by insurers. Although TRIA recently
has been amended and extended through 2007, it is possible that
TRIA will not be renewed beyond 2007, or could be adversely
amended, which could adversely affect the commercial real estate
markets and capital markets if a material subsequent event
occurred. Lenders generally require owners of commercial real
estate to maintain terrorism insurance. In the event TRIA is not
renewed, terrorism insurance may become difficult or impossible
to obtain. Natural disasters such as Katrina and the lack of
commercially available wind damage and flood insurance could
also have a negative impact on the acquisition, disposition and
financing of the commercial properties in certain areas. Any of
these events could result in a general decline in acquisition,
disposition and financing activities, which could lead to a
reduction in our fees for arranging such transactions as well as
a reduction in
our loan servicing activities due to increased delinquencies and
lack of additional loans that we would have otherwise added to
our portfolio, all of which could adversely affect our business,
financial condition and results of operation.
We
have experienced significant growth over the past several years,
which may be difficult to sustain and which may place
significant demands on our administrative, operational and
financial resources.
We expect our significant growth to continue, which could place
additional demands on our resources and increase our expenses.
Our future growth will depend, among other things, on our
ability to successfully identify experienced transaction
professionals to join our firm. It may take years for us to
determine whether new transaction professionals will be
profitable or effective. During that time, we may incur
significant expenses and expend significant time and resources
toward training, integration and business development. If we are
unable to hire and retain profitable transaction professionals,
we will not be able to implement our growth strategy, which
could adversely affect our business, financial condition and
results of operations.
Sustaining our growth will also require us to commit additional
management, operational and financial resources to maintain
appropriate operational and financial systems to adequately
support expansion. There can be no assurance that we will be
able to manage our expanding operations effectively or that we
will be able to maintain or accelerate our growth, and any
failure to do so could adversely affect our ability to generate
revenue and control our expenses which could adversely affect
our business, financial condition and results of operations.
If we
acquire companies in the future, we may experience high
transaction and integration costs, the integration process may
be disruptive to our business and the acquired businesses may
not perform
as we expect.
Future acquisitions and any necessary related financings may
involve significant transaction-related expenses.
Transaction-related expenditures include severance costs, lease
termination costs, transaction costs, deferred financing costs,
possible regulatory costs and merger-related costs, among
others. We may also experience difficulties in integrating
operations and accounting systems acquired from other companies.
These challenges include the diversion of management’s
attention from the regular operations of our business and the
potential loss of our key clients, our key associates or those
of the acquired operations, each of which could harm our
financial condition and results of operation. We believe that
most acquisitions will initially have an adverse impact on
revenues, expenses, operating income and net income.
Acquisitions also frequently involve significant costs related
to integrating information technology, accounting, reporting and
management services and rationalizing personnel levels. If we
are unable to fully integrate the accounting, reporting and
other systems of the businesses we acquire, we may not be able
to effectively manage them and our financial results may be
materially affected. Moreover, the integration process itself
may be disruptive to our business as it requires coordination of
geographically diverse organizations and implementation of new
accounting and information technology systems.
In addition, acquisitions of businesses involve risks that the
businesses acquired will not perform in accordance with
expectations, that the expected synergies associated with
acquisitions will not be achieved and that business judgments
concerning the value, strengths and weaknesses of businesses
acquired will prove incorrect, which could have an adverse
affect on our business, financial condition and results of
operations.
A
failure to appropriately deal with actual or perceived conflicts
of interest could adversely affect
our businesses.
Outside of our people, our reputation is one of our most
important assets. As we have expanded the scope of our
businesses and our client base, we increasingly have to address
potential actual or perceived conflicts of interest relating to
the capital market services we provide to our existing and
potential clients. For example, conflicts may arise between our
position as an advisor to both the buyer and seller in
commercial real estate sales transactions or in instances when a
potential buyer requests that we represent it in securing the
necessary capital to acquire an asset we are selling for another
client. In addition, certain of our employees hold interests in
real property as well as invest in pools of funds outside of
their capacity as our employees, and their individual interests
could be perceived to or actually conflict with the interests of
our clients. While we have attempted to adopt various policies,
controls and procedures to address or limit actual or perceived
conflicts, these policies and procedures may not be adequate or
carry attendant costs and may not be adhered to by our
employees. Appropriately dealing with conflicts of interest is
complex and difficult and our reputation could be damaged and
cause us to lose existing clients or fail to gain new clients if
we fail, or appear to fail, to deal appropriately with conflicts
of interest, which could have an adverse affect on our business,
financial condition and results of operations.
A
majority of our revenue is derived from capital market services
transaction fees, which are not
long-term contracted sources of revenue and are subject to
intense competition, and declines in those engagements could
have a material adverse effect on our financial condition and
results of operations.
We historically have earned over 90% of our revenue from capital
market services transaction fees. We expect that we will
continue to rely heavily on capital market services transaction
fees for a substantial portion of our revenue for the
foreseeable future. A decline in our engagements or in the value
of the commercial real estate we sell or finance could
significantly decrease our capital market services revenues
which would adversely affect our business, financial condition
and results of operations. In addition, we operate in a highly
competitive environment where typically there are no long-term
contracted sources of revenue; each revenue-generating
engagement typically is separately awarded and negotiated on a
transaction-by-transaction
basis, and the inability to continue to be paid for services at
the current levels or the loss of clients would adversely affect
our business, financial condition and results of operation.
Our
business could be hurt if we are unable to obtain additional
capital.
Prior to the closing of this offering, substantially all of the
Operating Partnerships’ cash will be distributed to the
members of HFF Holdings. As a result, we will have little cash
and the cash that we generate from our operations may be
insufficient to fund our working capital needs. We intend to
negotiate with our current lender or other potential lenders to
maintain or replace our current line of credit and to request an
increase in the amount available to us under this line of
credit. We expect to be able to borrow under this line of
credit, but we cannot guarantee that we will be able to do so in
sufficient amounts or at all. If we are unable to obtain
sufficient additional financing, we will be required to fund our
short-term liquidity requirements solely from our operations,
which may not be sufficient for our capital needs or may be
inadequate to maintain or grow our business, which could
adversely affect our business, financial condition and results
of operation.
Additional
indebtedness may make us more vulnerable to economic downturns
and limit our ability to withstand competitive
pressures.
Prior to the closing of this offering, substantially all of the
Operating Partnerships’ cash will be distributed to members
of HFF Holdings and, other than our line of credit, which we
hope to increase, and any loans outstanding under the
arrangement with Red Mortgage Capital, Inc. used in connection
with the Freddie Mac loans we originate and then sell to Freddie
Mac, we will have almost no indebtedness. Even though we will
have limited indebtedness, we will have little cash and the cash
that we generate from our operations may be insufficient to fund
our working capital or our on-going capital needs. As a result,
we may require additional financing to fund our on-going capital
needs as well as to fund our working capital needs. Any
additional indebtedness that we incur will make us more
vulnerable to economic downturns and limit our ability to
withstand competitive pressures.
The level of our indebtedness could have important consequences,
including:
•
a substantial portion of our cash flow from operations will be
dedicated to debt service and may not be available for other
purposes;
•
making it more difficult for us to satisfy our obligations;
•
limiting our flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate;
•
obtaining financing in the future for working capital, capital
expenditures and general corporate purposes, including
acquisitions, and may impede our ability to secure favorable
lease terms;
making us more vulnerable to economic downturns and may limit
our ability to withstand competitive pressures;
•
making it more difficult to continue to fund our strategic
growth initiatives and retain and attract key
individuals; and
•
placing us at a competitive disadvantage compared to our
competitors with less debt and greater financial resources.
Our future cash flow may not be sufficient to meet our
obligations and commitments. If we are unable to generate
sufficient cash flow from operations in the future to service
our indebtedness and to meet our other commitments, we will be
required to adopt one or more alternatives, such as refinancing
or restructuring our indebtedness, selling material assets,
operations or seeking to raise additional debt or equity capital
or terminating significant numbers of key associates. These
actions may not be effected on a timely basis or on satisfactory
terms or at all, and these actions may not enable us to continue
to satisfy our capital requirements. As a result, we may not be
able to maintain or accelerate our growth, and any failure to do
so could adversely affect our ability to generate revenue and
control our expenses, which could adversely affect our business,
financial condition and results of operations.
Significant
fluctuations in our revenues and net income may make it
difficult for us to achieve steady earnings growth on a
quarterly or an annual basis, which may make the comparison
between periods difficult and may cause the price of our
Class A common stock to decline.
We have experienced and continue to experience significant
fluctuations in revenues and net income as a result of many
factors, including the timing of transactions, the commencement
and termination of contracts, revenue mix and the timing of
additional selling, general and administrative expenses to
support new business activities. We provide many of our services
without written contracts or pursuant to contracts that are
terminable at will. Consequently, many of our clients can
terminate or significantly reduce their relationships with us on
very short notice for any reason.
We plan our capital and operating expenditures based on our
expectations of future revenues and, if revenues are below
expectations in any given quarter or year, we may be unable to
adjust capital or operating expenditures in a timely manner to
compensate for any unexpected revenue shortfall, which could
have an immediate material adverse effect on our business,
financial condition and results of operation.
Our
results of operation vary significantly among quarters during
each calendar year, which makes comparisons of our quarterly
results difficult.
A significant portion of our revenue is seasonal. Historically,
this seasonality has caused our revenue, operating income, net
income and cash flows from operating activities to be lower in
the first six months of the year and higher in the second half
of the year. This variance among periods during each calendar
year makes comparison between such periods difficult, and it
also makes the comparison of the same periods during different
calendar years difficult as well. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operation — Seasonality.”
Employee
misconduct, which is difficult to detect and deter, could harm
us by impairing our ability to attract and retain clients and
subjecting us to significant legal liability and reputational
harm.
If our associates engage in misconduct, our business could be
adversely affected. For example, our business often requires
that we deal with confidential matters of great significance to
our clients. It is not always possible to deter employee
misconduct, and the precautions we take to deter and prevent
this activity may not be effective in all cases. If our
associates were improperly to use or disclose confidential
information provided by our clients, we could be subject to
regulatory sanctions and suffer serious harm to our reputation,
financial position and current client relationships and
significantly impair our ability to attract future clients,
which could adversely affect our business, financial condition
and results of operation.
Compliance
failures and changes in regulation could result in an increase
in our compliance costs or subject us to sanctions or
litigation.
A number of our services are subject to regulation, including by
the Securities and Exchange Commission, National Association of
Securities Dealers, Inc. and state real estate commissions and
securities regulators. Our failure to comply or have complied
with applicable laws or regulations could result in fines,
suspensions of personnel or other sanctions, including
revocation of the registration of us or any of our subsidiaries
as a commercial real estate broker or broker-dealer. Even if a
sanction imposed against us or our personnel is small in
monetary amount, the adverse publicity arising from the
imposition of sanctions against us by regulators could harm our
reputation and cause us to lose existing clients or
significantly impair our ability to gain new clients. Our
broker-dealer operations are subject to periodic examination by
the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc. We cannot predict the
outcome of any such examinations, and any negative exam may have
a significant and material adverse affect on our company. In
addition, it is possible that the regulatory scrutiny of, and
litigation in connection with, conflicts of interest will make
our clients less willing to enter into transactions in which
such a conflict may occur, and will adversely affect our
businesses as well as significantly impair our ability to gain
new clients, which could adversely affect our business,
financial condition and results of operation.
In addition, we may be adversely affected as a result of new or
revised legislation or regulations imposed by the Securities and
Exchange Commission, other United States or state or local
governmental regulatory authorities or self-regulatory
organizations that supervise the financial and commercial real
estate markets.
Risks
Related to Our Organizational Structure
Our
only material asset after completion of this offering will be
our units in the Operating Partnerships, and we are accordingly
dependent upon distributions from the Operating Partnerships to
pay our expenses, taxes and dividends (if and when declared by
our board of directors).
HFF, Inc. will be a holding company and will have no material
assets other than its ownership of partnership units in the
Operating Partnerships. HFF, Inc. has no independent means of
generating revenue. We intend to cause the Operating
Partnerships to make distributions to its partners in an amount
sufficient to cover all expenses, applicable taxes payable and
dividends, if any, declared by our board of directors. To the
extent that HFF, Inc. needs funds, and the Operating
Partnerships are restricted from making such distributions under
applicable law or regulation or under any present or future debt
covenants, or are otherwise unable to provide such funds, it
could materially adversely affect our business, liquidity,
financial condition and results of operation.
We
will be required to pay HFF Holdings for most of the benefits
relating to any additional tax depreciation or amortization
deductions we may claim as a result of the tax basis
step-up we
receive in connection with this offering, subsequent sales of
our common stock and related transactions with HFF
Holdings.
As described in “Organizational Structure”,
partnership units in HFF LP and HFF Securities held by Holdings
Sub, a wholly-owned subsidiary of HFF Holdings, will be sold to
HoldCo LLC, our wholly-owned subsidiary, for cash raised in the
initial public offering. In the future, partnership units in HFF
LP and HFF Securities held by HFF Holdings may be exchanged by
HFF Holdings for shares of our Class A common stock. The
initial sale and subsequent exchanges are expected to result in
increases in the tax basis of the assets of HFF LP and HFF
Securities that would be allocated to HFF, Inc. These increases
in tax basis would likely reduce the amount of tax that we would
otherwise be required to pay in the future depending on the
amount, character and timing of our taxable income, but there
can be no assurances that such treatment will continue in the
future.
HFF, Inc. intends to enter into a tax receivable agreement with
HFF Holdings that will provide for the payment by HFF, Inc. to
HFF Holdings of 85% of the amount of cash savings, if any, in
U.S. federal, state and local income tax that we actually
realize as a result of these 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. For purposes of the tax receivable agreement, cash
savings in income tax will be computed by comparing our actual
income tax liability to the amount of such taxes that we would
have been required to pay had there been no increase
to the tax basis of the assets of HFF LP and HFF Securities as a
result of the initial sale and later exchanges and had we not
entered into the tax receivable agreement. The term of the tax
receivable agreement will commence upon consummation of this
offering and will continue until all such tax benefits have been
utilized or expired, including the tax benefits derived from
future exchanges.
While the actual amount and timing of payments under the tax
receivable agreement will depend upon a number of factors,
including the amount and timing of taxable income we generate in
the future, the value of our individual assets, the portion of
our payments under the tax receivable agreement constituting
imputed interest and increases in the tax basis of our assets
resulting in payments to HFF Holdings, we expect that the
payments that may be made to HFF Holdings will be substantial.
Assuming no material changes in the relevant tax law and that we
earn significant taxable income to realize the full tax benefit
of the increased amortization of our assets, we expect that
future payments to HFF Holdings in respect of the initial sale
to aggregate $90.4 million and range from approximately
$4.1 million to $10.6 million per year over the next
15 years. Future payments to HFF Holdings in respect of
subsequent exchanges would be in addition to these amounts and
are expected to be substantial. The payments under the tax
receivable agreement are not conditioned upon HFF Holdings’
or its affiliates’ continued ownership of us. We may need
to incur debt to finance payments under the tax receivable
agreement to the extent our cash resources are insufficient to
meet our obligations under the tax receivable agreement as a
result of timing discrepancies or otherwise.
In addition, although we are not aware of any issue that would
cause the Internal Revenue Service, or IRS, to challenge the tax
basis increases or other benefits arising under the tax
receivable agreement, HFF Holdings will not reimburse us for any
payments previously made if such basis increases or other
benefits were later not allowed. As a result, in such
circumstances we could make payments to HFF Holdings under the
tax receivable agreement in excess of our actual cash tax
savings.
If
HFF, Inc. was deemed an “investment company” under the
Investment Company Act of 1940 as a result of its ownership of
the Operating Partnerships, applicable restrictions could make
it impractical for us to continue our business as contemplated
and could have a material adverse effect on our
business.
If HFF, Inc. were to cease participation in the management of
the Operating Partnerships, its interest in the Operating
Partnerships could be deemed an “investment security”
for purposes of the Investment Company Act. Generally, a
person is deemed to be an “investment company” if it
owns investment securities having a value exceeding 40% of the
value of its total assets (exclusive of U.S. government
securities and cash items) on an unconsolidated basis, absent an
applicable exemption. Following this offering, HFF, Inc. will
have no material assets other than its equity interest in the
Operating Partnerships and Holliday GP. A determination that
this interest was an investment security could result in HFF,
Inc. being an investment company under the Investment
Company Act and becoming subject to the registration and
other requirements of the Investment Company Act. HFF, Inc.
will not be deemed an investment company because it will manage
the Operating Partnerships through its wholly owned subsidiary,
Holliday GP. Holliday GP is the sole general partner of each of
the Operating Partnerships.
The 1940 Act and the rules thereunder contain detailed
parameters for the organization and operations of investment
companies. Among other things, the 1940 Act and the rules
thereunder limit or prohibit transactions with affiliates,
impose limitations on the issuance of debt and equity
securities, prohibit the issuance of stock options, and impose
certain governance requirements. We intend to conduct our
operations so that HFF, Inc. will not be deemed to be an
investment company under the 1940 Act. However, if anything
were to happen which would cause HFF, Inc. to be deemed to be an
investment company under the 1940 Act, we could, among
other things, be required to substantially change the manner in
which we conduct our operations either to avoid being required
to register as an investment company or to register as an
investment company. If we were required to register as an
investment company under the 1940 Act, we would be subject
to substantial regulation with respect to, among other things,
our capital structure (including our ability to use leverage),
management, operations, ability to transact business with
affiliated persons as defined in the 1940 Act (including
our subsidiaries), portfolio composition (including restrictions
with respect to diversification and industry concentrations) and
ability to compensate key employees. These restrictions and
limitations could make it impractical for us to continue our
business as currently
conducted, impair our agreements and arrangements and materially
adversely affect our business, financial condition and results
of operations.
Risks
Related to Our Class A Common Stock and this
Offering
Control
by HFF Holdings of the voting power in HFF, Inc. may give rise
to conflicts of interests and may prevent new investors from
influencing significant corporate decisions.
Our certificate of incorporation provides that the holders of
our Class B common stock (other than HFF, Inc. or any of
its subsidiaries) will be entitled to a number of votes that is
equal to the total number of shares of Class A common stock
for which the partnership units that HFF Holdings holds in the
Operating Partnerships are exchangeable.
Accordingly, immediately following this offering, HFF Holdings
will have approximately 61% of the voting power in HFF, Inc. As
a result, because HFF Holdings will have a majority of the
voting power in HFF, Inc. and our certificate of incorporation
will not provide for cumulative voting, HFF Holdings will have
the ability to elect all of the members of our board of
directors and thereby to control our management and affairs,
including determinations with respect to acquisitions,
dispositions, borrowings, issuances of common stock or other
securities, and the declaration and payment of dividends. In
addition, HFF Holdings will be able to determine the outcome of
all matters requiring stockholder approval and will be able to
cause or prevent a change of control of our company or a change
in the composition of our board of directors and could preclude
any unsolicited acquisition of our company. We cannot assure you
that the interests of HFF Holdings and its members will not
conflict with your interests.
The concentration of ownership could deprive our Class A
stockholders of an opportunity to receive a premium for their
shares as part of a sale of our company and might ultimately
affect the market price of our Class A common stock. As a
result of the control exercised by HFF Holdings over us, we
cannot assure you that we would not have received more favorable
terms from an unaffiliated party in our agreements with HFF
Holdings. For additional information regarding the share
ownership of, and our relationships with, HFF Holdings and its
members, you should read the information under the headings
“Principal Stockholders” and “Certain
Relationships and Related Party Transactions.”
In addition, the HFF LP and HFF Securities Profit Participation
Bonus Plans may only be amended or terminated with the written
approval of all of the limited partners and general partners of
each Operating Partnership. Accordingly, so long as HFF Holdings
continues to hold any partnership units in the Operating
Partnerships, the consent of HFF Holdings will required to amend
or terminate these plans. This could prevent our board of
directors or management from amending or terminating these
plans. For a detailed description of these plans, you should
read the information under the heading
“Management — Profit Participation Bonus
Plan.”
Transformation
into a public company may increase our costs and disrupt the
regular operations of
our business.
This offering will have a significant transformative effect on
us. Our business has historically operated as a privately-owned
company, and we expect to incur significant additional legal,
accounting, reporting and other expenses as a result of having
publicly traded common stock. We will also incur costs which we
have not previously incurred, including, but not limited to,
costs and expenses for directors fees, increased directors and
officers insurance, investor relations fees, expenses for
compliance with the Sarbanes-Oxley Act and new rules implemented
by the Securities and Exchange Commission and the New York Stock
Exchange, and various other costs of a public company. On an
annual basis, we estimate that we will incur costs of more than
$3 million per year as a result of becoming a
publicly-traded company. Since we have not operated as a public
company before, there can be no assurance that this estimate is
accurate and our actual costs may be significantly higher.
We also anticipate that we will incur costs associated with
recently adopted corporate governance requirements, including
requirements under the Sarbanes-Oxley Act of 2002, as amended,
as well as rules implemented by the SEC and the NYSE. We expect
these rules and regulations to increase our legal and financial
compliance costs and make some management and corporate
governance activities more time-consuming and costly. These
rules and regulations may make it more difficult and more
expensive for us to obtain director and officer liability
insurance
and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same
or similar coverage, and therefore could have an adverse impact
on our ability to recruit and bring on a qualified independent
board. We cannot predict or estimate the amount of additional
costs we may incur as a result of these requirements or the
timing of such costs.
The individuals who now constitute our management have never had
responsibility for managing a publicly-traded company, and we
may experience difficulty attracting and retaining qualified
individuals to serve on our board of directors or as executive
officers. The additional demands associated with being a public
company may disrupt regular operations of our business by
diverting attention of some of our most active senior
transaction professionals away from revenue producing activities
to management and administrative oversight, adversely affecting
our ability to attract and complete business opportunities with
clients and increasing difficulty in retaining transaction
professionals and managing and growing our businesses, the
occurrence of any of which could harm our business, financial
condition and results of operations.
Our
internal controls over financial reporting may not be effective
and our independent registered public accounting firm may not be
able to certify as to their effectiveness, which could have a
significant and adverse effect on our business and
reputation.
We will evaluate our internal controls over financial reporting
in order to allow management to report on, and our independent
registered public accounting firm to attest to, our internal
controls over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act of 2002, as amended,
and rules and regulations of the SEC thereunder, which we refer
to as “Section 404.” The process of documenting
and testing our internal control procedures in order to satisfy
the requirements of Section 404 requires annual management
assessments of the effectiveness of our internal controls over
financial reporting and a report by our independent registered
public accounting firm addressing these assessments. During the
course of our testing, we may identify deficiencies which we may
not be able to remediate in time to meet the deadline imposed by
the Sarbanes-Oxley Act for compliance with the requirements of
Section 404. In addition, if we fail to achieve and
maintain the adequacy of our internal controls, as such
standards are modified, supplemented or amended from time to
time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404. We
cannot be certain as to the timing of completion of our
evaluation, testing and any remediation actions or the impact of
the same on our operations. If we are not able to implement the
requirements of Section 404 in a timely manner or with
adequate compliance, our independent registered public
accounting firm may not be able to certify as to the
effectiveness of our internal control over financial reporting
and we may be subject to sanctions or investigation by
regulatory authorities, such as the SEC. As a result, there
could be a negative reaction in the financial markets due to a
loss of confidence in the reliability of our financial
statements. In addition, we may be required to incur costs in
improving our internal control system and the hiring of
additional personnel. Any such action could harm our reputation
and cause us to lose existing clients or fail to gain new
clients and otherwise negatively affect our results of
operations. While our management has not identified any material
weaknesses in our internal controls over financial reporting,
management has identified reportable conditions involving, among
other things, the documentation of and adherence to certain
accounting policy and financial reporting matters and management
and governance of information systems, which could have an
adverse effect on our business, financial condition or results
of operations if not remediated timely.
The
historical and pro forma financial information in this
prospectus may make it difficult to accurately predict our costs
of operations in the future.
The historical financial information in this prospectus does not
reflect the added costs we expect to incur as a public company
or the resulting changes that will occur in our capital
structure and operations. In preparing our pro forma financial
information we have given effect to, among other items, the
reorganization transactions described in “Organizational
Structure,” a deduction and charge to earnings of estimated
taxes based on an estimated tax rate (which may be different
from our actual tax rate in the future), and the cash
distribution of pre-incorporation profits to members of HFF
Holdings. The estimates we used in our pro forma financial
information may not be similar to our actual experience as a
public company. For more information on our historical financial
information and pro forma financial information, see
“Unaudited Pro Forma Financial Information,”
“Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and the historical combined financial statements included
elsewhere in this prospectus.
You
will experience immediate and substantial
dilution.
The price you pay for shares of our Class A common stock
sold in this offering is substantially higher than our net
tangible book value per share, after giving effect to this
offering. Assuming an initial public offering price for our
Class A common stock of $16.00 per share (the midpoint
of the initial public offering price range indicated on the
cover of this prospectus), you will incur immediate dilution in
net tangible book value per share of $15.94. Dilution is the
difference between the offering price per share and the net
tangible book value per share of our Class A common stock
immediately after the offering. See “Dilution.”
Because
all of the proceeds from this offering will be used to purchase
partnership units in each of the Operating Partnerships and to
repay outstanding debt, we will not have any of the proceeds
from this offering available to invest in our
business.
We estimate that our proceeds from this offering, after
deducting underwriting discounts and estimated offering
expenses, will be approximately $209.0 million, or
$240.9 million if the underwriters exercise in full their
option to purchase additional shares. We intend to use all of
the net proceeds from this offering (including any proceeds
received pursuant to the underwriters’ option to purchase
additional shares) to purchase partnership units in each of the
Operating Partnerships and repay all outstanding borrowings
under HFF LP’s credit agreement. Accordingly, we will
not retain any of the proceeds from this offering and such
proceeds will not be available to us to invest in and grow our
business. See “Use of Proceeds.”
There
may not be an active trading market for shares of our
Class A common stock, which may cause our Class A
common stock to trade at a discount from its initial public
offering price and make it difficult to sell the shares you
purchase.
Prior to this offering, there has been no public trading market
for shares of our Class A common stock. It is possible
that, after this offering, an active trading market will not
develop or continue, which would make it difficult for you to
sell your shares of Class A common stock at an attractive
price or at all. The initial public offering price per share of
our Class A common stock will be determined by agreement
among us and the representatives of the underwriters, and may
not be indicative of the price at which the shares of our
Class A common stock will trade in the public market after
this offering.
If
securities analysts do not publish research or reports about our
business or if they downgrade our
company or our sector, the price of our Class A common
stock could decline.
The trading market for our Class A common stock will depend
in part on the research and reports that industry or financial
analysts publish about us or our business. We do not control
these analysts. Furthermore, if one or more of the analysts who
do cover us downgrades our company or our industry, or the stock
of any of our competitors, the price of our Class A common
stock could decline. If one or more of these analysts ceases
coverage of our company, we could lose visibility in the market,
which in turn could cause the price of our Class A common
stock to decline.
Our
share price may decline due to the large number of shares
eligible for future sale and for exchange.
The market price of our Class A common stock could decline
as a result of sales of a large number of shares of Class A
common stock in the market after the offering or the perception
that such sales could occur. These sales, or the possibility
that these sales may occur, also might make it more difficult
for us to sell equity securities in the future at a time and at
a price that we deem appropriate. After the consummation of this
offering, we will have 14,300,000 outstanding shares of
Class A common stock. This number is comprised of the
shares of our Class A common stock we are selling in this
offering, which may be resold immediately in the public market.
See “Shares Eligible for Future Sale.”
We have agreed with the underwriters not to dispose of or hedge
any of our Class A common stock or securities convertible
into or exchangeable for shares of our Class A common
stock, subject to specified exceptions, during
the period from the date of this prospectus continuing through
the date 180 days after the date of this prospectus, except
with the prior written consent of the underwriters. Subject to
these agreements, we may issue and sell in the future additional
shares of Class A common stock.
In addition, HFF Holdings will, at the time of this offering,
own 22,500,000 partnership units in each of the Operating
Partnerships. Our amended and restated certificate of
incorporation will allow the exchange of partnership units in
the Operating Partnerships (other than those held by us) for
shares of our Class A common stock on the basis of two
partnership units (one in each Operating Partnership) for one
share of Class A common stock, subject to customary
conversion rate adjustments for stock splits, stock dividends
and reclassifications. HFF Holdings has agreed with the
underwriters not to dispose of or hedge any of our Class A
common stock or securities convertible into or exchangeable for
shares of our Class A common stock (including partnership
units in the Operating Partnerships), subject to specified
exceptions, during the period from the date of this prospectus
continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the
underwriters. After the expiration of the
180-day
lock-up
period, the shares of Class A common stock issuable upon
exchange of the partnership units in the Operating Partnerships
will be eligible for resale from time to time, subject to
certain contractual and Securities Act restrictions. Pursuant to
contractual provisions and subject to certain exceptions, HFF
Holdings will be restricted from exchanging partnership units
for Class A common stock for two years. After two years,
HFF Holdings will have the right to exchange 25% of its
partnership units, with an additional 25% becoming available for
exchange each year thereafter. However, these contractual
provisions may be waived, amended or terminated by the members
of Holdings LLC following consultation with our Board of
Directors.
HFF Holdings has entered into a registration rights agreement
with us. Under that agreement, after the expiration of the
180-day
lock-up
period, HFF Holdings will have the ability to cause us to
register the shares of our Class A common stock it could
acquire upon exchange of its partnership units in the Operating
Partnerships.
The
market price of our Class A common stock may be volatile,
which could cause the value of your investment to decline or
subject us to litigation.
Our stock price will be affected by a number of factors,
including quarterly and annual variations in our results and
those of our competitors; changes to the competitive landscape;
estimates and projections by the investment community; the
arrival or departure of key personnel, especially the retirement
or departure of key senior transaction professionals and
management, including members of HFF Holdings; the introduction
of new services by us or our competitors; and acquisitions,
strategic alliances or joint ventures involving us or our
competitors. Securities markets worldwide experience significant
price and volume fluctuations. This market volatility, as well
as general global and domestic economic, market or political
conditions, could reduce the market price of our Class A
common stock. In addition, our operating results could be below
the expectations of public market analysts and investors, and in
response, the market price of our Class A common stock
could decrease significantly. You may be unable to resell your
shares of our Class A common stock at or above the initial
public offering price.
When the market price of a company’s common stock drops
significantly, stockholders sometimes institute securities class
action lawsuits against the company. A securities class action
lawsuit against us could cause us to incur substantial costs and
could divert the time and attention of our management and other
resources from our business.
Anti-takeover
provisions in our charter documents and Delaware law could delay
or prevent a change
in control.
Our certificate of incorporation and by-laws may delay or
prevent a merger or acquisition that a stockholder may consider
favorable by permitting our board of directors to issue one or
more series of preferred stock, requiring advance notice for
stockholder proposals and nominations, providing for a
classified board of directors, providing for super-majority
votes of stockholders for the amendment of the bylaws and
certificate of incorporation, and placing limitations on
convening stockholder meetings and not permitting written
consents of stockholders. In addition, we are subject to
provisions of the Delaware General Corporation Law that restrict
certain business combinations with interested stockholders.
These provisions may also discourage acquisition proposals or
delay or prevent a change in control, which could harm our stock
price. See “Description of Capital Stock.”
This prospectus contains forward-looking statements, which
reflect our current views with respect to, among other things,
our operations and financial performance. You can identify these
forward-looking statements by the use of words such as
“outlook,”“believes,”“expects,”“potential,”“continues,”“may,”“will,”“should,”“seeks,”“approximately,”“predicts,”“intends,”“plans,”“estimates,”“anticipates” or the negative version of these words
or other comparable words. Such forward-looking statements are
subject to various risks and uncertainties. Accordingly, there
are or will be important factors that could cause actual
outcomes or results to differ materially from those indicated in
these statements. We believe these factors include, but are not
limited to, those described under “Risk Factors.”
These factors should not be construed as exhaustive and should
be read in conjunction with the other cautionary statements that
are included in this prospectus. We undertake no obligation to
publicly update or review any forward-looking statement, whether
as a result of new information, future developments or otherwise.
INDUSTRY
AND MARKET DATA
In this prospectus, we rely on and refer to information and
statistics regarding economic conditions and trends, our market
and our market share in the sectors of that market in which we
compete. In particular, we have obtained general industry
information and statistics from Real Capital Analytics, Mortgage
Bankers Association, Commercial Mortgage Alert, Kingsley
Associates, Institutional Real Estate Inc., and Pension Real
Estate Association. We believe that these sources of information
and estimates are reliable and accurate, but we have not
independently verified them.
Although some of the companies that compete in our markets are
publicly held as of the date of this prospectus, many are not.
Accordingly, no current publicly available information is
available with respect to our relative market strength or
competitive position. Our statements about our relative market
strength and competitive position in this prospectus are based
on our management’s belief, internal studies and our
management’s knowledge of industry trends.
We have proprietary rights to the trademarks
HFF®
and
HFFS®.
Other trademarks appearing in this prospectus are the property
of their respective owners.
HFF, Inc. was formed in November 2006 for purposes of this
offering. HFF, Inc. has not engaged in any business or other
activities except in connection with its formation and the
Reorganization Transactions.
Upon the consummation of this offering, HFF, Inc. will
contribute the net proceeds raised in this offering to HoldCo
LLC, its wholly-owned subsidiary. In consideration for the net
proceeds from this offering and one share of Class B common
stock, HFF Holdings will sell all of the shares of Holliday GP,
which is the sole general partner of each of the Operating
Partnerships, and approximately 39% of the partnership units in
each of the Operating Partnerships (including partnership units
in the Operating Partnerships held by Holliday GP), or
approximately 45% of the partnership units in each of the
Operating Partnerships (including partnership units in the
Operating Partnerships held by Holliday GP) if the underwriters
exercise in full their option to purchase additional shares, to
HoldCo LLC. HFF Holdings will use approximately
$56.3 million of the sale proceeds to repay all outstanding
borrowings under HFF LP’s credit agreement. Accordingly, we
will not retain any of the proceeds from this offering. In
addition to cash, HFF Holdings will also receive an exchange
right that will permit HFF Holdings to exchange interests in the
Operating Partnerships for shares of our Class A common
stock (the “Exchange Right”) and rights under a tax
receivable agreement between HFF, Inc. and HFF Holdings (the
“TRA”).
The Exchange Right will entitle HFF Holdings to exchange, at
permitted times, two partnership units, one in each Operating
Partnership, for a share of Class A common stock. HFF
Holdings will also receive rights under the TRA to receive
payments from HFF, Inc. for 85% of the tax benefits attributable
to the basis
step-up for
tax purposes derived from the initial sale by HFF Holdings of
its interests in the Operating Partnerships. In addition,
subsequent exchanges of partnership units in the Operating
Partnerships for Class A common stock upon exercise of the
Exchange Right will also result in tax basis step-ups, and the
TRA will entitle HFF Holdings to 85% of the tax benefits
resulting from these exchanges.
The purchase of shares of Holliday GP and partnership units in
each of the Operating Partnerships will be treated as a
reorganization under common control for financial reporting
purposes. Accordingly, the net assets of HFF Holdings purchased
by HFF, Inc. will be reported in the consolidated financial
statement of HFF, Inc. at HFF Holdings’ historical
cost.
Effect of
the Reorganization Transactions
As a result of the transactions described above, which we
collectively refer to as the “Reorganization
Transactions,” immediately following this offering:
•
HFF, Inc., through HoldCo LLC, will become the sole stockholder
of Holliday GP and control the Operating Partnerships;
•
HFF Holdings will hold one share of our Class B common
stock and 22,500,000 partnership units in each of the
Operating Partnerships (or 20,355,000 partnership units in
each of the Operating Partnerships if the underwriters exercise
in full their options to purchase additional shares). HFF, Inc.
will hold 14,300,000 partnership units in each of the Operating
Partnerships (or 16,445,000 partnership units in each of the
Operating Partnerships if the underwriters exercise in full
their option to purchase additional shares);
•
our public stockholders will collectively own
14,300,000 shares of Class A common stock (or
16,445,000 shares if the underwriters exercise in full
their option to purchase additional shares); and
•
our public stockholders will collectively have approximately 39%
of the voting power in HFF, Inc. (or approximately 45% if the
underwriters exercise in full their option to purchase
additional shares) and, through its holdings of our Class B
common stock, HFF Holdings will have approximately 61% of the
voting power in HFF, Inc. (or approximately 55% if the
underwriters exercise in full their option to purchase
additional shares). See “Description of Capital Stock”.
There will be certain restrictions on the right of HFF Holdings
to exchange into and sell Class A common stock. It is
expected that these restrictions will be in effect for two
years, and after two years HFF Holdings will have the right
to sell 25% of the Class A common stock that it is entitled
to, with an additional 25% becoming available for sale each year
thereafter, so that after five years, the restrictions on HFF
Holdings will have fully expired. However, these contractual
provisions may be waived, amended or terminated by us. See
“Shares Eligible for Future Sale —
Lock-up
Arrangements.”
Holding
Company Structure
Following the reorganization and this offering, HFF, Inc. will
be a holding company and its sole assets will be, through its
wholly-owned subsidiary HoldCo LLC, partnership units in the
Operating Partnerships and all of the outstanding shares of
Holliday GP.
As the sole stockholder of Holliday GP, the sole general partner
of the Operating Partnerships, HFF, Inc. will operate and
control all of the business and affairs of the Operating
Partnerships. HFF, Inc. will consolidate the financial results
of the Operating Partnerships and the ownership interest of HFF
Holdings in the Operating Partnerships will be treated as a
minority interest in HFF, Inc’s consolidated financial
statements. HFF Holdings through its wholly-owned subsidiary,
Holdings Sub, and HFF, Inc., through its wholly-owned
subsidiaries HoldCo LLC and Holliday GP, will be the only
partners of the Operating Partnerships after this offering.
The holders of partnership units in the Operating Partnerships,
including HFF Holdings and HFF, Inc., will incur
U.S. federal, state and local income taxes on their
proportionate share of any net taxable income of the Operating
Partnerships. In the case of HFF Holdings such taxes will be
incurred principally by the members of HFF Holdings. Net profits
and net losses of the Operating Partnerships will generally be
allocated to its partners pro rata in accordance with their
respective partnership units. Because HFF, Inc. will own
approximately 39% of the total partnership units in each of the
Operating Partnerships, including partnership units held through
Holliday GP (or approximately 45% if the underwriters exercise
in full their option to purchase additional shares), HFF, Inc.
will be allocated approximately 39% of the net profits and net
losses of the Operating Partnerships (or approximately 45% if
the underwriters exercise in full their option to purchase
additional shares). The remaining net profits and net losses
will be allocated to HFF Holdings. These percentages are subject
to change, including upon an exchange of partnership units to
shares of our Class A common stock and upon issuance of
additional shares to the public. The partnership agreements of
the Operating Partnerships will provide for cash distributions
to the holders of partnership units of the Operating
Partnerships if HFF, Inc. determines that the taxable income of
the Operating Partnerships will give rise to taxable income for
its partners. In accordance with the partnership agreements, we
intend to cause the Operating Partnerships to make cash
distributions to the holders of partnership units of the
Operating Partnerships for purposes of funding their tax
obligations (or in the case of HFF Holdings principally its
members’ tax obligations) in respect of the income of the
Operating Partnerships that is allocated to them. Generally,
these tax distributions will be computed based on our estimate
of the net taxable income of the Operating Partnerships
allocable to such holder of partnership units multiplied by an
assumed tax rate equal to the highest effective marginal
combined U.S. federal, state and local income tax rate
prescribed for an individual or corporate resident of New York,
New York (taking into account the nondeductibility of certain
expenses and the character of our income). If we had effected
the Reorganization Transactions on January 1, 2006, this
assumed tax rate for 2006 would have been approximately 46%.
After this offering, the Operating Partnerships also intend to
make distributions to HFF, Inc. in order to pay expenses, taxes
and fund dividends the board of directors of HFF, Inc. may
declare on the Class A common stock, if any. If HFF, Inc.
declares such dividends, HFF Holdings will be entitled to
receive equivalent distributions pro rata based on its
partnership units in the Operating Partnerships.
We estimate that our net proceeds from this offering, after
deducting underwriting discounts and estimated offering
expenses, will be approximately $209.0 million, or
approximately $240.9 million if the underwriters exercise
in full their option to purchase additional shares. We will use
these proceeds, as well as any proceeds received from the
exercise of the underwriters’ option to purchase additional
shares, to purchase from HFF Holdings all of the shares of
Holliday GP and partnership units representing approximately 39%
of each of the Operating Partnerships, or partnership units
representing 45% of each of the Operating Partnerships if the
underwriters exercise in full their option to purchase
additional shares. HFF Holdings will use approximately
$56.3 million of the sale proceeds to repay all outstanding
borrowings under HFF LP’s credit agreement. Accordingly, we
will not retain any of the proceeds from this offering.
HFF LP’s credit agreement consists of a senior secured term
loan facility in an aggregate amount of $60 million and a
senior secured revolving credit facility in an aggregate amount
of $20 million. Borrowings under the credit agreement bear
interest at the applicable thirty-day London Interbank Offered
Rate, or LIBOR rate (5.32% at September 30, 2006), plus 250
basis points. We have the option to convert revolving credit
borrowings, subject to certain restrictions, to Base Rate Notes
which bear interest at the Base Rate (defined as the greater of
(a) the federal funds rate (5.34% at September 30,2006) plus 50 basis points, and the (b) prime
rate, as determined pursuant to the credit agreement (8.25% at
September 30, 2006)), plus 150 basis points. As of
September 30, 2006, we had outstanding borrowings of
approximately $57,500,000 under our term loan facility bearing
interest at a weighted average rate of approximately 7.7% and no
borrowings under our revolving credit facility. As of
January 1, 2007, we had outstanding borrowings of
approximately $56,273,000 under our term loan facility bearing
interest at a weighted average rate of approximately 7.7% and no
outstanding borrowings under our revolving credit facility. The
credit agreement matures on March 29, 2010, subject to our
option to extend the maturity date an additional 12 months
upon the satisfaction of certain conditions set forth in the
credit agreement. Proceeds from these borrowings have been used
for distribution payments to the members of HFF Holdings.
An affiliate of Banc of America Securities LLC is the lender
under our credit agreement and, based on an initial public
offering price per share of $16.00 and assuming no exercise of
the underwriters’ option to purchase additional shares,
will receive approximately 26.9% of the proceeds of this
offering of shares of Class A common stock used to repay
those borrowings. See “Underwriting.”
We currently do not intend to pay cash dividends on our
Class A common stock. If we do declare a dividend at some
point in the future, the Class B common stock will not be
entitled to dividend rights. The declaration and payment of any
future dividends will be at the sole discretion of our board of
directors.
HFF, Inc. will be a holding company and will have no material
assets other than its ownership of partnership units in the
Operating Partnerships. If we declare a dividend at some point
in the future, we intend to cause the Operating Partnerships to
make distributions to HFF, Inc. in an amount sufficient to cover
any such dividends. If the Operating Partnerships make such
distributions, HFF Holdings will be entitled to ratably receive
equivalent distributions on its partnership units in the
Operating Partnerships.
The following table sets forth the consolidated cash and cash
equivalents and capitalization of HFF Holdings as of
September 30, 2006 on an actual basis and of HFF, Inc. on a
pro forma basis giving effect to the Reorganization Transactions
as described in “Organizational Structure” and to
reflect our sale of 14,300,000 shares of our Class A
common stock in this offering, after deducting the estimated
underwriting discounts and commissions and the estimated
offering expenses payable by us and our use of the proceeds as
described in “Use of Proceeds.”
This table should be read in conjunction with
“Organizational Structure,”“Unaudited Pro Forma
Financial Information,”“Selected Historical Financial
Data,”“Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the
historical financial statements and related notes included
elsewhere in this prospectus.
Class A common stock, par
value $.01 per share, 175,000,000 shares authorized;
36,800,000 shares issued and outstanding, as adjusted for
this offering
—
143
Class B common stock, par
value $.01 per share, 1 shares authorized; 1 share
issued and outstanding, as adjusted for this offering
—
0
Additional paid-in capital
—
8,278
Retained earnings
—
—
Total stockholders/members’
(deficiency) equity
(8,101
)
8,421
Total capitalization(a)
$
49,589
$
21,837
(a)
A $1.00 increase (decrease) in the assumed initial public
offering price $16.00 per share would increase (decrease) total
capitalization by $1,050,000, assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated expenses
payable by us.
If you invest in our Class A common stock, your interest
will be diluted to the extent of the difference between the
initial public offering price per share of our Class A
common stock and the pro forma net tangible book value per share
of our Class A common stock after this offering. Dilution
results from the fact that the per share offering price of the
Class A common stock is substantially in excess of the book
value per share attributable to the existing equity holders.
Our pro forma net tangible book value as of September 30,2006 was approximately $(57,741,000), or $(1.57) per share of
our Class A common stock. Pro forma net tangible book value
represents the amount of total tangible assets less total
liabilities and pro forma net tangible book value per share
represents pro forma net tangible book value divided by the
number of shares of Class A common stock outstanding, in
each case, after giving effect to the Reorganization
Transactions and assuming that HFF Holdings exchanges all of its
interests in the Operating Partnerships for newly-issued shares
of our Class A common stock on the basis of two partnership
units, one of each Operating Partnership, for one share of
Class A common stock.
After giving effect to the sale of 14,300,000 shares of
Class A common stock in this offering at an assumed initial
public offering price of $16.00 per share (the midpoint of
the price range on the cover of this prospectus) and the payoff
of all outstanding borrowings under HFF LP’s credit
agreement and the tax receivable agreement, our pro forma net
tangible book value would have been $2,029,000, or
$0.06 per share. This represents an immediate increase in
net tangible book value (or a decrease in net tangible book
deficit) of $1.63 per share to existing equityholders and
an immediate dilution in net tangible book value of
$15.94 per share to new investors.
The following table illustrates this dilution on a per share
basis assuming the underwriters do not exercise their option to
purchase additional shares:
Increase in pro forma net tangible
book value per share attributable to new investors
$
1.63
Pro forma net tangible book value
per share after the offering
$
0.06
Dilution in pro forma net tangible
book value per share to new investors (a)
$
15.94
(a)
A $1.00 increase (decrease) in the assumed initial public
offering price of $16.00 per share would increase
(decrease) our adjusted net tangible book value per share after
this offering by approximately $0.01 as a result of the impact
of the tax receivable agreement, assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated expenses
payable by us. We will not retain any of the proceeds from this
offering.
If the underwriters’ overallotment option is exercised in
full the pro forma net tangible book value per share of
Class A common stock, after giving effect to the
Reorganization Transactions, would be approximately $0.03 per
share and the dilution in pro forma net tangible book value per
share to new investors would be $15.97 per share.
The following table summarizes, on the same pro forma basis as
of September 30, 2006, the total number of shares of
Class A common stock purchased from us, the total cash
consideration paid to us and the average price per share paid by
the existing equityholders and by new investors purchasing
shares in this offering, assuming that HFF Holdings exchanged
all of its partnership units in the Operating Partnerships for
shares of our Class A common stock on the basis of two
partnership units, one of each Operating Partnership, for one
share of Class A common stock (in thousands, except per
share data):
Shares Purchased
Total Consideration
Average Price
Number
Percent
Amount
Percent
per Share
Existing equity holders
22,500
61.1
%
$
—
—
%
$
—
New investors(a)
14,300
38.9
228,800
100
16.00
Total
36,800
100
%
$
228,800
100
%
(a)
A $1.00 increase (decrease) in the assumed initial public
offering price of $16.00 per share would increase
(decrease) the total consideration paid by new investors by
$14,300,000, assuming the number of shares offered by us, as set
forth on the cover page of this prospectus, remains the same.
The following unaudited condensed consolidated pro forma
statements of income for the year ended December 31, 2005
and the nine months ended September 30, 2006 and the
unaudited pro forma consolidated balance sheet as of
September 30, 2006 present our consolidated results of
operations and financial position to give pro forma effect to
all of the Reorganization Transactions described in
“Organizational Structure” and the sale of shares in
this offering (excluding shares issuable upon exercise of the
underwriters’ option to purchase additional shares, if
any), and the application of the net proceeds from this
offering, as if all such transactions had been completed as of
January 1, 2005 with respect to the unaudited condensed
consolidated pro forma statements of income and as of
September 30, 2006 with respect to the unaudited pro forma
balance sheet data. The unaudited pro forma consolidated
financial statements reflect pro forma adjustments that are
described in the accompanying notes and are based on available
information and certain assumptions we believe are reasonable,
but are subject to change. We have made, in our opinion, all
adjustments that are necessary to present fairly the pro forma
financial data.
The pro forma adjustments principally give effect to the
following items:
•
the Reorganization Transactions described in
“Organizational Structure,” including the elimination
of the financial results of HFF Holdings and Holdings Sub from
the historical audited consolidated financial statements, which
are included elsewhere in this prospectus;
•
cash distributions of pre-incorporation profits to members of
HFF Holdings. The net assets purchased by HFF, Inc. will be
reported in the consolidated statements of HFF, Inc. at
historical cost;
•
this offering and the use of a portion of the proceeds to repay
outstanding borrowings as described in “Use Of
Proceeds;”
•
the provision for corporate income taxes;
•
the tax receivable agreement we will enter into with HFF
Holdings; and
•
the awards we expect to grant under our proposed stock incentive
plan at the time of this offering. See
“Management — Omnibus Incentive Compensation
Plan.”
We will account for the income tax effects and corresponding tax
receivable agreement effects as a result of the initial purchase
and the sale of units of the Operating Partnerships in
connection with the Reorganization Transactions and future
exchanges of Operating Partnership units for our Class A
shares as follows:
•
we will recognize an increase in our deferred tax asset for the
estimated income tax effects of the increase in the tax basis of
the assets owned by the Operating Parternships, based on enacted
tax rates at the date of the transaction;
•
we will evaluate the likelihood that we will realize the benefit
represented by the deferred tax asset and, to the extent we
estimate that we will not realize the benefit based on a more
likely than not standard, we will reduce the deferred tax asset
with a valuation allowance; and
•
we will record 85% of the estimated amount of the increase in
deferred tax assets, net of any valuation allowance, as a
liability to HFF Holdings under the tax receivable agreement and
the remaining 15% of the increase in deferred tax assets
directly in additional paid-in capital in stockholders’
equity.
Therefore, at the date of the Reorganization Transactions, on a
cumulative basis the net effect of accounting for income taxes
and the tax receivable agreement on our financial statements
will be a net increase in shareholders’ equity of 15% of
the estimated realizable tax benefit. All of the effects of
changes in any of our estimates after the date of any exchange
will be included in net income. Similarly, the effect of
subsequent changes in the enacted tax rates will be included in
net income.
The unaudited pro forma financial data is presented for
informational purposes only and should not be considered
indicative of actual results of operations that would have been
achieved had the Reorganization Transactions and this offering
been consummated on the dates indicated, and do not purport to
be indicative of statements of financial condition data or
results of operations as of any future date or for any future
period.
Notes to
Unaudited Pro Forma Combined Income Statements
(a)
Adjustment reflects the elimination of the historical results of
operations of HFF Holdings and Holdings Sub as these entities
will not be included in the consolidated results of HFF, Inc. as
a result of this offering and the Reorganization Transactions.
See “Organizational
Structure — Reorganization Transactions.”
For the year ended December 31, 2005, this adjustment
reflects $1,011,000 death and disability insurance premiums on
individual members of HFF Holdings, $656,000 of other operating
costs, $993,000 of interest income, and $191,000 of interest
expense on outstanding debt. For the nine months ended
September 30, 2006, this adjustment reflects $1,209,000 of
death and disability insurance premiums, $1,016,000 of other
operating costs, and $1,025,000 of interest income.
(b)
Adjustment reflects the tax impact associated with the
Reorganization Transactions. The entities that formed HFF
Holdings have been limited liability companies, partnerships,
and a corporation. The income of the limited liability companies
and partnerships of HFF Holdings has not been subject to U.S.
federal and state income taxes. The adjustment reflects taxes
attributable to business and corporate income taxes in various
jurisdictions.
(c)
Represents non-cash compensation expense in the form of
restricted stock awards and stock options. See “Omnibus
Incentive Compensation Plan.”
(d)
Adjustment reflects $93,000 and $2,330,000 for the nine months
ended September 30, 2006 for the amortization of deferred
financing costs and the interest expense, respectively,
associated with the outstanding borrowings that will be repayed
as a result of this offering. See “Use of Proceeds”.
(e)
Reflects an adjustment to record the 61.1% minority interest
ownership of HFF Holdings. Following the Reorganization
Transactions, as the sole stockholder of Holliday GP, the sole
general partner of the Operating Partnerships, HFF, Inc. will
operate and control all of the business affairs of the Operating
Partnerships. HFF, Inc. will consolidate the financial results
of the Operating Partnerships and Holliday GP. HFF Holdings and
HFF, Inc., through its wholly-owned subsidiaries HoldCo, LLC and
Holliday GP, will be the only partners of the Operating
Partnerships following this offering. HFF Holdings, through its
ownership of Class B common stock will have no economic
rights in HFF, Inc. but will hold the majority of our voting
power. Accordingly, HFF, Inc. will consolidate the Operating
Partnerships and Holliday GP and will record a minority interest
for the economic interest of HFF Holdings in the Operating
Partnerships.
(f)
Adjustment to reflect a pro forma provision for income taxes at
an effective tax rate of 40.0% for the year ended
December 31, 2005 and the nine months ended
September 30, 2006.
(g)
For purposes of the HFF, Inc. pro forma net income per share of
Class A common stock calculation, the weighted average
shares outstanding of Class A common stock, basic and
diluted, are calculated as follows (in thousands):
Weighted average shares of
Class A common stock outstanding
14,313
14,329
14,313
14,368
The partnership units of Operating Partnerships exchangeable
into shares of Class A common stock pursuant to the
Exchange Right are not included in the calculation of weighted
average shares of Class A common stock outstanding as they
are anti-dilutive.
HFF, Inc. pro forma basic and net diluted net income per share
of Class A common stock are calculated as follows (in
thousands, except per share data):
Net income available to holders of
shares of Class A common stock
$
11,088
$
11,088
$
8,248
$
8,248
Basic and diluted weighted average
shares of Class A common stock outstanding
14,313
14,329
14,313
14,368
Basic and diluted net income per
share of Class A common stock
$
0.77
$
0.77
$
0.58
$
0.57
The share of Class B common stock has no right to receive
dividends of HFF, Inc. The share of Class B common stock
does not share in the earnings of HFF, Inc. and no earnings are
allocable to such class. Accordingly, pro forma basic and
diluted net income per share of Class B common stock have
not been presented.
Due to HFF Holdings under tax
receivable agreement
—
—
90,440
(h)
90,440
Total liabilities
120,952
(358
)
120,594
32,927
153,521
Minority interest
—
—
13,226
(g)
13,226
Stockholders’/Members’
Equity (Deficit)
Members’ equity (deficit)
(8,101
)
(42,600
)(a)(b)
(50,701)
50,701
(g)
—
143
(c)
143
Class A common stock, $0.01
par value per share, 175,000,000 shares authorized:
36,800,000 shares issued and outstanding, actual and as
adjusted for this offering
—
—
Class B common stock, $0.01
par value per share, 1 share authorized: 1 share
issued and outstanding, actual and as adjusted for this offering
Additional paid in capital
8,278
(c)(d)(e)(f)(g)(h)
8,278
Retained earnings
—
—
Total stockholders/members’
equity
(8,101
)
(42,600)
(50,701)
59,122
8,421
Total liabilities and
stockholders’/members’ equity
Notes to
Unaudited Pro Forma Consolidated Balance Sheet
(a)
Adjustment reflects the elimination of the cash, accounts
receivable, prepaid expenses and other current assets, and other
current and long-term liabilities of HFF Holdings and Holdings
Sub, as these entities will not be included in the consolidated
results of HFF, Inc. as a result of this offering and the
Reorganization Transactions. See “Organizational
Structure — Reorganization Transactions.”
(b)
Reflects the anticipated cash distributions of pre-offering
profits to the members of HFF Holdings. This adjustment, as
reflected, is estimated to be $0 at September 30, 2006. The
actual amount of the distribution will be funded with available
cash, subject to maintenance of minimum working capital
requirements of the Operating Partnerships.
(c)
Reflects net proceeds from the sale by us of
14,300,000 shares of Class A common stock at the
initial public offering price of $16.00 per share of
Class A common stock, after deducting underwriting
discounts, commissions, and estimated offering expenses.
(d)
Reflects repayment of outstanding term notes using net proceeds
from this offering. Adjustment reflects the elimination of
$57,500,000 of current and long-term debt, $13,000 of related
accrued interest payable, and $648,000 of the unamortized
balance of deferred financing costs associated with the term
notes.
(e)
Represents our purchase from HFF Holdings of the partnership
units representing 38.9% of each of the Operating Partnerships
using net proceeds from this offering. See “Use Of
Proceeds.”
(f)
Reflects the elimination of direct costs incurred through
September 30, 2006 in connection with this offering.
(g)
Reflects a minority interest adjustment for the 61.1% of the
total number of partnership units of each of the Operating
Partnerships held by HFF Holdings following this offering.
(h)
Reflects the adjustment to give effect to the tax receivable
agreement with HFF Holdings and the tax effects of changes in
the tax bases of assets and liabilities resulting in the
recognition of deferred tax assets. The “Tax Receivable
Agreement” is described in further detail in “Certain
Relationships and Related Party Transactions.”
The following tables present our selected consolidated financial
data as of and for the dates and periods indicated. We derived
the selected historical consolidated financial data set forth
below as of December 31, 2003, 2004 and 2005 and for the
period from June 16, 2003 through December 31, 2003
and for the years ended December 31, 2004 and 2005 and as
of and for the nine months ended September 30, 2006 from
our audited consolidated financial statements, which have been
audited by Ernst & Young LLP, our independent
registered public accounting firm, and, except for the
consolidated statement of income for the period from
June 16, 2003 through December 31, 2003, are included
elsewhere in this prospectus. We derived the selected historical
consolidated financial data set forth below as of and for the
nine months ended September 30, 2005 from our unaudited
interim consolidated financial statements which are included
elsewhere in this prospectus. We derived the selected historical
consolidated financial data set forth below as of
December 31, 2003, 2002 and 2001, and for the period from
January 1, 2003 through June 15, 2003 and for the
years ended December 31, 2002 and 2001 from our unaudited
consolidated financial information not included elsewhere in
this prospectus.
The summary consolidated financial data presented below is not
indicative of our results for any future period. In
management’s opinion, the unaudited information has been
prepared on substantially the same basis as the consolidated
financial statements appearing elsewhere in this prospectus and
includes all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the unaudited
consolidated data. The summary consolidated financial data set
forth below should be read in conjunction with our consolidated
financial statements and related notes, “Unaudited Pro
Forma Financial Information” and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this prospectus.
Predecessor (a)
Successor
For the Year Ended
For the Year Ended
Nine Months Ended
December 31,
1/1/03-
6/16/03-
December 31,
September 30
2001
2002
6/15/03
12/31/03
2004
2005
2005
2006
(unaudited)
(unaudited)
(unaudited)
(unaudited)
(In thousands, except per share data)
(In thousands, except per share data)
Statement of Income
Data
Revenues
Capital markets services revenue
$
77,561
$
84,297
$
36,626
$
71,735
$
142,192
$
203,457
$
135,983
$
153,586
Interest on mortgage notes
receivable
—
—
—
—
—
412
65
662
Other
—
364
99
739
1,499
1,979
1,251
2,289
Total revenues
77,561
84,661
36,725
72,474
143,691
205,848
137,299
156,537
Operating expenses
Cost of services
55,336
59,637
26,289
43,370
85,778
119,106
81,026
89,340
Personnel
3,949
2,574
(807
)
5,148
9,107
14,369
8,874
10,460
Occupancy
4,731
5,716
2,465
2,824
5,047
5,357
4,034
4,629
Travel and entertainment
2,473
2,673
1,575
1,466
3,617
5,067
3,221
3,842
Supplies, research &
printing
1,618
2,757
929
1,227
2,933
5,089
3,690
4,800
Insurance
—
265
38
777
1,500
2,470
1,883
2,265
Professional fees
425
541
206
634
871
1,201
1,012
1,979
Depreciation and amortization
256
350
203
1,598
2,506
2,735
1,988
2,039
Other operating
4,930
4,145
1,563
1,763
3,441
3,483
2,532
3,270
Interest on warehouse line of credit
—
—
—
—
409
60
676
Total operating expenses
73,718
78,658
32,461
58,807
114,800
159,286
108,320
123,300
Operating income
3,843
6,003
4,264
13,667
28,891
46,562
28,979
33,237
Interest and other income
—
—
—
97
317
1,267
675
1,394
Interest expense
—
—
—
(234
)
(406
)
(271
)
(220
)
(2,377
)
Income before taxes
3,843
6,003
4,264
13,529
28,802
47,558
29,434
32,254
Income tax expense(b)
—
—
—
—
728
715
433
557
Net income
$
3,843
$
6,003
4,264
13,529
$
28,074
$
46,843
$
29,001
$
31,697
Pro forma basic net income per
share of Class A common stock(c)
$
0.77
$
0.58
Pro forma diluted net income per
share of Class A common stock(c)
$
0.77
$
0.57
Pro forma basic weighted average
shares of Class A common stock(c)
14,313
14,313
Pro forma diluted weighted average
shares of Class A common stock(c)
The financial information for the period from January 1,2001 through June 15, 2003 is derived from unaudited
financial information and general ledger reports provided by HFF
LP’s parent company at that time. Prior to June 15,2003, HFF LP was an indirect wholly-owned subsidiary of Lend
Lease, an Australian company with a June 30 fiscal year.
The acquisition of HFF LP on June 16, 2003 by HFF Holdings
created a new basis of accounting and, accordingly, the
financial information for the periods through December 31,2003 are not comparable to recent periods and comparisons of
those periods to recent periods may not be accurate indicators
of our relative financial performance.
(b)
We have historically operated as two limited liability companies
(HFF Holdings and Holdings Sub), a corporation (Holliday GP) and
two limited partnerships (HFF LP and HFF Securities), which two
partnerships we refer to as the Operating Partnerships. As a
result, our income has been subject to limited U.S. federal
income taxes, and our income and expenses have been passed
through and reported on the individual tax returns of the
members of HFF Holdings. Income taxes shown on our consolidated
statements of income are attributable to taxes incurred at the
state and local level. Following this offering, HFF, Inc. will
be subject to additional entity-level taxes that will be
reflected in our consolidated financial statements. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operation — Key Financial
Measures and Indicators — Costs and
Expenses — Income Tax Expense” and
“Unaudited Pro Forma Financial Information.”
(c)
For the purposes of the HFF, Inc. pro forma net income per share
of Class A common stock calculation, the weighted average of
Class A common stock outstanding, basic and diluted, are
calculated based on:
Weighted average shares of
Class A common stock outstanding
14,313
14,329
14,313
14,368
The partnership units of the Operating Partnerships exchangeable
into shares of Class A common stock pursuant to the
Exchange Right are not included in the calculation of weighted
average shares of Class A common stock outstanding as they
are anti-dilutive.
Net income available to holders of
shares of Class A common stock
$
11,088
$
11,088
$
8,248
$
8,248
Basic and diluted weighted average
shares of Class A common stock outstanding
14,313
14,329
14,313
14,368
Basic and diluted net income per
share of Class A common stock
$
0.77
$
0.77
$
0.58
$
0.57
The share of Class B common stock has no right to receive
dividends of HFF, Inc. The share of Class B common stock
does not share in the earnings of HFF, Inc. and no earnings are
allocable to such class. Accordingly, pro forma basic and
diluted net income per share of Class B common stock have
not been presented.
The following discussion should be read in conjunction with
“Selected Historical Financial Data,”“Unaudited
Pro Forma Financial Information” and the historical
financial statements and the related notes thereto included
elsewhere in this prospectus. The following discussion contains,
in addition to historical information, forward-looking
statements that include risks and uncertainties. Our actual
results may differ materially from those anticipated in those
forward-looking statements as a result of certain factors,
including those set forth under the heading “Risk
Factors” and elsewhere in this prospectus.
Overview
Our
Business
We are a leading provider of commercial real estate and capital
markets services to the U.S. commercial real estate
industry based on transaction volume and are one of the largest
private full-service commercial real estate financial
intermediaries in the country. We operate out of 18 offices
nationwide with more than 130 transaction professionals and
approximately 270 support associates. In 2005, we advised on
approximately $32 billion of completed commercial real
estate transactions, more than a 40% increase compared to the
approximately $22 billion of completed transactions we
advised on in 2004.
Substantially all of our revenues are in the form of capital
market services fees collected from our clients, usually
negotiated on a
transaction-by-transaction
basis. We also earn fees from commercial loan servicing
activities. We believe that our multiple product offerings,
diverse client mix, expertise in a wide range of property types
and national platform create a stable and diversified revenue
stream. Furthermore, we believe our business mix, operational
expertise and the leveragability of our platform have enabled us
to achieve profit margins that are among the highest of our
public company peers. Our revenues and net income were
$205.8 million and $46.8 million, respectively, for
the year ended December 31, 2005, compared to
$143.7 million and $28.1 million, respectively, for
the year ended December 31, 2004. For the nine months ended
September 30, 2006, our revenues and net income were
$156.5 million and $31.7 million, respectively.
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 and even a regional economic downturn could
adversely affect our business. A general decline in acquisition
and disposition activity can lead to a reduction in fees and
commission 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. Likewise, a general decline in commercial real
estate investment activity can lead to a reduction in fees and
commissions for arranging acquisitions, dispositions and
financings for acquisitions as well as for recapitalizations for
existing property owners as well as a significant reduction in
our loan servicing activities, due to increased delinquencies
and lack of additional loans that we would have otherwise added
to our loan servicing portfolio, all of which would have an
adverse effect on our business.
•
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 superior performance of other asset
classes when compared with continued good 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.
•
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 effect the operation and income of
commercial real estate properties as well as the demand from
investors for commercial real estate investments. Both of these
events could adversely affect investor demand and the supply of
capital for debt
and equity investments in commercial real estate. In particular,
increased interest rates may cause prices to decrease due to the
increased costs of obtaining financing and could lead to
decreases in purchase and sale activities thereby reducing the
amounts of investment sales and loan originations and related
servicing fees. If our investment sales origination and
servicing businesses are negatively impacted, it is likely that
our other lines of business would also suffer due to the
relationship among our various capital market services.
Other factors that may adversely affect our business are
discussed under the heading “Forward-Looking
Statements” and under the caption “Risk Factors”
in this prospectus.
Key
Financial Measures and Indicators
Revenues
Over 95% of our revenues are capital market service revenues.
These capital market service revenues are in the form of fees
collected from our clients, usually negotiated on a
transaction-by-transaction
basis, which includes origination fees, investment sales fees
earned for brokering sales of commercial real estate, loan
servicing fees and note sale and note sales advisory and other
production fees. We also earn interest on mortgage notes
receivable. For the nine months ended September 30, 2006,
we had total revenues of approximately $156.5 million, of
which approximately 98% were attributable to capital markets
service revenue, 0.4% were attributable to interest on mortgage
notes receivable and 1.6% were attributable to other revenue
sources. For the year ended December 31, 2005, our total
revenues equaled approximately $205.8 million, of which
approximately 99% were generated by our capital markets
services, 0.2% were attributable to interest on mortgage notes
receivable and 0.8% were attributable to other revenue sources.
Total
Revenues:
Capital markets services revenues. We earn our
capital markets services revenue through the following
activities and sources:
•
Origination fees. Our origination fees are
earned through the placement of debt, equity and structured
financing. Debt placements represent the majority of our
business, with approximately $22 billion of debt
transaction volume in 2005. Fees earned by HFF Securities for
discretionary and non-discretionary equity capital raises and
other investment banking services are also included with capital
market services revenue in our consolidated statements of
income. We recognize origination revenues at the closing of the
applicable financing and funding of capital, when such fees are
generally collected.
•
Investment sales fees. We earn investment
sales fees by acting as a broker for commercial real estate
owners seeking to sell a property(ies) or an interest in a
property(ies). We recognize investment sales revenues at the
close and funding of the sale, when such fees are generally
collected.
•
Loan servicing fees. We generate loan
servicing fees through the provision of collection, remittance,
recordkeeping, reporting and other related loan servicing
functions, activities and services. We also earn fees through
escrow balances maintained as a result of required reserve
accounts and tax and insurance escrows for the loans we service.
We recognize loan servicing revenues at the time services are
rendered, provided the loans are current and the debt service
payments are actually made by the borrowers. We recognize the
other fees related to escrows and other activities at the time
the fees are paid.
•
Note sale, note sales advisory and other production
fees. We generate note sale, note sales advisory
and other production fees through assisting our clients in their
efforts to sell all or portions of commercial real estate debt
notes. We recognize note sale, note sales advisory and other
production revenues at the close and funding of the capital to
consummate sale, when such fees are generally collected.
Interest on mortgage notes receivable. We
recognize interest income on the accrual basis during the
approximately one month holding period based on the contract
interest rate in the loan that is to be purchased by Freddie
Mac, provided that the debt service is paid by the borrower.
Other. Our other revenues include expense
reimbursements from clients related to out of pocket costs
incurred, which reimbursements are considered revenue for
accounting purposes.
A substantial portion of our transactions are success based,
with a small percentage including retainer fees (such retainer
fees typically being included in a success-based fee upon the
closing of a transaction). Transactions that are terminated
before completion will sometimes generate breakage fees, which
are usually calculated as a set amount or a percentage (which
varies by deal size and amount of work done at the time of
breakage) of the fee we would have received had the transaction
closed. The amount and timing of all of the fees paid vary by
the type of transaction and are generally negotiated on a
transaction-by-transaction
basis.
Costs
and Expenses
The largest components of our expenses are our operating
expenses, which consist of cost of services, personnel expenses
not directly attributable to providing services to our clients,
occupancy expenses, travel and entertainment expenses, supplies,
research and printing expenses and other expenses. For the nine
months ended September 30, 2006, our total operating
expenses were approximately $123.3 million. In addition, we
incur non-operating expenses relating to interest expense and
income tax expense.
Operating
Expenses:
Cost of Services. The largest portion of our
expenses is cost of services. We consider personnel expenses
directly attributable to providing services to our clients and
certain purchased services to be directly attributable to the
generation of our capital markets services revenue, and classify
these expenses as cost of services in the consolidated
statements of income. Personnel expenses include
employee-related compensation and benefits. Most of our
transaction professionals are paid commissions; however, there
are some transaction professionals who are initially paid a
salary with commissions credited against the salary. Analysts,
who support transaction professionals in executing transactions,
are paid a salary plus a discretionary bonus, which is usually
calculated as a percentage of an analyst bonus pool or as direct
bonuses for each transaction, depending on the policy of each
regional office. All other employees receive a combination of
salary and an incentive bonus based on performance, job
function, individual office policy/profitability, and overall
corporate profitability.
Personnel. Personnel expenses include
employee-related compensation and benefits that are not directly
attributable to providing services to our clients. In addition,
personnel expense includes profit participation bonuses in which
offices or lines of business that generate profit margins of
14.5% or more are entitled to additional bonuses of 15% of net
income from the office. The allocation of the profit
participation and how it is shared within the office are
determined by the office head with a review by the managing
member of HFF Holdings. In 2005, total profit participation
bonuses paid were approximately 18% of operating profit before
the profit participation bonus.
Occupancy. Occupancy expenses include rental
expenses and other expenses related to our 18 offices nationwide.
Travel and entertainment. Travel and
entertainment expenses include travel and other entertainment
expenses.
Supplies, research and printing. Supplies,
research and printing expenses represent expenses related to
office supplies, market and other research (including expenses
relating to our proprietary database) and printing.
Other. The balance of our operating expenses
include costs for insurance, professional fees, depreciation and
amortization, interest on our warehouse line of credit and other
operating expenses. We refer to all of these expenses below as
“Other” expenses.
As a result of this offering, we will no longer be a
privately-owned company and our costs for such items as
insurance, accounting and legal advice will increase
substantially relative to our historical costs for such
services. We will also incur costs which we have not previously
incurred for directors fees, increased directors and officers
insurance, investor relations fees, expenses for compliance with
the Sarbanes-Oxley Act and new rules implemented by the
Securities and Exchange Commission and the New York Stock
Exchange, and various other costs of a public company. On an
annual basis, we estimate that we will incur costs of more than
$3 million per year as a result of becoming a
publicly-traded company. Since we have not operated as a public
company before, there can be no guarantee that this estimate is
accurate and our actual costs may be significantly higher. In
addition, we expect to
incur substantial one-time costs in meeting the legal and
regulatory requirements of a public company, including
Section 404 of the Sarbanes-Oxley Act.
Interest
and Other Income:
Interest and other income consist primarily of interest earned
from the investment of our cash and cash equivalents and
short-term investments.
Interest
Expense:
Interest expense represents the interest on our outstanding debt
instruments, including indebtedness outstanding under our credit
agreement.
Income
Tax Expense:
We have historically operated as two limited liability companies
(HFF Holdings and Holdings Sub), a corporation (Holliday GP) and
two limited partnerships (HFF LP and HFF Securities, which two
partnerships we refer to collectively as the Operating
Partnerships). As a result, our income has been subject to
limited U.S. federal corporate income taxes (that allocable
to Holliday GP), and the remainder of our income and
expenses have been passed through and reported on the individual
tax returns of the members of HFF Holdings. Income taxes shown
on our consolidated statements of income are attributable to
taxes incurred at the state and local level.
Following this offering, the Operating Partnerships will
continue to operate in the U.S. as partnerships for
U.S. federal income tax purposes. In addition, however,
HFF, Inc. will be subject to additional entity-level taxes that
will be reflected in our consolidated financial statements. For
information on the pro forma effective tax rate of HFF following
the Reorganization Transactions, see note (e) in
“Unaudited Pro Forma Financial Information—Notes to
Unaudited Pro Forma Combined Income Statements.”
In accordance with the partnership agreements, we intend to
cause the Operating Partnerships to make cash distributions to
the holders of partnership units of the Operating Partnerships
for purposes of funding their tax obligations in respect of the
income of the Operating Partnerships that is allocated to them.
Generally, these tax distributions will be computed based on our
estimate of the net taxable income of the Operating Partnerships
allocable to such holder of partnership units multiplied by an
assumed tax rate equal to the highest effective marginal
combined U.S. federal, state and local income tax rate
prescribed for an individual or corporate resident of New York,
New York (taking into account the nondeductibility of certain
expenses and the character of our income). If we had effected
the Reorganization Transactions on January 1, 2006, this
assumed tax rate for 2006 would have been approximately 46%.
Minority
Interest:
On a historical basis, we have not reflected any minority
interest in our financial results. Following this offering,
however, we will record significant minority interest relating
to the ownership interest of HFF Holdings in the Operating
Partnerships. As described in “Organizational
Structure,” HoldCo LLC, a wholly-owned subsidiary of HFF,
Inc., will own the sole general partner of the Operating
Partnerships. Accordingly, although HFF, Inc. will have a
minority economic interest in the Operating Partnerships, it
will have a majority voting interest and control the management
of the Operating Partnerships. The limited partners in the
Operating Partnerships do not have kick-out rights or other
substantive participating rights. As a result, HFF, Inc. will
consolidate the Operating Partnerships and record a minority
interest for the economic interest in the Operating Partnerships
indirectly held by HFF Holdings.
Results
of Operations
Following is a discussion of our results of operation for the
nine months ended September 30, 2005 and 2006 and the two
years ended December 31, 2004 and 2005. The tables included
in the period comparisons below provide summaries of our results
of operations. The
period-to-period
comparisons of financial results are not necessarily indicative
of future results.
Revenues. Our total revenues were
$156.5 million for the nine months ended September 30,2006 compared to $137.3 million for the same period in
2005, an increase of $19.2 million, or 14.0%. Revenues
increased primarily as a result of increased production.
•
The revenues we generated from capital markets services for the
nine months ended September 30, 2006 increased
$17.6 million, or 12.9%, to $153.6 million from
$136.0 million for the same nine months in 2005. The
increase is primarily attributable to increased production.
•
The revenues derived from interest on mortgage notes were
$0.7 million for the nine months ended September 30,2006 compared to $0.07 million for the same period in 2005,
an increase of $0.63 million. Revenues increased primarily
as a result of increased production of Freddie Mac loans.
•
The other revenues we earned were $2.3 million for the nine
months ended September 30, 2006 compared to
$1.3 million for the same period in 2005, an increase of
$1.0 million, or 76.9%. Other revenues increased primarily
as a result of expense reimbursements on a larger number of
transactions.
Total Operating Expenses. Our total operating
expenses were $123.3 million for the nine months ended
September 30, 2006 compared to $108.3 million for the
same period in 2005, an increase of $15.0 million, or
13.8%. Expenses increased primarily due to commissions on
increased production.
The costs of services for the nine months ended
September 30, 2006 increased $8.3 million, or 10.3%,
to $89.3 million from $81.0 million for the same nine
months in 2005. The increase is most significantly a result of
commissions on increased capital market services provided for
clients.
•
The employee compensation and benefits expenses that are not
directly attributable to providing services to our clients for
the nine months ended September 30, 2006 increased
$1.6 million, or 17.9%, to $10.5 million from
$8.9 million for the same nine months in 2005. The increase
is primarily related to a result of increased head count and
increased profit participation bonus on higher profit.
•
Occupancy, travel and entertainment, and supplies, research and
printing expenses for the nine months ended September 30,2006 increased $2.3 million, or 21.3%, to
$13.3 million, respectively, for the same nine months in
2005. These increases are primarily due to increased production
volume.
•
Other expenses, including costs for insurance, professional
fees, depreciation and amortization, interest on our warehouse
line of credit and other operating expenses, were
$10.2 million in the nine months ended September 30,2006, an increase of $2.8 million, or 36.8%, versus
$7.5 million in the nine months ended September 30,2005. This increase is primarily related to increased insurance
limits and increased Freddie Mac volume resulting in interest
expense on our warehouse line.
Net Income. Our net income for the nine months
ended September 30, 2006 was $31.7 million, an
increase of $2.7 million, or 9.3%, versus
$29.0 million for the same fiscal period in 2005. We
attribute this increase to several factors, with the more
significant cause being an increase of operating income of
$4.3 million. Other factors included:
•
Interest and other income, partially offsetting the costs we
incurred in these periods, increased $0.7 million, to
$1.4 million versus $0.7 million earned in the nine
months ended September 30, 2005. This increase is
principally attributable to increased cash balances as a result
of increased production.
•
The interest expense we incurred in the nine months ended
September 30, 2006 totaled $2.4 million, an increase
of $2.2 million from $0.2 million of similar expenses
incurred in the nine months ended September 30, 2005. This
increase resulted from the term loan of $60 million funded
in March 2006.
•
Expenses from income tax increased $0.1 million, or 28.6%,
to $0.6 million for the nine months ended
September 30, 2006 from $0.4 million for the same
period in 2005, principally as a result of increased net income.
Total Revenues. Our total revenues were
$205.8 million for the year ended December 31, 2005
compared to $143.7 million for 2004, an increase of
$62.2 million, or 43.3%. Revenues increased primarily as a
result of increased business volume across all capital market
services transaction types.
•
The revenues earned from our capital markets services for the
year ended December 31, 2005 increased $61.3 million,
or 43.1%, to $203.5 million from $142.2 million for
the year ended December 31, 2004. The increase resulted
from a number of factors, most significantly an increase in
number of transactions as well as higher fees per transaction
professional and an increase in the number of transaction
professionals, a larger servicing portfolio and an increased
focus on certain revenue sources that were not previously a main
focus for the company including service fees from CMBS loans and
expanding activity of HFF Securities.
•
The revenues derived from interest on mortgage notes receivable
were $0.4 million for the year ended December 31,2005. No such revenue was recorded in 2004. We earn interest on
mortgage notes receivable in connection with our loan servicing
business and our participation in Freddie Mac’s
Program Plus Seller Servicer program. HFF LP qualified for this
program in December 2004; accordingly, we did not begin earning
revenue derived from this program until 2005.
•
Our other revenues increased $0.5 million to
$2.0 million for the year ended December 31, 2005
compared with $1.5 million in 2004. Other revenues
increased primarily as a result of expense reimbursements on a
larger number of transactions.
Total Operating Expenses. Our total operating
expenses were $159.3 million for the year ended
December 31, 2005 compared to $114.8 million for the
same period in 2004, an increase of $44.5 million, or
38.8%. Expenses increased primarily due to a $33.3 million
increase in employee-compensation related costs of services and
certain purchased services directly attributable to the
generation of capital market services revenue, a
$5.3 million increase in personnel expenses, a
$0.3 million increase in occupancy expenses, a
$1.5 million increase in travel and entertainment expenses
and a $2.2 million increase in expenses related to
supplies, research and printing.
•
Our cost of services for the year ended December 31, 2005
was $119.1 million, which represented a $33.3 million,
or 38.9%, increase over $85.8 million in similar expenses
incurred in 2004. We attribute this increase primarily to
increased commissions we paid in 2005, which increase was
directly attributable to our increased capital market services
revenue.
•
Personnel expenses for 2005 increased $5.3 million, or
57.8%, to $14.4 million from $9.1 million for the year
ended December 31, 2004. The increase was primarily a
result of an increase in the profit participation bonus that is
calculated based on the net income of each office.
•
Our occupancy expenses were $5.4 million for 2005, which
represented an increase of $0.3 million, or 6.1%, from
$5.0 million in 2004. The primary reason for this increase
was an increase in office space and operating leases to support
our growth and expansion in several locations. Our travel and
entertainment expenses increased $1.5 million, or 40.1%, to
$5.1 million in 2005 from $3.6 million in 2004, while
our supply, research and printing expenses increased $2.2, or
73.5% to $5.1 million for the year ended 2005 compared with
$2.9 million in 2004.
•
Other expenses were $10.3 million in the year ended
December 31, 2005, an increase of $2.0 million, or
23.8%, versus $8.3 million in 2004. This increase was most
significantly attributable to an increase of our occupancy,
depreciation and amortization expenses.
Net Income. Our net income increased
$18.8 million, or 66.9%, to $46.8 million for the year
ended December 31, 2005 versus $28.1 million in 2004.
The primary reason underlying this increase was a
$17.7 million increase in operating income, which was
principally driven by increased business volume. Less
significant factors included:
•
Interest and other income increased $1.0 million to
$1.3 million in the year ended 2005 compared with
$0.3 million in 2004. This increase primarily arose as a
consequence of higher cash balances resulting from increased net
income.
•
Our interest expense equaled $0.3 million in 2005, a
decrease of $0.1 million from $0.4 million in the year
ended December 31, 2004. This decrease was most
significantly due to the payoff of certain indebtedness in 2005.
•
Income tax expense incurred in each of 2005 and 2004 equaled
$0.7 million.
Cash
Flows
Our historical cash flows are primarily related to the timing of
receipt of transaction fees, the timing of distributions to
members of HFF Holdings and payment of bonuses to employees.
Cash and cash equivalents decreased $4.4 million in the
nine month period ended September 30, 2006. Net cash of
$16.3 million was provided by operating activities,
including $31.7 million from net income. Cash of
$2.1 million was used for investing in property and
equipment. Financing activities used $18.6 million of cash
primarily due to distributions to members of HFF Holdings of
$99.9 million, which was partially offset by borrowings
under our credit agreement of $60 million.
Cash and cash equivalents increased $18.3 million in the
twelve month period ended December 31, 2005. Operating
activities provided $36.4 million, primarily resulting from
$46.8 million in net income partially offset by a
$14.7 million increase in mortgage notes receivable. Cash
of $1.4 million was used to invest in property and
equipment. Financing activities used $16.7 million of cash
primarily as a result of distributions to members of HFF
Holdings of $23.8 million and the payoff of
$7.5 million of indebtedness, which was partially offset by
borrowing in 2005 of $14.7 million under our warehouse line
of credit.
2004
Cash and cash equivalents increased $15.8 million in the
twelve month period ended December 31, 2004. Cash of
$31.6 million was provided by operating activities
primarily due to $28.1 million from net income. Investing
activities used $1.6 million to purchase property and
equipment. Net cash used in financing activities was
$14.1 million which was primarily related to distributions
to members of HFF Holdings of $11.5 million.
Liquidity
and Capital Resources
Our current assets typically have consisted primarily of cash
and accounts receivable in relation to earned transaction fees.
Cash distributions to members of HFF Holdings were generally
made two times each year, although approximately 75% to 90% of
the anticipated total annual distribution was distributed to
members each January. Therefore, levels of cash on hand decrease
significantly after the January distribution of cash to members
of HFF Holdings, and gradually increase until year end. In
connection with this offering, we will change our distribution
policy as described below. Our liabilities have typically
consisted of accounts payable and accrued compensation.
Over the nine month period ended September 30, 2006, we
generated approximately $40.0 million of cash. 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 nine months ended September 30,2006, we incurred approximately $123.3 million in total
operating expenses. The majority of our operating expenses are
variable, highly correlated to our revenue streams and dependent
on the collection of transaction fees. During the nine month
period ended September 30, 2006, approximately 67% of our
operating expenses were variable expenses. Our liquidity needs
related to our long term obligations are primarily related to
our facility leases and long-term debt obligations. We believe
that cash flows from operating activities will be sufficient to
satisfy our long-term obligations. For the nine months ended
September 30, 2006, we incurred approximately
$4.6 million in occupancy expenses and approximately
$2.4 million in interest expense.
Our cash flow generated from operations historically has been
sufficient to enable us to meet our objectives. Assuming current
conditions remain unchanged and our pipeline remains strong, and
we collect revenues on a consistent basis during the first
several months immediately following the offering (as we will
not retain any of the proceeds of this offering), we believe
that cash flows from operating activities should be sufficient
for us to fund our current obligations for the next
12 months and beyond. In addition, we maintain and intend
to continue to maintain lines of credit that can be utilized
should the need arise. In the course of the past several years,
we have entered into financing arrangements designed to
strengthen our liquidity. Our current principal financing
arrangements are described below.
On March 29, 2006, we entered into an $80.0 million
credit agreement with Bank of America, N.A. that matures on
March 29, 2010, subject to our option to extend the
maturity date an additional 12 months upon the satisfaction
of certain conditions set forth in the credit agreement. The
agreement consists of a senior secured term loan facility in an
aggregate amount of $60.0 million and a senior secured
revolving credit facility in an aggregate amount of
$20.0 million. Borrowings under the credit agreement bear
interest at the applicable thirty-day London Interbank Offered
Rate, or LIBOR (5.32% at September 30, 2006), plus
250 basis points. We have the option to convert revolving
credit borrowings, subject to certain restrictions, to Base Rate
Notes which bear interest at the Base Rate (defined as the
greater of (a) the federal funds rate (5.34% at
September 30, 2006) plus 50 basis points, and the (b) prime
rate, as determined pursuant to the credit agreement (8.25% at
September 30, 2006)), plus 150 basis points. As of
September 30, 2006, we had outstanding borrowings of
$57.5 million under our term loan facility bearing interest
at a weighted average rate of 7.7% and no outstanding borrowings
under our revolving credit facility. We recognized approximately
$1 million of debt issuance cost expense and
$2.4 million of interest expense
for the nine months ended September 30, 2006. The proceeds
from these term loan facility borrowings have been used for
distribution payments to the members of HFF Holdings and for
working capital purposes. A portion of the proceeds from this
offering will be used to repay all outstanding borrowing under
the term loan facility and the revolving credit facility, if any
amounts are outstanding under the revolving credit facility. As
a result of this offering, all amounts outstanding under this
facility, including the $20.0 million line of credit, will
become immediately due and payable upon the offering. Although
we will be required and intend to negotiate with our current
lender to maintain or replace our current line of credit and to
request an increase in the amount available to us under this
line of credit, we cannot guarantee that we will be able to do
so in sufficient amounts or at all. In the event we are not able
to secure a line of credit on satisfactory terms, we may attempt
to secure financing through other sources and, in the meantime,
we would attempt to manage our business so that our cash flows
from operations are sufficient to meet our working capital needs.
In 2005, we entered into an uncommitted financing arrangement
with Red Mortgage Capital, Inc. to fund our Freddie Mac loan
closings. Pursuant to this arrangement, Red Mortgage Capital
funds multifamily Freddie Mac loan closings on a
transaction-by-transaction
basis, with each loan being separately collateralized by a loan
and mortgage on a multifamily property that is ultimately
purchased by Freddie Mac. Red Mortgage Capital documents each
funding with standard agreements, including a Letter Agreement
Regarding Participation Interest, a Participation and Servicing
Agreement and a Participation Certificate. Each of these
documents generally remains unchanged from transaction to
transaction with the exception of the exhibit which outlines the
specific terms of the loan. As of September 30, 2006, we
had outstanding borrowing of $39.6 million under this
arrangement and a corresponding amount of mortgage notes
receivable. Borrowings under this arrangement generally bear
interest at the thirty day LIBOR rate plus 75 basis points,
although rates may be negotiated to a lower amount if the rate
associated with the underlying Freddie Mac loan does not cover
the default rate. There is no assurance that Red Mortgage
Capital will continue to accommodate lower rates, and may
actually increase our rates in the future. As a result of this
offering, we believe all amounts outstanding under this
arrangement will become immediately due and payable, and
although we intend to negotiate with Red Mortgage Capital to
maintain our current line of credit, we cannot guarantee that we
will be able to do so in sufficient amounts or at all. In the
event we are not able to secure a warehouse line of credit for
our Freddie Mac loan closings, we will cease originating Freddie
Mac loans until we have an available warehouse line of credit.
We are also paid interest on our loan secured by a multifamily
loan at the interest rate set forth in the Freddie Mac note.
We regularly monitor our liquidity position, including cash
levels, credit lines, interest and payments on debt, capital
expenditures and matters relating to liquidity and to compliance
with regulatory net capital requirements. We maintain a line of
credit under our revolving credit facility in excess of
anticipated liquidity requirements. As of September 30,2006, we had $20 million in undrawn line of credit
available to us under our credit agreement with Bank of America,
N.A. This facility provides us with the ability to meet
short-term cash flow needs resulting from our various business
activities. If this facility proves to be insufficient or
unavailable to us, we would seek additional financing in the
credit or capital markets, although we may be unsuccessful in
obtaining such additional financing on acceptable terms or at
all. In addition, we intend to enter into a tax receivable
agreement with HFF Holdings that will provide for the payment by
us to HFF Holdings of 85% of the amount of cash savings, if any,
in U.S. federal, state and local income tax that we
actually realize as a result of these 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.
In accordance with the Operating Partnerships’ partnership
agreements, we intend to cause the Operating Partnerships to
make distribution to its partners, including HFF, Inc., in an
amount sufficient to cover all applicable taxes payable by the
members of HFF Holdings and by us and to cover dividends, if
any, declared by the board of directors.
Critical
Accounting Policies; Use of Estimates
We prepare our financial statements in accordance with
accounting principles generally accepted in the
United States. In applying many of these accounting
principles, we need to make assumptions, estimates
and/or
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses in our consolidated financial
statements. We base our estimates and judgments on historical
experience and other assumptions that we believe are
reasonable under the circumstances. These assumptions, estimates
and/or
judgments, however, are often subjective and they and our actual
results may change negatively or 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. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 142,
“Goodwill and Other Intangible Assets”, we
evaluate goodwill for potential impairment annually or more
frequently if circumstances indicate impairment may have
occurred. In this process, we make estimates and assumptions in
order to determine the fair value of the Company. In determining
the fair value of the Company for purposes of evaluating
goodwill for impairment, we utilize a valuation multiple
approach. In applying this approach, we use recent historical
EBITDA amounts and multiply by EBITDA multiples observed in
transactions in the market. We utilize judgment in determining
which market transactions best represent our Company and the mix
of our revenue streams. We evaluate goodwill for impairment at
the reporting unit level, which is the financial statements of
HFF LP. Based on HFF LP’s EBITDA levels as of
September 30, 2006 and the results of recent transactions
in the market, HFF LP’s twelve-month rolling EBITDA could
decrease by more than $50 million before our estimated fair
value of the Company would be lower than the book value of the
Company. Goodwill is considered impaired if the recorded book
value of goodwill exceeds the implied fair value of goodwill as
determined under this valuation technique. We use our best
judgment and information available to us at the time to perform
this review. Because our assumptions and estimates are used in
projecting future earnings as part of the valuation, actual
results could differ.
Intangible Assets. Our intangible assets
primarily include servicing rights under agreements with third
party lenders and deferred financing costs. Servicing rights are
recorded at the lower of cost or market. Management makes
certain judgments and estimates in determining the fair value of
servicing rights. These judgments and estimates include
prepayment levels of the underlying mortgages, the income margin
expected to be realized by the Company and the discount rate.
The prepayment levels is the most important factor affecting the
value of the servicing rights. Management estimates the
prepayment levels of the underlying mortgages by analyzing
recent historical experience. Many of the commercial loans being
serviced have financial penalties for prepayment or early payoff
before the stated maturity date. As a result, the Company has
consistently experienced a low level of loan runoff. The
estimated value of the servicing rights is impacted by changes
in these assumptions. As of September 30, 2006, the fair
value and net book value of the servicing rights were
$2.9 million and $2.4 million, respectively. A 10% and
20% increase in the level of assumed prepayments would decrease
the estimated fair value of the servicing rights by 17% and 35%,
respectively. A 10% and 20% decrease in the estimated net income
margin of the servicing business would decrease the estimated
fair value of the servicing rights by 12% and 22%, respectively.
A 10% and 20% increase in the discount rate would decrease the
estimated fair value of the servicing rights by 7% and 12%,
respectively. 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 over their estimated
useful life using a method of amortization that reflects the
pattern of economic benefit, which results in an accelerated
level of amortization over eight years. In accordance with
Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangible Assets,” we
evaluate amortizable intangible assets on an annual basis, or
more frequently if circumstances so indicate, for potential
impairment.
Certain
Information Concerning Off-Balance Sheet Arrangements
We do not currently invest in any off-balance sheet vehicles
that provide liquidity, capital resources, market or credit risk
support, or engage in any leasing activities that expose us to
any liability that is not reflected in our combined financial
statements.
The following table sets forth information relating to our
contractual obligations as of September 30, 2006:
Payment Due by Period
More
10/1/06-
2007-
2010-
Than
Total
12/31/06
2009
2011
5 Years
(Dollars in thousands)
Long-term debt obligations
$
57.5
$
1.3
$
51.3
$
4.9
$
0
Capital lease obligations
.2
0
.2
0
0
Operating lease obligation
14.6
1.1
10.0
2.5
1.0
Purchase obligations
0
0
0
0
0
Other long-term liabilities
reflected
0
0
0
0
0
Total
$
72.3
$
2.4
$
61.5
$
7.4
$
1.0
Seasonality
Our capital markets services revenue are seasonal, which can
affect an investor’s ability to compare our financial
condition and results of operation on a
quarter-by-quarter
basis. Historically, this seasonality has caused our revenue,
operating income, net income and cash flows from operating
activities to be lower in the first six months of the year and
higher in the second half of the year. The concentration of
earnings and cash flows in the last six months of the year is
due to an industry-wide focus of clients to complete
transactions towards the end of the calendar year.
Effect of
Inflation
Inflation will significantly affect our compensation costs,
particularly those not directly tied to our transaction
professionals’ compensation, due to factors such as
increased costs of capital. The rise of inflation could also
significantly and adversely affect certain of expenses, such as
debt service costs, information technology and occupancy costs.
To the extent that inflation 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 “Risk Factors —
General Economic Conditions and Commercial Real Estate Market
Conditions.”
Recent
Accounting Pronouncements
SFAS 123(R). On December 16, 2004,
the Financial Accounting Standards Board (“FASB”)
issued SFAS No. 123 (revised 2003),
“Share-Based Payment,” or SFAS 123(R),
which is a revision of SFAS No. 123
“Accounting for Stock Based Compensation.”
SFAS 123(R) supersedes Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees,” and amends
SFAS No. 95, “Statement of Cash
Flows.” Generally, the approach in SFAS 123(R) is
similar to the approach described in SFAS 123. However,
SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the Consolidated Statements of Income based on their fair
values. Pro forma disclosure is no longer an option. We have
operated as a series of partnerships and limited liability
companies and have not historically issued stock-based
compensation awards. We adopted SFAS 123(R) on
January 1, 2006 using the modified prospective method. The
impact of adopting SFAS 123(R) will depend on the timing,
nature, and level of share-based awards granted in the future.
SFAS 154. In May 2005, the FASB issued
SFAS No. 154, “Accounting Changes and Error
Corrections,” or SFAS 154. SFAS 154 replaces
APB Opinion No. 20, “Accounting Changes,” and
FASB SFAS No. 3, “Reporting Accounting Charges
in Interim Financial Statements.” SFAS 154
requires that a voluntary change in accounting principle be
applied retrospectively with all prior period financial
statements presented on the new accounting principle, unless it
is impracticable to do so. SFAS 154 also provides that a
correction of errors in previously issued financial statements
should be termed a “restatement.” The new standard is
effective for accounting changes and correction of errors
beginning July 1, 2005. We adopted SFAS 154 on
January 1, 2006. The adoption of SFAS 154 did not have
a material effect on the Company’s consolidated financial
condition or result of operations.
SFAS 156. In March 2006, the FASB issued
SFAS No. 156, “Accounting for Servicing of
Financial Assets — an amendment of FASB Statement
No. 140,” or SFAS 156. SFAS No. 156
requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract based on
certain conditions. SFAS No. 156 permits a company to
choose either the amortized cost method or fair value method for
each class of separately recognized servicing assets. The
provisions of SFAS 156 are effective for fiscal years
beginning after September 15, 2006. We are currently
analyzing the impact of adopting SFAS No. 156 on our
consolidated financial statements.
SFAS 157. In September 2006, the FASB
issued Statement No. 157, “Fair Value
Measurements,” or SFAS No. 157.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. SFAS No. 157 emphasizes that fair value
is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be
determined based on the assumptions that market participants
would use in pricing the asset or liability. The provisions of
SFAS No. 157 are effective for fiscal years beginning
after November 15, 2007 and interim periods within those
fiscal years. Prior to adoption, we will evaluate the impact of
adopting SFAS No. 157 on our consolidated financial
statements.
FIN 48. In June 2006, the FASB also
issued FASB Interpretation 48, “Accounting for
Uncertainty in Income Taxes,”an interpretation of
SFAS No. 109, “Accounting for Income
Taxes,”or FIN 48. FIN 48 clarifies the
accounting for uncertainty in income taxes. FIN 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 requires that we recognize in the financial
statements the impact of a tax position if that position is more
likely than not of being sustained on audit, based on the
technical merits of the position. FIN 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods and disclosure. The
provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006, with the cumulative
effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. We are currently
evaluating the impact of adopting FIN 48 on our
consolidated financial statements.
Quantitative
and Qualitative Disclosures about Market Risk
Due to the nature of our business and the manner in which we
conduct our operations, in particular that our financial
instruments which are exposed to concentrations of credit risk
consist primarily of short-term cash investments, we believe we
do not face any material interest rate risk, foreign currency
exchange rate risk, equity price risk or other market risk.
Our business provides a broad array of services to clients
involved in the purchase, sale and financing of commercial real
estate. We believe that a combination of the following trends
has created and will continue to create a favorable climate for
continued potential revenue growth in the markets in which we
compete: (1) growth in the U.S. commercial real estate
markets, (2) increasing equity and debt allocations to
commercial real estate, (3) growth in commercial real
estate financing activity, and (4) industry consolidation.
Growth in
the U.S. Commercial Real Estate Markets
The U.S. commercial real estate market has grown
substantially since 2000. According to Real Capital Analytics,
commercial real estate sales volume has increased from
$76.4 billion in 2001 to $274.9 billion in 2005. More
recently, for the first three quarters of 2006, real estate
sales volume totaled $210.8 billion, an increase of 5% over
the same period in 2005.
Increasing
Investment Allocations to Commercial Real Estate
Increased allocations by pension funds, endowments, life
insurers and other primary asset allocators, as well as
increased investment from private equity funds and wealthy
individuals, have increased the amount of capital committed to
the commercial real estate market. According to Kingsley
Associates and Institutional Real Estate, Inc., new allocations
in 2006 to U.S. real estate assets are expected to reach
$59 billion, approximately 15% more than the new
allocations in 2005 of $51 billion, which was an increase
of 16% from allocations in 2004 of $44 billion. The Pension
Real Estate Association (PREA) found its plan sponsor
members’ investment in “core” real estate
properties during 2004 captured 70%, or $73 billion, of the
total funds allowable in the real estate category. This is
higher than reported in previous years — 65% or
$51 billion to core assets in 2003 and 66.5% or
$50 billion in 2002. PREA’s data for 2005 shows that
plan sponsors’ allocation to core assets was approximately
68% of the seeded amount in real estate, or $65 billion.
Growth in
Commercial Real Estate Financing Activity
The availability of debt financing has also been a significant
contributor to the robust U.S. commercial real estate
market. According to the Mortgage Bankers Association,
commercial and multifamily real estate loan originations totaled
$201.7 billion in 2005, a 48% increase over 2004
originations of $136 billion. Originations in the first
half of 2006 increased 24% over the same period in 2005. A
significant contributor to this growth is investment banks’
and commercial banks’ so-called “conduit”
platforms, which originate loans for sale into the commercial
mortgage backed securities (“CMBS”) market as well as
collateralized debt obligations (“CDO’s”) and
other instruments. The U.S. and global CMBS markets have
experienced significant growth and record issuance volumes as
investors have increased their willingness to invest in
increasingly complex transactions. Many fixed income portfolio
investors have found CMBS an attractive alternative to other
fixed income investments such as rated and unrated corporate
bonds. According to Commercial Mortgage Alert, U.S. CMBS
issuance increased to $169 billion in 2005, an 82% increase
over 2004, and global CMBS issuance increased to
$239 billion in 2005, an 86% increase over 2004.
Industry
Consolidation
The commercial real estate industry remains highly fragmented
despite recent consolidation which has reduced the number of
firms we compete with. We believe that most major property
owners and capital providers are motivated to consolidate their
service provider relationships, preferably on a national or
regional basis. We believe that by utilizing a smaller group of
service providers, clients are able to achieve more consistent
execution across markets due to the efficiency of single point
of contact and benefit from lower costs from the economies of
scale resulting from streamlined management oversight. We also
believe that these current market forces will result in further
consolidation going forward among local, regional, national and
international service providers.
We are a leading provider of commercial real estate and capital
markets services to the U.S. commercial real estate
industry based on transaction volume and are one of the largest
private full-service commercial real estate financial
intermediaries in the country. We operate out of 18 offices
nationwide with more than 130 transaction professionals and
approximately 270 support associates. In 2005, we advised on
approximately $32 billion of completed commercial real
estate transactions, more than a 40% increase compared to the
approximately $22 billion of completed transactions we
advised on in 2004.
Our fully-integrated national capital markets platform, coupled
with our knowledge of the commercial real estate markets, allows
us to effectively act as a “one-stop shop” for our
clients, providing a broad array of capital markets services
including:
•
Debt placement;
•
Investment sales;
•
Structured finance;
•
Private equity, investment banking and advisory services;
•
Note sale and note sales advisory services; and
•
Commercial loan servicing.
Substantially all of our revenues are in the form of capital
market services fees collected from our clients, usually
negotiated on a
transaction-by-transaction
basis. We believe that our multiple product offerings, diverse
client mix, expertise in a wide range of property types and our
national platform create a stable and diversified revenue
stream. Furthermore, we believe our business mix, operational
expertise and the leveragability of our platform have enabled us
to achieve profit margins that are among the highest of our
public company peers. Our revenues and net income were
$205.8 million and $46.8 million, respectively, for
the year ended December 31, 2005, compared to
$143.7 million and $28.1 million, respectively, for
the year ended December 31, 2004. For the nine months ended
September 30, 2006, our revenues and net income were
$156.5 million and $31.7 million, respectively.
We have established strong relationships with our clients. Our
clients are both users of capital, such as property owners, and
providers of capital, such as lenders and equity investors. Many
of our clients act as both users and providers of capital in
different transactions, which enables us to leverage our
existing relationships and execute multiple transactions across
multiple services with the same clients.
We believe we have a reputation for high ethical standards,
dedicated teamwork and a strong focus on serving the interests
of our clients. We take a long-term view of our business and
client relationships, and our culture and philosophy are firmly
centered on putting the client’s interests first.
Furthermore, through their ownership of HFF Holdings,
approximately 40 of our senior transaction professionals will in
the aggregate own a majority interest in the Operating
Partnerships following this offering. We believe this further
aligns their individual interests with those of the Company, our
clients and now our stockholders.
Our
Competitive Strengths
We attribute our success and distinctiveness to our ability to
leverage a number of key competitive strengths, including:
People,
Expertise and Culture
We and our predecessor companies have been in the commercial
real estate business for over 25 years, and our transaction
professionals have significant experience and long-standing
relationships with our clients. We employ over 130 transaction
professionals with an average of nearly 16 years of
commercial real estate transaction
experience. The transaction history accumulated among our
transaction professionals ensures a high degree of market
knowledge on a macro level, intimate knowledge of local
commercial real estate markets, long term relationships with the
most active investors, and a comprehensive understanding of
capital market products. Our employees come from a wide range of
real estate related backgrounds, including investment advisors
and managers, investment bankers, attorneys, brokers and
mortgage bankers.
Our culture is governed by our commitment to high ethical
standards, putting the client’s interest first and treating
clients and our own associates fairly and with respect. These
distinctive characteristics of our culture are highly evident in
our ability to retain and attract employees. The average tenure
for our senior transaction professionals is 10 years and
the average production tenure for the top 25 senior transaction
professionals compiled by initial leads during the last five
years was 14 years (including tenure with predecessor
companies). Furthermore, many of our senior transaction
professionals have a significant economic interest in our firm,
which aligns their individual interests with those of the
company as a whole and our clients. Following the completion of
our initial public offering, through their ownership of HFF
Holdings, approximately 40 senior transaction professionals will
in the aggregate own a majority interest in the company which we
believe will continue to align their interests with the company.
Integrated
Capital Markets Services Platform
In the increasingly competitive commercial real estate and
capital markets industry, we believe our key differentiator is
our ability to analyze all commercial real estate product types
and markets as well as our ability to provide clients with
comprehensive analysis, advice and execution expertise on all
types of debt and equity capital markets solutions. Because of
our broad range of execution capabilities, our clients rely on
us not only to provide capital market alternatives but, more
importantly, to advise them on how to optimize value by
uncovering inefficiencies in the non-public capital markets to
maximize their commercial real estate investments. Our
capabilities provide our clients with the flexibility to pursue
multiple capital market options simultaneously so that, upon
conclusion of our efforts, they can choose the best
risk-adjusted based solution.
Independent
Objective Advice
Unlike many of our competitors, we do not currently offer
services that compete with services provided by our clients such
as leasing or property management, nor do we currently engage in
principal capital investing activities. This allows us to offer
independent objective advice to our clients. We believe our
independence distinguishes us from our competitors, enhances our
reputation in the market and allows us to retain and expand our
client base.
Extensive
Cross-Selling Opportunities
As some participants in the commercial real estate market are
frequently buyers, sellers, lenders and borrowers at various
times, our relationships with these participants across all
aspects of their businesses provides us with multiple revenue
opportunities throughout the life cycle of their commercial real
estate investments. In addition, we often provide more than one
service in a particular transaction, such as in an investment
sale or note sale assignment where we not only represent the
seller of a commercial real estate investment but also represent
the buyer in
arranging acquisition financing. From 2003 through 2005, we
executed multiple transactions across multiple platform services
with 24 of our top 25 clients.
Broad
and Deep Network of Relationships
We have developed broad and deep-standing relationships with the
users and providers of capital in the industry and have
completed multiple transactions for many of the top
institutional commercial real estate investors in the U.S. as
well as several global investors who invest in the U.S.
Importantly, our transaction professionals, analysts and closing
specialists foster relationships with their respective
counterparts within each client’s organization. This
provides, in our opinion, a deeper relationship with our firm
relative to our competitors. In 2004 and 2005, no one borrower
or seller client represented more than 4% of our total capital
market services revenues. The combined fees from our top 25
seller clients for the years 2004 and 2005, respectively, were
less than 20% of our capital market services revenues for each
year, and the combined fees from our top 25 borrower clients
were less than 20% of our capital market services revenues for
each year. Additionally, we closed multiple transactions with 23
of our top 25 clients in 2004 and 25 of our 25 top clients in
2005.
Proprietary
Transaction Database
We believe that the extensive volume of commercial real estate
transactions that we advise on throughout the U.S. and across
multiple property type and capital market service lines provides
our transaction professionals with valuable, real-time market
information. We maintain a proprietary database on over
4,800 clients as well as databases that track key terms and
provisions of all closed and pending transactions for which we
are involved as well as historic and current flows and the
pricing of debt, structured finance, investment sales, note
sales and equity transactions. Included in the databases are
real-time quotes and bids on pipeline transactions, status
reports on all current transactions as well as historic
information on clients, lenders and buyers. Furthermore, our
internal databases maintain current and historical information
on our loan servicing portfolio, which enables us to track
real-time property level performance and market trends. These
internal databases are updated regularly and are available to
our transaction professionals, analysts and other internal
support groups to share client contact information and real-time
market information. We believe this information strengthens our
competitive position by enhancing the advice we provide to
clients and improving the probability of successfully closing a
transaction. Our associates also understand the confidential
nature of this information, and if it is misused and depending
on the circumstances, it can be cause for immediate dismissal
from the Company.
Our
Strategic Growth Plan
We seek to improve our market position by focusing on the
following strategic growth initiatives:
Expand
Our Geographic Footprint
We believe that opportunities exist to establish and increase
our presence in several key domestic, and potentially,
international markets. While our transactional professionals,
located in 18 offices throughout the U.S., advised clients on
transactions in 44 states (and the District of Columbia)
and in more than 500 cities in 2005, there are a number of
major metropolitan areas where we do not maintain an office, and
we have no overseas offices. By comparison, many of our large
public competitors have over 100 offices worldwide. We
constantly review key demand drivers of commercial real estate
by market, including growth in population, households,
employment, commercial real estate inventory by product type,
and new construction. By doing so, we can determine not only
where future strategic growth should occur, but more
importantly, we can also ensure our transaction professionals
are constantly calling on the most attractive markets where we
do not have offices. Since 1998, we have opened offices in
Washington, D.C., Los Angeles, San Francisco
(opened in October 2006) and Chicago. In addition, during
this same period, we have significantly added to the platform
services in our Miami, New York, New Jersey,
Washington, D.C., Los Angeles and Chicago offices. While
historical performance does not assure similar results, it is
interesting to note that the combined revenues from these new
offices (Washington, DC, Los Angeles and Chicago) in the
offices’ respective third year of operation were
approximately 2.5 times higher than these same offices’
respective first year of operation.
We expect to achieve future strategic geographic expansion
through a combination of recruitment of key transaction
professionals, organic growth and possible acquisitions of
smaller local and regional firms across all services in both new
and existing markets. However, in all cases our strategic growth
will be focused on serving our clients’ interests and
predicated on finding the most experienced professionals in the
market who have the highest integrity, work ethic and
reputation, while fitting into our culture and sharing our
philosophy and the way we conduct our business.
Increase
Market Share Across Each of our Capital Market
Services
We have achieved significant growth in each of the services we
provide through our integrated capital market platform. We
believe that we have the opportunity to continue to increase our
market share in each of the various capital market services we
provide to our clients by penetrating deeper into our national,
regional and local client relationships. We also intend to
increase our market shares by selectively hiring transaction
professionals in our existing offices and in new locations,
predicated on finding the most experienced professionals in the
market who have the highest integrity, work ethic and
reputation, while fitting into our culture and sharing our
philosophy and the way we conduct our business. For example,
since 1998, in addition to opening offices in
Washington, D.C., Los Angeles, San Francisco (opened
in October 2006) and Chicago, we have significantly added
to the platform services in Miami, New York, New Jersey,
Washington, D.C., Los Angeles and Chicago offices. While
historical performance does not assure similar results, it is
interesting to note that the combined revenues from these
existing offices with additional platform services (New York,
Washington, DC and Chicago in these combined offices’
respective third year of operation were approximately 3.7 times
higher than these combined offices’ respective first year
of operation with these additional platform services.
•
Debt Placement. Our transaction value in debt
placements was approximately $22.0 billion in 2005, an
increase of approximately 39% from approximately
$15.8 billion in 2004. According to Mortgage Bankers
Association, debt issuances in 2005 were $201.7 billion and
$136 billion in 2004. Also, given our top reputation for
debt placement and the growth expectations of our investment
sales platform, loan servicing business, structured finance
activity and HFF Securities, we believe the firm is
well-positioned to gain additional market share in debt
placements.
•
Investment Sales. In 2005, we completed
investment sales in excess of $7.6 billion, an increase of
38% over $5.5 billion completed in 2004. According to Real
Capital Analytics, commercial real estate sales volume in the
U.S. in 2005 was $274.9 billion and $187.0 billion in
2004. In 2001, our New York City office generated 99% of its
capital markets services revenue from debt placement fees.
During 2001, we hired three investment sales transaction
professionals in our New York City office, and in 2005 the New
York City office generated more than $3.1 billion in debt
and investment sales transaction volume while revenues
associated with these capital markets services grew by
4.4 times over 2001 with investment sales contributing to
46% of the revenue in 2005.
•
Structured Finance, Private Equity and Advisory
Services. In 2005, we completed approximately
$1.9 billion of structured finance transactions (which
includes amounts that we internally allocate to the structured
finance reporting category, even though the transaction may have
been funded through a single mortgage note) for our clients. In
April 2004, we formed our broker-dealer subsidiary,
HFF Securities, to undertake both discretionary and
non-discretionary private equity raises, select property
specific joint ventures, and select investment banking
activities for our clients. We are selectively looking to add to
HFF Securities licensed transaction professionals in our
larger markets who fit with our culture and meet our high
standards of integrity.
•
Note sale and note sales advisory. Since
formalizing our note sales and note sales advisory services
platform in 2004, we have consummated over $250 million in
note sale and note sales advisory transactions. We see growth in
this market as well due to the desire of lenders seek to
diversify concentration risk (geographic, borrower or product
type), manage potential problems in their loan portfolios or
sell loans rejected from CMBS securitization pools. We recently
added two transaction professionals in our Chicago office which
we believe resulted in a significant increase in our pipe-line
of business from institutional and CMBS lenders who are all
existing clients of our firm.
Loan servicing. In 2005, we serviced
approximately $14.9 billion in principal amount of
commercial mortgages, an increase of 14.6% from the
approximately $13.0 billion we were servicing at the end of
2004. Currently, we have 33 formal correspondent lender
relationships with life insurers and 17 CMBS sub servicing
and primary servicing agreements The majority of the CMBS
contracts having been put in place over the past 18 months
due to our increased focus on growing our servicing platform to
better serve our client. As a result of our continued debt
placements with correspondent lenders as well as our new sub
servicing relationships with CMBS lenders, our loan servicing
portfolio has grown from $14.9 billion in 2005 to
$16.4 billion at September 30, 2006 with a large
percentage of this growth coming from CMBS sub-servicing
contracts we have been executing since early 2005. We expect to
continue to grow our servicing platform by increasing our
sub-servicing penetration of CMBS originators, leveraging our
formal correspondent lender relationships with life insurance
companies as well as our Freddie Mac originations, and pursuing
third-party servicing opportunities.
Continue
to Capitalize on Cross-Selling Opportunities
Participants in the commercial real estate market increasingly
are buyers, sellers, lenders and borrowers at various times. We
believe our relationships with these participants across all
aspects of their businesses provide us with multiple revenue
opportunities throughout the lifecycle of their commercial real
estate investments. Many of our clients are both users and
providers of capital. Our clients typically execute transactions
throughout the U.S. utilizing the wide spectrum of our
services. By maintaining close relationships with these clients,
we intend to continue to generate significant repeat business
across all of our business lines.
Our debt transaction professionals originated approximately
$377 million and $1.3 billion of debt for clients that
purchased properties sold by our investment sales professionals
for their clients in 2004 and 2005, respectively. Our investment
sales professionals also referred clients to our debt
transaction professionals who arranged debt financings totalling
approximately $593 million and $475 million in 2004
and 2005, respectively. Our debt professionals also referred
clients to our investment sales transaction professionals who
sold approximately $736 million and $1.8 billion of
properties in 2004 and 2005, respectively. Also, from its
inception in late 2004 through the third quarter of 2006, our
HFF Securities subsidiary originated debt volumes of
approximately $589 million, in addition to their other
equity placement activities.
Our
Services
Debt
Placement Services
We offer our clients a complete range of debt instruments,
including but not limited to construction and
construction/mini-permanent loans, adjustable and fixed rate
mortgages, entity level debt, mezzanine debt, forward delivery
loans, tax exempt financing, and sale/leaseback financing.
Our clients are owners of various types of property, including,
but not limited to, office, retail, industrial, hotel,
multi-family, self-storage, assisted living, nursing homes,
condominium conversions, mixed-use properties and land. Our
clients range in size from individual entrepreneurs who own a
single property to the largest real estate funds and
institutional property owners throughout the world who invest in
the U.S. Debt is placed with all major capital funding sources,
both domestic and foreign, including but not limited to life
insurance companies, conduits, investment banks, commercial
banks, thrifts, agency lenders, pension funds, pension fund
advisors, REITs, credit companies, opportunity funds and
individual investors.
Investment
Sales Services
We provide investment sales services to commercial real estate
owners who are seeking to sell one or more properties or
property interests. We seek to maximize proceeds and certainty
of closure for our clients through our knowledge of the
commercial real estate and capital markets, our extensive
database of potential buyers, with whom we have deep and
long-standing relationships, and our experienced transaction
professionals. Real time data on comparable transactions, recent
financings of similar assets and market trends, enable our
transaction professionals to better advise our clients on
valuation and certainty of execution based on a prospective
buyer’s proposed capital structure.
We offer a wide array of structured finance alternatives and
solutions at both the property and ownership entity level. This
allows us to provide financing alternatives at every level of
the capital structure, including but not limited to mezzanine
and equity, thereby providing potential buyers and existing
owners with the highest appropriate leverage at the lowest
blended cost of capital to purchase properties or recapitalize
existing ones versus an out-right sales alternative. By focusing
on the inefficiencies in the structured finance capital markets,
such as mezzanine, preferred equity, participating
and/or
convertible debt structures, pay and accrual debt structures,
pre-sales, stand-by commitments and bridge loans, we are able to
access capital for properties in transition, predevelopment and
development loans
and/or joint
ventures
and/or
structured transactions, which provide maximum flexibility for
our clients.
Private
Equity, Investment Banking and Advisory Services
Through HFF Securities, our licensed broker-dealer subsidiary,
we offer our clients the ability to access the private equity
markets for an identified commercial real estate asset and
discretionary and non-discretionary joint ventures, funds
marketing, private equity placements, and advisory services.
HFF Securities’ services to its clients include:
•
Joint Ventures. Equity capital for our
commercial real estate clients to establish joint ventures
relating to either identified properties or properties to be
acquired by a fund sponsor. These joint ventures typically
involve the acquisition, development, recapitalization or
restructuring of multi-asset commercial real estate portfolios,
and include a variety of property types and geographic areas.
•
Private Placements. Private placements of
common, perpetual preferred and convertible preferred
securities. Issuances involve primary or secondary shares that
may be publicly registered, listed and traded.
•
Advisory Services. Entity-level advisory
services for various types of transactions including mergers and
acquisition, sales and divestitures, management buyouts, and
recapitalizations and restructurings.
•
Marketing and Fund-Raising. Institutional
marketing and fund-raising for public and private commercial
real estate companies, with a focus on opportunity and
value-added commercial real estate funds. In this capacity, we
undertake private equity raises, both discretionary and
non-discretionary, and offer advisory services.
Note
Sale and Note Sales Advisory Services
We assist our clients in their efforts to sell all or portions
of their commercial real estate debt note portfolios. We are
actively marketing our note sale and note sales advisory
services to our clients.
Commercial
Loan Servicing
We provide commercial loan servicing (primary and sub-servicing)
for life insurance companies and CMBS originators. Our servicing
platform, experienced personnel and hands-on service allow us to
maintain close contact with both borrowers and lenders. As a
result, we are often the first point of contact in connection
with refinancing, restructuring or sales of commercial real
estate assets. Revenue is earned primarily from servicing fees
charged to the lender, as well as from investment income earned
on escrow balances.
To avoid potential conflicts, our transaction professionals do
not share in servicing revenue, eliminating conflicts which can
occur with serviced versus non-serviced lenders. However,
throughout the servicing life of a loan, the transaction
professional who originated the loan usually remains the main
contact for both the borrower and lender, or the master
servicer, as the case may be, to assist our servicing group with
annual inspections, operating statement reviews and other major
servicing issues affecting a property or properties.
The commercial real estate services industry, and all of the
services that we provide, are highly competitive, and we expect
them to remain so. We compete on a national, regional and local
basis as well as on a number of other critical factors,
including but not limited to the quality of our people and
client service, historical track record and expertise and range
of services and execution skills, absence of conflicts and
business reputation. Depending on the product or service, we
face competition from other commercial real estate service
providers, institutional lenders, insurance companies,
investment banking firms, investment managers and accounting
firms, some of which may have greater financial resources than
we do. Consistently, the top competitors we face on national,
regional and local levels include, but are not limited to, CB
Richard Ellis Group, CBRE Capital Markets (formerly L.J.
Melody & Company), Cushman & Wakefield,
Eastdil Secured, Trammell Crow, Jones Lang LaSalle, Northmarq
Capital (Marquette) and CapMark (formerly GMAC). There are
numerous other local and regional competitors in each of the
local markets where we are located as well as the markets we do
business in.
Competition to attract and retain qualified employees is also
intense in each of the capital market services we provide to our
clients. We compete by offering a competitive compensation
package to our transaction professionals and our other
associates as well as equity-based incentives for key associates
who lead our efforts in terms of running our offices or leading
our efforts in each of our capital market services. Our ability
to continue to compete effectively will depend upon our ability
to retain and motivate our existing transaction professionals
and other key associates as well as our ability to attract new
ones, all predicated on finding the most experienced
professionals in the market who have the highest integrity, work
ethic and reputation, while fitting into our culture and sharing
our philosophy and the way we conduct our business.
Regulation
Our U.S. broker-dealer subsidiary, HFF Securities, is
subject to regulation. HFF Securities is currently registered as
a broker-dealer with the SEC and the NASD. HFF Securities is
registered as a broker dealer in California and is considering
in which additional states it may register as a broker-dealer.
HFF Securities is subject to regulations governing effectively
every aspect of the securities business, including the effecting
of securities transactions, minimum capital requirements,
record-keeping and reporting procedures, relationships with
customers, experience and training requirements for certain
employees and business procedures with firms that are not
subject to regulatory controls. Violation of applicable
regulations can result in the revocation of broker-dealer
licenses, the imposition of censures or fines and the
suspension, expulsion or other disciplining of a firm, its
officers or employees.
Our broker-dealer subsidiary is also subject to the SEC’s
uniform net capital rule,
Rule 15c3-1,
and the net capital rules of the NYSE and the NASD, which may
limit our ability to make withdrawals of capital from our
broker-dealer subsidiary. The uniform net capital rule sets the
minimum level of net capital a broker-dealer must maintain and
also requires that a portion of its assets be relatively liquid.
The NYSE and the NASD may prohibit a member firm from expanding
its business or paying cash dividends if resulting net capital
falls below its requirements. In addition, our broker-dealer
subsidiary is subject to certain notification requirements
related to withdrawals of excess net capital. Our broker-dealer
subsidiary is also subject to several new laws and regulations
that were recently enacted. The USA Patriot Act of 2001 has
imposed new obligations regarding the prevention and detection
of money-laundering activities, including the establishment of
customer due diligence and other compliance policies and
procedures. Additional obligations under the USA Patriot Act
regarding procedures for customer verification became effective
on October 1, 2003. Failure to comply with these new
requirements may result in monetary, regulatory and, in the case
of the USA Patriot Act, criminal penalties.
HFF LP is licensed (in some cases, through our employees or its
general partner) as a mortgage broker and a real estate broker
in multiple jurisdictions. Generally we are licensed in each
state where we have an office as well as where we frequently do
business.
Our principal executive offices are located in leased office
space at 429 Fourth Avenue, Suite 200, Pittsburgh,
Pennsylvania. We also lease or sublease space for our offices at
Boston, Massachusetts; Hartford, Connecticut; Westport,
Connecticut; New York, New York; Florham Park, New Jersey;
Washington, D.C.; Miami, Florida; Atlanta, Georgia;
Indianapolis, Indiana; Chicago, Illinois; Houston, Texas;
Dallas, Texas; San Diego, California; Orange County,
California; Los Angeles, California; San Francisco,
California and Portland, Oregon. We do not own any real
property. We consider these arrangements to be adequate for our
present needs.
Legal
Proceedings
We believe, based on currently available information, that the
results of any pending judicial, regulatory and arbitration
proceedings, in the aggregate, will not have a material adverse
effect on our financial condition but might be material to our
operating results for any particular period, depending, in part,
upon the operating results for such period.
History
We have grown through the combination of several prominent
commercial real estate brokerage firms. Our namesake dates back
to Holliday Fenoglio & Company, which was founded in
Houston in 1982. Although our predecessor companies date back
to the 1970s, our recent history began in 1994 when Holliday
Fenoglio Dockerty & Gibson, Inc. was purchased by
AMRESCO, Inc. to create Holliday Fenoglio Inc. In 1998,
Holliday Fenoglio acquired Fowler Goedecke Ellis &
O’Connor, to create Holliday Fenoglio Fowler, L.P. Later
that year Holliday Fenoglio Fowler, L.P. acquired PNS Realty
Partners, LP and Vanguard Mortgage.
In March 2000, AMRESCO sold its commercial mortgage banking
businesses, Holliday Fenoglio Fowler, L.P., to Lend
Lease (US) Inc., the U.S. subsidiary of the Australian
real estate services company. Finally, in June 2003, HFF
Holdings completed an agreement for a management buyout from
Lend Lease. In April 2004, we established our broker-deal
subsidiary, HFF Securities L.P.
The following table sets forth the names, ages and positions of
our current directors and executive officers, as well as our
nominees for our board of directors as of January 1, 2007.
Name
Age
Position
John P. Fowler
61
Director
Mark D. Gibson
47
Director
John Z. Kukral
46
Director Nominee
Deborah H. McAneny
47
Director Nominee
George L. Miles, Jr.
63
Director Nominee
Lenore M. Sullivan
48
Director Nominee
John H. Pelusi, Jr.
51
Director and Chief Executive
Officer
McHenry T. Tichenor, Jr.
51
Director Nominee
Joe B. Thornton, Jr.
46
Director
Gregory R. Conley
46
Chief Financial Officer
Nancy O. Goodson
48
Chief Operating Officer
John P. Fowler. Mr. Fowler currently
serves as a director of HFF, Inc. after holding the positions of
Executive Managing Director of HFF, L.P. and member of the
operating committee of HFF Holdings since 2003. Mr. Fowler
began his career in the real estate finance business in 1968 and
spent four years in the Real Estate Department of John Hancock
Mutual Life Insurance Company. In 1972 he joined a New
England-based mortgage banking and development company, and in
1974 formed Fowler, Goedecke & Co., a predecessor to
Fowler Goedecke Ellis & O’Connor, Inc., which was
merged into our predecessor in 1998. Mr. Fowler is active
in the Urban Land Institute, Real Estate Finance Association,
Mortgage Bankers Association, International Council of Shopping
Centers, National Association of Industrial & Office
Properties, and Artery Business Committee. He received his
Bachelor of Arts from Brown University.
Mark D. Gibson. Mr. Gibson is one of our
founding partners having joined our predecessor firm, Holliday
Fenoglio & Company, in 1984. He currently serves as a
director of HFF, Inc. after holding the positions of Executive
Managing Director and member of the operating committee of HFF
Holdings since 2003. Mr. Gibson is an Assistant
Chairman/Council Member of IOPC Gold in the Urban Land
Institute; Chairman of the University of Texas Real Estate
Finance & Investment Center; Member and Former Board
Member of the Real Estate Council of Dallas; and is a member of
International Council of Shopping Centers, Mortgage Bankers
Association of America, and Young Presidents Organization. Mr.
Gibson graduated in 1981 from the University of Texas at Austin
with a BBA in Finance.
John Z. Kukral. Mr. Kukral is a nominee
for a director position for HFF, Inc. Mr. Kukral is
currently President of Northwood Investors, a real estate
investment company. Mr. Kukral started his career at JMB
Realty Corporation in 1982 and was most recently (1994 to
2005) with Blackstone Real Estate Advisors where he served
as President and Chief Executive Officer from 2002 until 2005.
Mr. Kukral graduated from Northwestern University and
received an M.B.A. from Harvard University. Mr. Kukral is a
member of the board of directors of Aircastle Limited and is a
Trustee of the Urban Land Institute and a Governor of the Urban
Land Foundation.
Deborah H. McAneny. Ms. McAneny is a
nominee for a director position for HFF, Inc. Ms. McAneny
is currently a principal of Equinox Advisors LLC. Prior to this,
Ms. McAneny was employed at John Hancock Financial Services
for 20 years, including as Executive Vice President for
Structured and Alternative Investments and a member of its
Policy Committee from 2002 to 2004, as Senior Vice President for
John Hancock’s Real Estate Investment Group from 2000 to
2002 and as a Vice President of the Real Estate Investment Group
from 1997 to 2000. She received a Bachelor of Science degree
from the University of Vermont and is a Certified Public
Accountant. Ms. McAneny is currently a member of the board
of directors of KKR Financial Corp. and the Board of
Trustees of the University of Vermont and The Rivers School.
She is a past president of the Commercial Mortgage Securities
Association.
George L. Miles, Jr. Mr. Miles is a
nominee for a director position as well as the Chairman of the
Audit Committee position for HFF, Inc. Mr. Miles is
president and Chief Executive Officer of WQED Multimedia, the
public broadcaster in southwestern Pennsylvania. He joined the
organization in 1994 after serving ten years as Executive Vice
President and Chief Operating Officer of WNET/Thirteen in New
York. Prior to that he held executive positions at KDKA,
Pittsburgh; WPCQ, Charlotte; the Westinghouse Television Group;
and WBZ-TV,
Boston. Earlier in his career, Mr. Miles was a contract
auditor at the U.S. Department of Defense and a manager at
Touche Ross & Co. He earned his BA degree from Seton
Hall University and his MBA from Fairleigh Dickinson University.
He serves on the Board of Directors of American International
Group, Inc. (AIG) — Audit Committee; WESCO
International, Inc.; Equitable Resources, Inc.; Harley Davidson,
Inc.; the University of Pittsburgh and the UPMC Health System.
He is the former Chairman of the Association for America’s
Public Television Stations and the Urban League of Pittsburgh,
Inc.
John H. Pelusi, Jr. Mr. Pelusi has
served as a director and Chief Executive Officer of HFF, Inc.
since its inception. He has also served as an Executive Managing
Director of HFF LP since 2001 and a member of the operating
committee and the Managing Member of HFF Holdings since
June 16, 2003. Mr. Pelusi has over 25 years of
experience in commercial real estate, including investment
sales, note sales, debt placement, equity, structured finance
and loan servicing. Mr. Pelusi joined HFF LP in May 1998,
and prior to that he was the Managing Partner of PNS Realty
Partners, L.P. Mr. Pelusi is currently a member of the
Board of Trustees for the University of Pittsburgh, the Board of
Directors for the University of Pittsburgh Medical Center, the
Board of Trustees for the Holy Family Foundation, and the Board
of Directors for the Manchester Bidwell Corporation. He is also
a member of the Real Estate Roundtable, the International
Council of Shopping Centers (ICSC) and the Mortgage Bankers
Association.
Lenore M. Sullivan. Ms. Sullivan is a
nominee for a director position for HFF, Inc. Since 2002,
Ms. Sullivan has served as the Associate Director for the
Real Estate and Finance and Investment Center at the University
of Texas at Austin. From 2000 to 2002, she was Vice President of
Hunt Private Equity Group, Inc. and from 1992 to 2000 she was
the President and co-owner of Stonegate Advisors, an investment
banking firm. Ms. Sullivan graduated cum laude from Smith
College with a degree in economics and government and a minor in
urban studies. She holds a MBA from Harvard Business School.
Ms. Sullivan is a member of the board of directors of
Parkway Properties, Inc., where she also sits on the audit and
corporate governance and nominating committees. She is a Charter
Investor in the Texas Women Ventures Fund, and sits on the
investment advisory and investment committees of the fund. She
is a partner in Republic Holdings Texas, L.P., and sits on the
investment committee of the fund. Ms. Sullivan has served
as a member of the Advisory Board of Capstone Partners and is a
full member of the Urban Land Institute and the Pension Real
Estate Association.
Joe B. Thornton, Jr. Mr. Thornton
currently serves as a director of HFF, Inc. in addition to
holding the position of Executive Managing Director and a member
of the operating committee of HFF Holdings since 2003.
Mr. Thornton operates from our Dallas office.
Mr. Thornton joined HFF’s predecessor firm, Holliday
Fenoglio, Inc., in March 1992. He has held several senior
positions with the firm, including Board Member and Principal.
Prior to his employment with us, he was a Senior Vice President
of The Joyner Mortgage Company, Inc., where he was responsible
for the origination of commercial mortgage and equity
transactions, and a Senior Accountant with the Audit Division of
Peat Marwick Mitchel & Co. Mr. Thornton is a
licensed Real Estate Salesman in the State of Texas.
Mr. Thornton graduated from the University of Texas at
Austin with a BBA in Accounting in 1982.
McHenry T.
Tichenor, Jr. Mr. Tichenor is a nominee
for a director position for HFF, Inc. Mr. Tichenor is
currently a private investor and Executive Director of the WWWW
Foundation. He was, until December 31, 2004, Executive Vice
President of Univision Communications Inc. and was President of
the company’s radio division. From 1997 through 2003,
Mr. Tichenor was Chairman, President and Chief Executive
Officer of Hispanic Broadcasting Corporation prior to its merger
with Univision in September 2003. From 1981 until February 1997,
Mr. Tichenor was the President, Chief Executive Officer and
a director of Tichenor Media System, Inc. He received a B.A.
with Honors in 1977 and a M.B.A. from the University of Texas at
Austin in 1979. Mr. Tichenor currently serves as a member
of the board of directors of Univision Communication, Inc. and
8e6 Technologies.
Gregory R. Conley. Mr. Conley serves as
the Chief Financial Officer for HFF, Inc. Mr. Conley joined
us in October 2006 and, working out of the Pittsburgh office, is
responsible for all areas of financial accounting and reporting
for the firm’s 18 offices. Most recently, from 1998 through
mid-year 2006, Mr. Conley was an executive vice president
and CFO with Precise Technology, Inc. and its successor, Rexam
Consumer Plastics, Inc. Precise Technology, Inc. was a plastics
packaging business and portfolio company of Code Hennessy &
Simmons. Between 1986 and early 1998, Mr. Conley served as
a consultant with national consulting firms that eventually
became part of Navigant Consulting, Inc. Between mid-1990 and
early 1998, he was a vice president of Barrington Consulting
Group, Inc. Prior to that between 1986 and mid-year 1990, he was
an executive consultant at Peterson & Company.
Mr. Conley began his career in public accounting with
Ernst & Young LLP. He earned an MBA from the University
of Pittsburgh and a BS from Duquesne University.
Nancy O. Goodson. Ms. Goodson serves as
the Chief Operating Officer of HFF, Inc. after holding the same
position at HFF LP and its predecessor companies since 1993.
Working out of the firm’s Houston office, Ms. Goodson
is responsible for the overall direction of the firm’s 18
national offices, with a specific focus on the oversight of
administrative functions and loan servicing aspects of the
Company. Prior to joining HFF in 1993, she spent seven years as
a controller at Beeler Sanders Properties in Houston. She is a
member of CREW Houston and is Treasurer of First United
Methodist Church in Missouri City, Texas. She received her BBA
from Southwest Texas State University.
There are no family relationships among any of our directors,
director nominees or executive officers.
Board
Composition
Prior to the closing of this offering, we intend to appoint John
Z. Kukral, Deborah H. McAneny, George L. Miles, Jr., Lenore
M. Sullivan, and McHenry T. Tichenor, Jr. to our board of
directors and they have consented to so serve. Our board of
directors has determined that each of them is independent under
the independence standards promulgated by the NYSE.
Our bylaws provide that our board of directors will consist of
such number of directors as set from time to time by our board
of directors. Further, our certificate of incorporation will be
amended to divide our board of directors into three classes. The
members of each class will serve for a staggered, three-year
term. Upon the expiration of the term of a class of directors,
directors in that class will be elected for three-year terms at
the annual meeting of stockholders in the year in which their
term expires. Any additional directorships resulting from an
increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class
will consist of one-third of our directors.
Committees
of the Board of Directors
In connection with this offering, our board of directors will
establish an Audit Committee, a Compensation Committee and a
Nominating and Corporate Governance Committee, and our board of
directors intends to adopt charters for its committees that
comply with current federal and New York Stock Exchange rules
relating to corporate governance matters.
Audit Committee. We anticipate that George L.
Miles, Jr.,
and
will serve on the Audit Committee and that Mr. Miles will
serve as its chair. The Audit Committee is responsible for,
among other things, directly appointing, retaining, evaluating,
compensating and terminating our independent auditors;
discussing with our independent registered public accounting
firm their independence from management; reviewing with our
independent registered public accounting firm the scope and
results of their audit; pre-approving all audit and permissible
non-audit services to be performed by the independent registered
public accounting firm; overseeing the financial reporting
process and discussing with management and our independent
registered public accounting firm the interim and annual
financial statements that we file with the SEC; and reviewing
and monitoring our accounting principles, policies and financial
and accounting controls.
Compensation Committee. We anticipate
that ,
and
will serve on the Compensation Committee and
that
will serve as its chair. The Compensation Committee will be
responsible for, among other things, reviewing and recommending
director compensation policies to the board of directors;
making recommendations, at least annually, to the board of
directors regarding our policies relating to the amounts and
terms of all compensation of our executive officers; and
administering and discharging the authority of the board of
directors with respect to our equity plans.
Nominating and Corporate Governance
Committee. We anticipate
that ,
and
will serve on the Nominating and Corporate Governance Committee
and
that will
serve as its chair. The Corporate Governance and Nominating
Committee will be responsible for, among other things, selecting
potential candidates to be nominated for election to the board
of directors; recommending potential candidates for election to
the board of directors; reviewing corporate governance matters;
and making recommendations to the board of directors concerning
the structure and membership of other board committees.
Compensation
Committee Interlocks and Insider Participation
We do not anticipate any interlocking relationships between any
member of our Compensation Committee or our nominating and
governance committee and any of our executive officers that
would require disclosure under the applicable rules promulgated
under federal securities laws. Prior to this offering, the
operating committee of HFF Holdings made all determinations
regarding executive officer compensation.
Director
Compensation
In 2006, none of our directors received any compensation for
service as a member of our board of directors or board
committees.
Our policy is not to pay director compensation to directors who
are also our employees. We anticipate that each outside director
will be paid a base annual retainer of $50,000. Each outside
director who is a director as of the date this registration
statement becomes effective will receive an initial grant of
approximately 4,688 options to purchase shares of our
Class A common stock, which will vest annually over three
years. Each outside director elected after the date this
registration statement becomes effective will receive an initial
election grant of options to purchase shares of our Class A
common stock with a Black-Scholes (or similar valuation method)
value of $30,000, which will vest annually over three years.
Each outside director will receive an annual grant of restricted
stock units based upon our Class A common stock with a
market value of $50,000 on the grant date which will initially
be upon the offering and thereafter will be payable at a future
date determined by our board of directors.
In addition, we expect the chair of the Audit Committee will
receive an additional annual retainer of $10,000 and the chair
of each of the Compensation Committee and Nominating and
Corporate Governance Committee will receive an additional annual
retainer of $5,000.
We intend to reimburse all non-employee directors for reasonable
expenses incurred to attend meetings of our board of directors
or committees. Other than as described above, we do not expect
to provide any of our directors with any other compensation or
perquisites.
In addition to the payments described above, we intend to allow
voluntary deferral by our directors of up to 100% of the cash
retainer and committee fees to a future date elected by the
director. The deferred retainer and fees will be deemed invested
in an investment fund based upon our Class A common stock
or another investment vehicle such as an interest-bearing cash
account.
Compensation
Discussion and Analysis
Current
Compensation Policies
Prior to the consummation of the Reorganization Transactions and
since June 2003, we were controlled by our principal
shareholder, HFF Holdings. All compensation decisions relating
to our senior transaction professionals, including those for
members of the operating committee of HFF Holdings and the
managing member of HFF Holdings, John H. Pelusi, Jr., were
subject to the approval of the operating committee of HFF
Holdings and then put to a vote of the members of HFF Holdings
for approval. Generally, the salary of Mr. Pelusi and
others on the operating committee are proposed by the members of
the operating committee as part of the annual budget process and
approved by a vote of the members of HFF Holdings on the budget.
In addition, the managing member is
eligible for a discretionary performance bonus every year. Upon
the recommendation of the operating committee of HFF Holdings,
the bonus for Mr. Pelusi is approved by a vote of the
members of the HFF Holdings (except for Mr. Pelusi).
Mission
and Vision Statement
The Operating Partnerships have adopted a mission and vision
statement that reflects their pay for value-added performance
philosophy. We believe this mission and vision statement is
critical to our continued success. The mission and vision
statement relies upon the concept that a client’s interest
must be ahead of ours or any individual working for us. Our goal
is to hire and retain associates throughout the entire
organization who have the highest ethical standards with the
best reputation in the industry to preserve our culture of
integrity, trust and respect. We endeavor to promote and
encourage teamwork to ensure our clients have the best team on
each transaction. Without the best people, we believe we cannot
be the best firm and achieve superior results for our clients.
To enable us to achieve our goals, we must maintain a flexible
compensation structure, including equity-based compensation
awards, to appropriately recognize and reward our existing and
future associates who profoundly affect our future success. The
ability to reward superior performance is essential if we want
to provide superior results for our clients.
Compensation
for Executive Officers During 2006
During 2006, Mr. Pelusi was not paid any amount for his
services as an executive officer to HFF, Inc. Mr. Pelusi is
also a transaction professional of HFF LP. He is primarily paid
for his service as a transaction professional. His payment as a
transaction professional is based upon commissions he earns for
the capital markets revenue that through his efforts he brings
into HFF LP. Like our other transaction professionals,
Mr. Pelusi is entitled to receive commission payments equal
to 50% of the adjusted collected fee amount that he has
generated for HFF LP. The adjusted collected fee amount is
determined based upon the gross revenue actually received by HFF
LP attributable to the efforts of Mr. Pelusi and after
payment of all customary and appropriate fee splits with outside
cooperating brokers or others. The adjusted collected fee amount
is also reduced by related producer expenses, including all
applicable management plan payments, bonus pool payments to
analysts, splits with other producers and employees, and other
similar compensation paid or payable to individuals involved in
the generation of any commission revenue. This is consistent
with HFF LP’s pay for performance policy, as the
compensation earned by Mr. Pelusi as a transaction
professional is directly related to the amount of revenue he
generates for HFF LP. In addition, in order to attract and
retain top producers, such as Mr. Pelusi, it is critical
that they share in the revenue and certain other income that
they generate for the Operating Partnerships.
During 2006, Mr. Pelusi was paid a salary that is
determined by annual review of the members of HFF Holdings. His
salary was proposed by the operating committee of HFF Holdings
and included in an annual operating budget. The annual operating
budget was then approved by a vote of the members of HFF
Holdings. Mr. Pelusi was also paid an additional
discretionary amount as the Executive Managing Director of HFF
LP and a member of the operating committee and Managing Member
of HFF Holdings. This amount is initially determined by the
operating committee of HFF Holdings and is based upon a number
of subjective factors, including, the performance of the
Operating Partnerships and HFF Holdings during the year, the
ability to attract and retain transactional professionals,
establish additional offices, and the time and effort dedicated
to the administration of the
day-to-day
affairs of the Operating Partnerships and HFF Holdings. The
annual discretionary bonus is then recommended to the members of
HFF Holdings who then approve the bonus through a vote
(Mr. Pelusi does not vote on the bonus nor is he present
during the vote or any discussion of the operating committee
regarding his bonus). In 2006, Mr. Pelusi was awarded a
bonus of $500,000 plus a tax gross up of $148,077 for self
employment taxes relating to compensatory payments received by
Mr. Pelusi in his capacity as a member of HFF Holdings. To
retain employees with high ethical standards, integrity and the
best reputation, consistent with our mission and vision
statement, we must be able to reward executive officers, such as
Mr. Pelusi for achieving individual or company-wide
milestones. We believe these milestones can only be determined
and adequately rewarded after they have been achieved and we
have reviewed them.
Mr. Pelusi also is eligible to participate in the HFF LP
Profit Participation Bonus Plan. The Profit Participation Bonus
Plan, described in more detail in “— Profit
Participation Bonus Plans”, provides that offices or lines
of business that generate profit margins for their office or
line of business of 14.5% or more are entitled to additional
bonuses of an allocated share of 15% of net income from the
office. The allocation of the profit participation bonus and how
it is shared within the office are determined by the office head
in consultation with the managing member. In 2006,
Mr. Pelusi received a profit participation bonus of
$175,286. We believe HFF LP Profit Participation Bonus plan
rewards an office or line of business for an exceptionally
productive year. In addition, the Profit Participation Bonus
Plan rewards income generation as well as the ability of an
office or line of business to control costs. This element of
compensation is integral to HFF LP’s compensation practices
because it provides an understandable incentive to each of our
offices and lines of business and allows us to reward superior
performance.
In addition to the above, Mr. Pelusi received distributions
with respect to his ownership interests in HFF Holdings as set
forth in the Summary Compensation Table below. The payments for
these ownership interests results in the alignment of
Mr. Pelusi’s interest as an employee with those as an
owner.
During 2006, Ms. Goodson was not paid any amount for her
services to HFF, Inc. She was paid a base salary based upon her
services as an Executive Managing Director of HFF LP and as
chief administrative and operational officer of the Operating
Partnerships and HFF Holdings. Her base salary was established
by Mr. Pelusi in consultation with the operating committee
of HFF Holdings. Among the factors considered in establishing
her base salary were her historical base salary and comparisons
to similar positions in similar peer group industries in Texas
for non-publicly traded companies. She is not a transactional
professional and accordingly is not entitled to a commission.
However, Ms. Goodson was eligible to receive a
discretionary annual cash bonus payable to her as an executive
officer based upon her individual achievement of financial or
strategic performance goals established by HFF LP from time to
time. The strategic and financial goals for 2006 were based upon
her efforts assisting in consummating this offering and running
the
day-to-day
operations of the Operating Partnerships. HFF Holdings
retained Mercer Human Resource Consulting to evaluate our
compensation practices and make recommendations about
compensation practices relative to Ms. Goodson’s
current role as well as her expanded role. An increase in salary
is contemplated, to $200,000, as set forth in the description of
her employment agreement below. Furthermore,
Ms. Goodson’s duties will be expanded after the
consummation of the Reorganization Transactions and this
offering.
Mr. Conley was hired in October 2006 when the offering was
being contemplated by us. In connection with his hiring, we
reviewed the compensation practices of a peer group of
businesses. HFF LP determined that Mr. Conley’s salary
should be comparable to the salaries paid to our peer group. His
base salary was established at $215,000. In addition, as
discussed below, in connection with this offering, HFF Holdings
retained Mercer Human Resource Consulting to evaluate our
compensation practices, and make recommendations about
compensation practices. These recommendations included a
determination that the $215,000 salary was an appropriate salary
for Mr. Conley.
Mr. Conley is not a transactional professional and
accordingly is not entitled to a commission. However,
Mr. Conley is eligible to receive a discretionary annual
cash bonus payable to him as an executive officer based upon the
achievement of financial or strategic performance goals
established by us from time to time. Furthermore,
Mr. Conley’s duties will be substantially expanded
after the consummation of the Reorganization Transactions and
this offering.
Expected
Compensation Policies
The following discussion relates to our anticipated policies and
practices relating to officer compensation following the
offering:
As soon as practicable after the consummation of this offering,
the Compensation Committee of the board of directors will be
responsible for implementing and administering all aspects of
our benefit and compensation plans and programs. All of the
members of our Compensation Committee will be independent
directors who are not currently members of HFF Holdings. Though
we expect the Compensation Committee to follow these policies,
it is possible that the Compensation Committee could develop a
compensation philosophy different than that discussed here.
We have adopted the mission and vision statement set forth
above, which was used to determine compensation by our Operating
Partnerships prior to the consummation of the Reorganization
Transactions and this offering. In addition, our mission and
vision statement reflects the fact that our ability to reward
superior performance is essential to appropriately align our
interests with our shareholders.
In connection with this offering, HFF Holdings retained the
compensation consulting firm of Mercer Human Resource Consulting
to evaluate our compensation practices and to assist in
developing and implementing the executive compensation program
and philosophy with respect to Mr. Conley and
Ms. Goodson. Mr. Pelusi’s compensation was not
reviewed by Mercer. It is anticipated that after the
consummation of this offering, the Compensation Committee will
undertake a review of the compensation of Mr. Pelusi.
Mercer developed a competitive peer group comprised of 24
companies comparable in size to us that have consummated an
initial public offering in the past three years (2003 –
2006). Using benchmarks based on this peer group, Mercer
performed analyses of competitive performance and compensation
levels. It also met with senior management to learn about our
business operations and strategy as a public company, key
performance metrics and target goals, and the labor and capital
markets in which we will compete. It developed recommendations
that were reviewed and approved by our board of directors in
connection with developing and approving this offering.
From time to time, our board of directors and/or compensation
committee will evaluate the performance of our senior executives
based on quantitative and qualitative performance criteria.
Elements
of Compensation
Following the consummation of the offering, we anticipate
executive compensation to consist of the following elements:
Base Salary.Base salaries for
executive officers are established based on each
individual’s job responsibilities and contribution to the
Company, while taking into account total compensation levels at
other companies for similar positions. Generally, we believe
that base salaries should be set at the low end of competitive
levels, while providing somewhat higher bonuses based on the
performance of the Company and the individual. Base salaries are
reviewed annually; however, a decrease in base salary may be
prohibited by an executive officer’s employment agreement.
Bonuses.Our Compensation
Committee will be responsible for establishing and implementing
pre-established quantitative and qualitative performance
standards for executive bonuses. To the extent that our
employment agreements contain qualitative standards for
discretionary bonuses, our board of directors intends to take
the following steps to ensure direct correlation between
executive compensation and performance:
•
initiate a practice of reviewing the performance of all senior
executives at every board meeting; and
•
establish annual reviews of compensation reports for the named
executive officers.
Bonus targets are intended to be on the high end of competitive
levels to compensate for lower salaries.
In addition to our regular bonus program, our Chief Executive
Officer will also be eligible for an annual bonus through our
Profit Participation Bonus Plan, mentioned above.
Long-Term Incentive Program.Our
board of directors believes that compensation paid to executive
officers should be closely aligned with our performance on both
a short-term and long-term basis, and that their compensation
should assist us in recognizing and rewarding key executives who
profoundly affect our future success through their value-added
performances. Therefore, as discussed below under
“— Omnibus Incentive Compensation Plan”, we
will adopt a new incentive compensation plan prior to the
consummation of this offering. That plan is designed to align
management’s performance objectives with the interests of
our shareholders. Awards under our 2006 Omnibus Incentive
Compensation Plan will be administered by a committee appointed
by our board of directors consisting of at least two
non-employee, outside directors. That committee will be
authorized to, among other things, select the participants and
determine the type of awards to be made to participants, the
number of shares subject to awards and the terms, conditions,
restrictions and limitations of the awards.
Employment Agreements. A description of the
employment agreements of our current executive officers, John H.
Pelusi, Jr. at HFF LP, Gregory R. Conley and Nancy O. Goodson,
including a specific description of the components of each such
executive officer’s compensation, is set forth below.
Stock Ownership. We have not yet developed a
stock ownership policy, guidelines or requirements. The
Compensation Committee may consider adopting such a policy in
the future for all or a select portion of our executive officers.
Executive
Compensation
Summary Compensation Table. Prior to this
offering, we have operated our business with a relatively small
number of executive officers. In October 2006, Gregory R. Conley
joined us as our Chief Financial Officer. The following table
sets forth the compensation paid or accrued during fiscal 2006
for our named executive officers: John H. Pelusi, Jr., our Chief
Executive Officer; Gregory R. Conley, our Chief Financial
Officer; and Nancy O. Goodson, our Chief Operating Officer.
All Other
Bonus
Compensation
Name and Principal Position
Year
Salary($)
($)
($)
Total ($)
John H. Pelusi, Jr.
2006
400,000
2,190,552
4,841,986(1
)
7,432,538
Chief Executive Officer
Gregory R. Conley
2006
44,792
25,000
1,194(2
)
70,986
Chief Financial Officer
Nancy O. Goodson
2006
165,000
200,000
17,858(3
)
382,858
Chief Operating Officer
(1)
Includes current estimates of
Mr. Pelusi’s participation in the earnings of HFF
Holdings of Mr. Pelusi in the amount of $4,500,000. We have
historically operated as two limited liability companies (HFF
Holdings and Holdings Sub) and two limited partnerships (HFF LP
and HFF Securities, which two partnership we refer to
collectively as the Operating Partnerships), and transaction
professionals who are also members of HFF Holdings, in addition
to a salary and bonus, received compensation in the form of
participation in the earnings of HFF Holdings. The amounts
presented reflect current estimates of distributions made by
such entities in respect of the fiscal year ended
December 31, 2006, include distributions to Mr. Pelusi
in 2007 in respect of the prior fiscal year and exclude
distributions to be made to him in 2006 in respect of the prior
fiscal year. The Operating Partnerships are currently finalizing
2006 financial information and as a result this amount is
preliminary and subject to change. This amount also includes
$12,277 in health benefits, $153 in life insurance premiums,
$5,000 in a 401(k) match, $175,286 in profit participation,
$1,193 in a gross-up for taxes on parking expenses paid for
by us and $148,077 in a tax gross-up for self-employment
taxes relating to compensatory payments received by
Mr. Pelusi in his capacity as a member of HFF Holdings.
(2)
This amount includes $12 in life
insurance premiums, $1,019 in a 401(k) match and $163 in a
gross-up for taxes on parking expenses paid for by us.
(3)
This amount includes $12,705 in
health benefits, $153 in life insurance premiums and $5,000 in a
401(k) match.
Plan-Based Award Grant Policies. As discussed
below under “— Omnibus Incentive Compensation
Plan”, we will adopt a new incentive compensation plan
prior to the consummation of this offering. That plan is
designed to align management’s performance objectives with
the interests of our shareholders. Awards under our 2006 Omnibus
Incentive Compensation Plan will be administered by a committee
appointed by our board of directors consisting of at least two
non-employee, outside directors. That committee will be
authorized to, among other things, select the participants and
determine the type of awards to be made to participants, the
number of shares subject to awards and the terms, conditions,
restrictions and limitations of the awards.
Employment
Agreements
John
H. Pelusi, Jr.
Prior to this offering, we expect HFF LP to enter into an
amended and restated employment agreement with Mr. Pelusi
in respect of Mr. Pelusi’s capacity as a transaction
professional on terms and conditions substantially identical to
the employment agreements between HFF LP and our other
transaction professionals. We believe that the compensation paid
by HFF LP to these transaction professionals, including
Mr. Pelusi, relates to such transaction professionals’
services to HFF LP and not to any executive services to HFF,
Inc. Consequently, we anticipate our Compensation Committee may
not take into account the compensation HFF LP pays to those
transaction professionals, including Mr. Pelusi, when
determining our executive compensation policies, programs or
awards for those individuals. This employment agreement would
provide for salary, bonuses, commission sharing, draws against
commissions, bonuses and other income allocations as established
from time to time by Holliday GP at the direction of our board
of directors after consideration of the recommendation and
advice of the operating committee and managing member of HoldCo
LLC. Mr. Pelusi would be provided with the welfare benefits
and other fringe benefits to the same extent as those benefits
are provided to our other similarly situated employees.
Gregory
R. Conley and Nancy O. Goodson
Prior to this offering, we anticipate entering into employment
agreements with each of Gregory R. Conley and Nancy O. Goodson.
Pursuant to the terms of these respective employment agreements,
Mr. Conley will serve as our Chief Financial Officer and
Ms. Goodson will serve as our Chief Operating Officer, in
each case until such executive’s employment is terminated
by us or Mr. Conley or Ms. Goodson, as the case may be.
The compensation package of each of Mr. Conley and
Ms. Goodson is comprised of the following elements:
•
Base Salary. Each employment agreement
establishes a base salary for the first year of the agreement.
The Compensation Committee, in consultation with our chief
executive officer, will review an executive officer’s base
salary annually to ensure that the proper amount of compensation
is being paid to such executive officer commensurate with his or
her services performed for us. The Compensation Committee may
increase, but not decrease, such base salary in its sole
discretion.
•
Annual Cash Bonus. Mr. Conley and Ms. Goodson
are each eligible to receive an annual cash bonus, in an amount
up to 50% of his or her base salary, based upon the applicable
executive officer’s achievement of certain pre-determined
financial or strategic performance goals established by the
Company from time to time.
•
Long-Term Incentive Compensation. On the effective date
of the employment agreement of Mr. Conley and
Ms. Goodson, subject to the terms and conditions of the
HFF, Inc. 2006 Omnibus Incentive Compensation Plan and the
applicable award agreement with such executive officer under
such plan, each executive officer will receive a grant of
restricted Class A common stock with an aggregate fair
market value on the date of grant of $300,000. This restricted
stock grant will vest in four equal annual installments
beginning on the second anniversary of the grant.
•
Other Benefits. Mr. Conley and Ms. Goodson will
be provided with welfare benefits and other fringe benefits to
the same extent as those benefits are provided to our other
similarly situated employees.
Non-Competition,
Non-Disclosure, Non-Solicitation and Other Restrictive
Covenants
Pursuant to the employment agreement, we will enter into
non-competition, non-disclosure, non-solicitation and other
restrictive covenants with Mr. Pelusi and non-disclosure
and other restrictive covenants with Mr. Conley and
Ms. Goodson. The following are descriptions of the material
terms of each covenant.
The non-competition, non-disclosure, non-solicitation and other
restrictive covenants provide as follows:
Non-Competition. For a period of time until
the earlier of (i) five years after the initial effective
date of the employment agreement (March 29, 2006), and
(ii) the second anniversary of the termination date of
Mr. Pelusi’s employment, Mr. Pelusi may not,
directly or indirectly, own, operate, manage, participate in,
invest in, render services for or otherwise assist any entity
that engages in any competitive business that we or our
affiliates are in or are actively considering conducting during
a six month period preceding the termination date of
Mr. Pelusi’s employment. Mr. Pelusi is also
prohibited by the terms of the non-competition covenant from
directly or indirectly engaging in any activity that requires or
would inevitably require the disclosure of confidential
information of us or our affiliates. This non-competition
covenant does not apply if Mr. Pelusi is terminated by us
without “cause” (as defined in the employment
agreement).
Non-Disclosure. Each of Mr. Pelusi,
Mr. Conley and Ms. Goodson is required, whether during
or after his or her employment, to hold all “confidential
information” in trust for us and is prohibited from using
or disclosing such confidential information except as necessary
in the regular course of our business or that of our affiliates.
Non-Solicitation. For a period of time until
the earlier of (i) five years after the initial effective
date of the employment agreement, and (ii) the second
anniversary of the termination date of the
Mr. Pelusi’s employment, Mr. Pelusi may not,
directly or indirectly, solicit the business of or perform
duties for any client or prospective client of ours in respect
of any service similar to a service performed by us or our
affiliates. “Prospective client” means any person with
which we or our affiliates were in active business discussions
at any time within six months prior to the termination date of
the Mr. Pelusi’s employment. Mr. Pelusi is also
prohibited from influencing or encouraging any of our clients or
prospective clients from ceasing to do business with us during
this same time period. This non-solicitation covenant does not
apply if Mr. Pelusi is terminated by us without
“cause” (as defined in the employment agreement).
Pursuant to the employment agreement, Mr. Pelusi also may
not, directly or indirectly, knowingly solicit or encourage any
of our employees or consultants to leave their employment with
us, or hire any such employee or consultant until the earlier of
(i) five years after the initial effective date of the
employment agreement, and (ii) the second anniversary of
the termination date of Mr. Pelusi’s employment.
Non-Disparagement. Each of Mr. Pelusi,
Mr. Conley and Ms. Goodson may not, except as legally
compelled, make any statement to third parties that would have a
material adverse impact on the business or business reputation
of, as the case may be, Mr. Pelusi, Mr. Conley and
Ms. Goodson or any of us or our affiliates.
Specific Performance. In the case of any
breach of the employment agreement, including the
non-competition, non-disclosure, non-solicitation and other
restrictive covenants thereof, Mr. Pelusi, Mr. Conley,
Ms. Goodson will each agree that, in addition to any other
right we may have at law, equity or under any agreement, we will
be entitled to immediate injunctive relief and may obtain a
temporary or permanent injunction or other restraining order.
Potential
Payments Upon Termination
Mr. Conley’s and Ms. Goodson’s respective
employment agreements will contain provisions providing for
payments by us following the termination of his or her
employment by us without cause or by such executive for good
reason. Under the respective employment agreements, if
Mr. Conley or Ms. Goodson’s employment is
terminated by us without cause or by such executive with good
reason, he or she, as the case may be, will be entitled to
receive his or her base salary through the date of termination
and for a subsequent period of twelve months, the benefits
provided under our employee benefit plans and programs,
continuation of medical benefits for twelve months after the
date of termination, vesting of 50% of his or her unvested
restricted stock units or stock options, if any, and
90 days to exercise any vested stock options, if any. In
addition, any restricted stock units or stock options granted
will become 100% vested if his or her position is eliminated or
compensation is reduced following a change in control.
“Cause” is defined under the respective employment
agreements as (i) gross misconduct or gross negligence in
the performance of one’s duties as our employee,
(ii) conviction or pleading nolo contendre to a felony or a
crime involving moral turpitude, (iii) significant
nonperformance of an executive’s duties as our employee,
(iv) material violation of our established policies and
procedures, or (v) material violation of the respective
employment agreement. “Good reason” is defined under
the respective employment agreements as (i) a significant
reduction of duties or authority, (ii) a reduction in base
salary without the executive’s consent, (iii) a
reduction in the executive’s bonus opportunity, (iv) a
significant change in the location of the executive’s
principal place of employment and (v) material violation of
the respective employment agreements.
If the employment of Mr. Conley or Ms. Goodson, as the
case may be, is terminated for any reason other than by us
without cause or by such executive for good reason (including by
us with cause, by such executive without good reason, or due to
death or disability), such executive will only be entitled to
all earned, unpaid base salary and the benefits provided under
our employee benefit plans and programs. Mr. Conley or
Ms. Goodson, as the case may be, will be permitted to
exercise vested stock options for a period of 30 days
following termination due to a voluntary resignation for a
period of 30 days and for a period of one year following a
termination due to death or
disability. For a termination due to cause, Mr. Conley or
Ms. Goodson, as the case may be, will not be permitted to
exercise any of their stock options following termination.
Unvested restricted stock units and stock options will be
forfeited upon a termination for any reason.
Mr. Pelusi’s employment agreement is not expected to
provide for any potential severance payments by us upon the
termination of his employment.
Continuation of
Continuation of
Base Salary
Medical Benefits
Gregory R. Conley
Without cause or with good reason
$
215,000
—
Nancy O. Goodson
Without cause or with good reason
$
200,000
$
16,331
Omnibus
Incentive Compensation Plan
Our board of directors intends to adopt the HFF, Inc. 2006
Omnibus Incentive Compensation Plan (the “Plan”)
before the effective date of this offering. The purpose of the
Plan is to assist HFF, Inc., HFF LP and HFF Securities, and each
of their subsidiaries and affiliates in attracting and retaining
valued employees, directors and consultants by offering them a
greater stake in our success and a closer identity with it and
to encourage ownership of our stock by such individuals. The
Plan will accomplish these goals by granting to eligible
individuals awards of deferred stock, restricted stock, options,
stock appreciation rights, stock units, stock purchase rights,
cash-based awards, or other stock-based awards. The number of
shares of our Class A common stock available for awards
under the terms of the Plan is 3,500,000 (subject to adjustments
for stock splits, stock dividends and the like) which equals
approximately 9.5% of the shares of Class A common stock to
be outstanding immediately following this offering plus the
number of shares of Class A common stock for which the
partnership units HFF Holdings holds in the Operating
Partnerships are exchangeable. Upon the effective date of our
Registration Statement on Form
S-1 of which
this prospectus is a part, we anticipate making grants of 18,750
restricted stock units to Mr. Conley and
18,750 restricted stock units to Ms. Goodson, 25% of
which will vest annually beginning on the second anniversary of
the grant date. Each outside director will receive a grant of
approximately 4,688 options to purchase shares of our
Class A common stock, which will vest annually over three
years, and a grant of approximately 2,500 restricted stock
units which will be fully vested. In addition, we intend to
grant up to another approximately 137,500 restricted stock
units to certain other employees. A $1.00 increase (decrease) in
the assumed offering price of $16.00 per share would decrease
(increase) the amount of shares underlying these awards by
approximately 15,000 shares. No awards have been or will be
made under the Plan prior to this offering. The Plan imposes
limits on the awards that may be made to any individual during
any calendar year as follows: awards to any individual that are
settled or payable in stock are limited to 1,750,000 shares
and awards settled or payable in cash are limited to $28,000,000.
General. The Plan authorizes the grant of
deferred stock, restricted stock, options, stock appreciation
rights, stock units, stock purchase rights, cash-based awards,
or other stock-based awards (collectively called
“Awards”). Options granted under the Plan may be
either “incentive stock options” as defined in
section 422 of the Internal Revenue Code, or nonqualified
stock options, as determined by the Board or a committee
appointed by the Board (in either case, the
“Committee”).
Eligibility. The Plan provides that Awards may
be granted to any of our employees, directors or consultants.
Administration. The Committee which will
consist of at least two non-employee, outside directors will
administer the Plan. With respect to Awards to individuals who
are not subject to the requirements of
Rule 16b-3
of the Securities Exchange Act of 1934, as amended or
Section 162(m) of the Internal Revenue Code, the Plan may
be administered by a Secondary Committee consisting of one or
more members of the Board. Subject to the other provisions of
the Plan, the Committee has the authority to:
•
interpret the Plan and correct any defect or supply any omission
or reconcile any inconsistency in the Plan;
•
establish and amend rules and regulations relating to the Plan;
•
select the participants and determine the type of Awards to be
made to participants, the number of shares subject to Awards and
the terms, conditions, restrictions and limitations of Awards;
•
accelerate or waive any such term or condition as the Committee
may have imposed on an Award;
determine whether, and certify that, performance goals to which
the settlement of an Award is subject are satisfied;
•
allocate any portion of its responsibilities among its members,
the Chief Executive Officer or the Secondary Committee; and
•
make all other determinations it deems necessary or advisable
for the administration of the Plan.
Each Award granted under the Plan will be evidenced by a written
award agreement between the participant and us, which will
describe the Award and state the terms and conditions to which
the Award is subject. The principal terms and conditions of each
particular type of Award are described below.
If any shares subject to Award are forfeited, or if any Award
terminates, expires or lapses without being exercised, shares of
Class A common stock subject to such Award will again be
available for future grant. In addition, any shares under the
Plan that are used to satisfy award obligations under the plan
of another entity that is acquired by us will not count against
the remaining number of shares available. Finally, in the event
of certain changes in our corporate capitalization, the
Committee in its sole discretion will cancel and make
substitutions of Awards or will adjust the number and kind of
shares available for award under the Plan, the number and kind
of shares covered by Awards then outstanding under the Plan, the
aggregate number and kind of shares of Class A common stock
available under the Plan and the exercise price of outstanding
Awards.
Performance
Goals
The Committee may condition the grant and vesting or exercise of
Awards on the achievement of performance objectives, and will
have discretion to determine the specific targets with respect
to such performance objectives.
The Committee may grant Awards intended to qualify as
“performance-based compensation” to “covered
employees” within the meaning of Section 162(m) of the
Internal Revenue Code. In such event, the Committee will
designate which covered employees will receive such Awards and
the performance goals applicable thereto within the earlier of
(1) 90 days or (2) the lapse of 25% of the
performance period to which such performance goals relate.
Unless otherwise determined by the Committee, the participant
must be employed by us on the last day of the performance period
to receive payment of such Award. A participant will only
receive payment of performance-based compensation after the
completion of the performance period to the extent performance
goals are certified by the Committee as having been achieved
during the performance period.
Deferred
Stock
An Award of deferred stock is an agreement by us to deliver to
the recipient a specified number of shares of Class A
common stock at the end of a specified deferral period, subject
to the fulfillment of conditions specified in the Award
agreement. During the deferral period, an amount equal to any
dividends declared with respect to the number of shares covered
by a deferred stock award will be paid to the participant
currently, or deferred and deemed reinvested in additional
shares of deferred stock or such other investment as the
Committee may determine, in its sole discretion.
Restricted
Stock
An Award of restricted stock is a grant to the recipient of a
specified number of shares of Class A common stock which
are subject to forfeiture upon specified events during the
restriction period. Each grant of restricted stock will specify
the length of the restriction period and will include
restrictions on transfer to third parties during the restriction
period. During the restriction period, unless otherwise
determined by the Committee, the participant has the right to
receive dividends from and to vote the shares of restricted
stock. The Committee may provide, in an applicable restricted
stock Award Agreement, for a tax reimbursement cash payment to
be made to the participant in connection with the tax
consequences resulting from an Award of restricted stock.
An option is the right to purchase shares of Class A common
stock for a specified period of time at a fixed price (the
“exercise price”). Each option agreement will specify
the exercise price, the type of option, the term of the option,
the date when the option will become exercisable and any
applicable performance goals. The Committee will determine the
exercise price of an option at the time the option is granted.
The exercise price under an option will not be less than 100% of
the fair market value of Class A common stock on the date
the option is granted unless the option was granted through the
assumption of, or in substitution for, outstanding awards
previously granted by an entity acquired by us. The term of an
option granted under the Plan will be no longer than ten years
from the date of grant or five years in the case of an Incentive
Stock Option granted to a Ten Percent Shareholder. No option may
be exercised more than ten years from the grant date.
Stock
Appreciation Rights
A stock appreciation right (“SAR”) entitles the
recipient to receive, upon exercise of the SAR, the increase in
the fair market value of a specified number of shares of
Class A common stock from the date of the grant of the SAR
to the date of exercise, payable in cash, shares of Class A
common stock, or any combination thereof as specified by the
Committee. Any grant may specify a waiting period or periods
before the SAR may become exercisable and permissible dates or
periods on or during which the SAR will be exercisable. In
addition, the Committee may grant limited stock appreciation
rights (“LSARs”) that are exercisable upon the
occurrence of specified contingent events. Such LSARs may
provide for a different method of determining the increase in
the fair market value of shares of Class A common stock,
may provide for payment only in cash, and may provide that any
related Awards are not exercisable while the LSARs are
exercisable. No SAR (including LSARs) may be exercised more than
ten years from the grant date.
Stock
Units
A stock unit is a book-entry unit with a value equal to one
share of Class A common stock. Payment of stock units may
be made either by delivery of shares to the participant or
payment in cash equal to the fair market value of the shares of
Class A common stock to which the award relates multiplied
by the number of stock units granted. The Committee may
condition the vesting of stock units upon performance goals or
continued service of the participant. The Committee will
determine on what terms and conditions the participant will be
entitled to receive current or deferred payments of cash,
Class A common stock or other property corresponding to
dividends payable on Class A common stock prior to the
payment of stock units.
Stock
Purchase Awards
A stock purchase award entitles the participant to purchase a
set number of shares of Class A common stock at a price
equal to the price established by the Committee. Upon purchase,
a participant will be a shareholder, entitled to exercise voting
rights and receive dividends.
Other
Stock-Based Awards
The Committee, in its sole discretion, may grant or sell other
stock-based awards, which will be subject to the terms and
conditions as the Committee will determine, including without
limitation performance goals. Such other stock-based awards may
be granted alone or in addition to any other awards and may be
settled in cash or shares of Class A common stock (or a
combination thereof), as determined by the Committee.
Cash-Based
Awards
The Committee, in its sole discretion, may grant cash-based
awards, which will be subject to the terms and conditions as the
Committee will determine, including performance goals. Such
cash-based awards will specify a payment amount or payment range
as determined by the Committee.
The purpose of the Holliday Fenoglio Fowler, L.P. Profit
Participation Bonus Plan and the HFF Securities, L.P. Profit
Participation Bonus Plan (each, a “Profit Participation
Bonus Plan”) is to attract, retain and provide incentives
to employees, and to promote the financial success, of HFF LP
and HFF Securities, respectively.
Applicability of Plan to Designated Offices. A
Profit Participation Bonus Plan shall apply to each separate
office or line of business (each, a “Business Line”)
of HFF LP and HFF Securities (each, an “Office”)
designated by the Managing Member of HFF LP (the “Managing
Member”). The Managing Member, currently John H. Pelusi,
Jr., is elected by certain senior officers of HFF LP pursuant to
the HFF LP partnership agreement.
Bonus Pool Calculation. With respect to each
Office or Business Line to which a Profit Participation Bonus
Plan applies and for each calendar year, if a fourteen and
one-half percent (14.5%) or greater Profit Margin is generated
by such Office or Business Line, then an amount equal to fifteen
percent (15%) of the Adjusted Operating Income generated by such
Office or Business Line, shall comprise the bonus pool. For
purposes of each Profit Participation Bonus Plan, “Profit
Margin” means the net operating income of such Office or
Business Line as a percentage of the revenue of such Office or
Business Line and “Adjusted Operating Income” means
the net operating income of such Office or Business Line
adjusted for depreciation and amortization, all as determined in
accordance with U.S. Generally Accepted Accounting Principles.
Allocation of Bonus Pool. Each full-time or
part-time employee of HFF LP and HFF Securities is eligible to
receive a bonus payment under the applicable Profit
Participation Bonus Plans (a “Profit Participation
Bonus”) with respect to services performed during the
calendar year.
For each calendar year, the head of each Office or Business Line
of HFF LP and HFF Securities, after consultation with the
Managing Member, shall select the recipients of Profit
Participation Bonuses and shall determine the allocation of the
bonus pool among the eligible recipients.
Payment of Profit Participation. Subject to
any applicable federal, state, local or other withholding taxes,
Profit Participation Bonuses shall be paid in accordance with
each Office’s or Business Line’s allocation plan on
the last business day of the year in which the Profit
Participation Bonus is earned, or, if determined by the Managing
Member with respect to any Office or Business Line, on or before
March 15 of the year following the year with respect to which
the Profit Participation Bonus was earned.
Administration. The Profit Participation Bonus
Plans shall be administered by the Managing Member. Any action
of the Managing Member in administering the Profit Participation
Bonus Plans shall be final, conclusive and binding on all
persons. Subject to the provisions of the Profit Participation
Bonus Plans, the Managing Member has the authority to:
•
determine the effect upon each Profit Participation Bonus Plan
and the Profit Participation Bonuses, if any, of any stock
dividend, recapitalization, forward stock split or reverse stock
split, reorganization, division, merger, consolidation,
spin-off, combination, repurchase or share exchange,
extraordinary or unusual cash distribution or other similar
corporate transaction or event,
•
construe and interpret the Profit Participation Bonus Plans and
to make all other determinations, including determinations as to
the eligibility of any employee, as he or she may deem necessary
or advisable for the administration of the Profit Participation
Bonus Plans,
•
correct any defect or supply any omission or reconcile any
inconsistency in the Profit Participation Bonus Plans,
•
adopt, amend and rescind such rules and regulations as, in his
or her opinion, may be advisable in the administration of the
Profit Participation Bonus Plans,
•
require any person to furnish such reasonable information as
requested for the purpose of the proper administration of the
Profit Participation Bonus Plans as a condition to receiving any
benefits under the Profit Participation Bonus Plans, and
•
prepare and distribute information explaining the Profit
Participation Bonus Plans to employees.
HFF LP and HFF Securities, respectively, shall indemnify and
hold harmless the Managing Member from and against any and all
liabilities, costs and expenses incurred by the Managing Member
as a result of any act or omission to act in connection with the
performance of the Managing Member’s duties,
responsibilities and obligations under the applicable Profit
Participation Bonus Plan, to the maximum extent permitted by
law, other than such liabilities, costs and expenses as may
result from the gross negligence, bad faith, willful misconduct
or criminal acts of the Managing Member.
Amendment or Termination of Plans. Each Profit
Participation Bonus Plan may only be amended or terminated
through a writing executed by each limited partner and general
partner of the HFF LP and HFF Securities, as the case may be.
The following table sets forth information regarding the
beneficial ownership of our Class A common stock and
Class B common stock, and of partnership units in the
Operating Partnerships, by (1) each person known to us to
beneficially own more than 5% of our voting securities,
(2) each of our directors, (3) each of our named
executive officers and (4) all directors and executive
officers as a group.
The number of shares and partnership units of the Operating
Partnerships outstanding and percentage of beneficial ownership
before the offering of Class A common stock set forth below
are based on the number of shares and partnership units in the
Operating Partnerships to be issued and outstanding prior to the
offering of Class A common stock after giving effect to the
other elements of the Reorganization Transactions. The number of
shares and partnership units in the Operating Partnerships and
percentage of beneficial ownership after this offering set forth
below are based on shares and partnership units of the Operating
Partnerships to be issued and outstanding immediately after this
offering.
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission.
Partnership Units
in each of the Operating Partnerships
Shares of Class A Common Stock Beneficially Owned(b)
Beneficially Owned(b)
Percentage
Percentage
Percentage
Percentage
of
After
After
Percentage
of
Combined
Percentage
Percentage
the
the
of
Combined
Voting
After the
After the
Offering
Offering of
Combined
Voting
Power
Offering of
Offering of
of Class A
Class A
Voting
Power
After the
Class A
Class A
Percentage
Common
Common
Power of
After the
Offering
Percentage
Common
Common
Prior to
Stock
Stock
Number of
HFF, Inc.
Offering
Assuming
Prior to
Stock
Stock
the
Assuming
Assuming
Shares of
Prior
Assuming
the
the
Assuming the
Assuming the
Offering
the Under-
the
Class B
to the
the Under-
Under-
Offering of
Underwriters’
Underwriters’
of
writers’
Underwriters’
Common
Offering
writers’
writers’
Class A
Option Is
Option is
Class A
Option is
Option is
Stock
of Class A
Option is
Option is
Name and address of
Common
Not
Exercised in
Common
Not
Exercised in
Beneficially
Common
Not
Exercised
Beneficial Owner(a)
Number
Stock
Exercised
Full
Number
Stock
Exercised
Full
Owned(c)
Stock
Exercised
in Full
HFF Holdings LLC(d)
—
—
—
—
22,500,000
(e)
100
%
61
%
55
%
1
—
61
%
55
%
John P. Fowler(d)
—
—
—
—
—
—
—
—
—
—
—
—
Mark D. Gibson(d)
—
—
—
—
—
—
—
—
—
—
—
—
John Z. Kukral(f)
7,188
—
*
*
—
—
—
—
—
—
*
*
Deborah H. McAneny(f)
7,188
—
*
*
—
—
—
—
—
—
*
*
George L. Miles, Jr.(f)
7,188
—
*
*
—
—
—
—
—
—
*
*
John H. Pelusi, Jr.(d)
—
—
—
—
—
—
—
—
—
—
—
—
Lenore M. Sullivan(f)
7,188
—
*
*
—
—
—
—
—
—
*
*
Joe B. Thornton, Jr.(d)
—
—
—
—
—
—
—
—
—
—
—
—
McHenry T. Tichenor, Jr.(f)
7,188
—
*
*
—
—
—
—
—
—
*
*
Gregory R. Conley(g)
18,750
—
*
*
—
—
—
—
—
100
%(h)
—
—
Nancy O. Goodson(g)
18,750
—
*
*
—
—
—
—
—
—
*
*
Directors and executive
officers as a group
73,440
—
*
*
—
—
—
—
—
100
%
*
*
*
Less than 1%.
(a)
The address of each beneficial owner in the table above is: c/o
HFF, Inc., 429 Fourth Avenue, Suite 200, Pittsburgh, PA15219.
(b)
The partnership units of the Operating Partnerships are
exchangeable for shares of Class A common stock of HFF,
Inc. on the basis of two partnership units, one of each
Operating Partnership, for one share of Class A common
stock, subject to customary conversion rate adjustments for
stock splits, stock dividends and reclassifications. Pursuant to
contractual provisions in the HFF Holdings Operating Agreement,
HFF Holdings’ right to exchange its partnership units in
the Operating Partnerships for shares of our Class A common
stock is exercisable on the second, third, fourth and fifth
anniversaries of this offering as described in “Shares
Eligible for Future Sale.” Beneficial ownership of
partnership units in the Operating Partnerships reflected in
this table has not also been reflected as beneficial ownership
of the shares of the Class A common stock of HFF, Inc. for
which such units may be exchanged.
(c)
Holders of our Class B common stock (other than HFF, Inc.
or any of its subsidiaries) will be entitled to a number of
votes that is equal to the total number of shares of
Class A common stock for which the partnership units that
HFF Holdings holds in the Operating Partnerships are
exchangeable.
The voting right of HFF Holdings as the holder of
Class A common stock and/or Class B common stock is
exercised by HFF Holdings’ managing member, currently
John H. Pelusi, Jr., upon the approval of 65% or more of
the interests held by the members of HFF Holdings, of which
there are presently approximately 40. No individual holds
interests sufficient to approve or block approval of any vote.
Messrs. Fowler, Gibson, Thornton and Pelusi are each a
member of HFF Holdings and currently serve on its operating
committee. Each member of HFF Holdings holds an ownership
interest in HFF Holdings which in turn holds partnership
units of the Operating Partnerships.
(e)
If the underwriters exercise in full their options to purchase
additional shares, HFF Holdings will hold 20,355,000 partnership
units in each of the Operating Partnerships.
(f)
Includes grants of approximately 4,688 options to purchase
shares of our Class A common stock, which will vest
annually over three years, and a grant of approximately 2,500
restricted stock units, which will be fully vested, that will be
made upon the effective date of our Registration Statement on
Form S-1
of which this prospectus is a part.
(g)
Includes grants of 18,750 restricted stock units to
Mr. Conley and 18,750 restricted stock units to
Ms. Goodson that will be made upon the effective date of
our Registration Statement on
Form S-1
of which this prospectus is a part, 25% of which restricted
stock units will vest annually beginning at the second
anniversary of the grant date.
(h)
Prior to the consummation of this offering and the
Reorganization Transactions, Mr. Conley holds one share of
common stock of HFF, Inc. In connection with the consummation of
this offering and the Reorganization Transactions, this share
will be extinguished.
The agreements described below are each filed as an exhibit to
the registration statement of which this prospectus forms a
part, and the following descriptions of each of these agreements
are qualified by reference thereto.
Reorganization
Transactions
Upon the consummation of this offering, pursuant to a sale and
merger agreement, HFF, Inc. will contribute the net proceeds
raised in this offering to HoldCo LLC, its wholly-owned
subsidiary. In consideration for the net proceeds from this
offering and one share of Class B common stock, HFF
Holdings will sell all of the shares of Holliday GP, which is
the sole general partner of each of the Operating Partnerships,
and approximately 39% of the partnership units in each of the
Operating Partnerships (including partnership units in the
Operating Partnerships held by Holliday GP), or approximately
45% of the partnership units in each of the Operating
Partnerships (including partnership units in the Operating
Partnerships held by Holliday GP) if the underwriters exercise
in full their option to purchase additional shares, to HoldCo
LLC. HFF Holdings will use approximately $56.3 million of
the sale proceeds to repay all outstanding borrowings under HFF
LP’s credit agreement. Accordingly, we will not retain any
of the proceeds from this offering. In addition to cash, HFF
Holdings will also receive an exchange right that will permit
HFF Holdings to exchange interests in the Operating Partnerships
for shares of our Class A common stock (the “Exchange
Right”) and rights under a tax receivable agreement between
HFF, Inc. and HFF Holdings (the “TRA”).
Tax
Receivable Agreement
As described in “Organizational Structure,”
partnership units in HFF LP and HFF Securities held by Holdings
Sub, HFF Holdings’ wholly-owned subsidiary, will be sold to
HoldCo LLC, our wholly-owned subsidiary, for cash raised in the
initial public offering. In the future, partnership units in HFF
LP and HFF Securities held by HFF Holdings through Holdings Sub
may be exchanged by HFF Holdings for shares of our Class A
common stock on the basis of two partnership units, one of each
Operating Partnership, for one share of Class A common
stock, subject to customary conversion rate adjustments for
stock splits, stock dividends and reclassifications. HFF LP and
HFF Securities intend to have an election under Section 754
of the Internal Revenue Code effective for the taxable year in
which the initial sale of partnership units occurs and for each
taxable year in which an exchange of partnership units for
shares occurs. The initial sale is expected to produce (and
later exchanges may produce) increases to the tax basis of the
assets owned by HFF LP and HFF Securities at the time of the
initial public offering (and at the time of each exchange of
partnership units). These anticipated increases in tax basis
would be allocated to us and would likely reduce the amount of
tax that we would otherwise be required to pay in the future.
We intend to enter into a tax receivable agreement with HFF
Holdings that will provide for the payment by us to HFF Holdings
of 85% of the amount of the cash savings, if any, in
U.S. federal, state and local income tax that we actually
realize as a result of these 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 would retain the remaining 15% of cash savings, if
any, in income tax that we realize. For purposes of the tax
receivable agreement, cash savings in income tax will be
computed by comparing our actual income tax liability to the
amount of such taxes that we 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 us as a result of the initial
sale and later exchanges and had we not entered into the tax
receivable agreement. The term of the tax receivable agreement
will commence upon consummation of this offering and will
continue until all such tax benefits have been utilized or have
expired.
Although we are not aware of any issue that would cause the IRS
to challenge the tax basis increases or other tax benefits
arising under the tax receivable agreement, HFF Holdings will
not reimburse us for any payments previously made if such basis
increases or other benefits were later not allowed. As a result,
in such circumstances we could make payments to HFF Holdings
under the tax receivable agreement in excess of our actual cash
tax savings. While the actual amount and timing of any payments
under this agreement will vary depending upon a number of
factors, including the timing of exchanges, the extent to which
such exchanges result in taxable gain and the amount, character
and timing of our income, we expect that during the term of the
tax receivable agreement, the
payments that we may make to HFF Holdings could be substantial.
Assuming no material changes in the relevant tax law and that we
earn sufficient taxable income to realize the full tax benefit
of the increased amortization of our assets, we expect that
future payments to HFF Holdings in respect of the initial sale
to aggregate $90.4 million and range from approximately
$4.1 million to $10.6 million per year over the next
15 years. Future payments to HFF Holdings in respect of
subsequent exchanges would be in addition to these amounts and
are expected to be substantial.
We will enter into a registration rights agreement with HFF
Holdings pursuant to which we will be required to register under
the Securities Act, under certain circumstances and subject to
certain restrictions, shares of our Class A common stock
(and other securities convertible into or exchangeable or
exercisable for shares of our Class A common stock) held or
acquired by HFF Holdings, its affiliates and certain of its
transferees. Such securities registered under any registration
statement will be available for sale in the open market unless
restrictions apply.
HFF LP
Partnership Agreement
As a result of the Reorganization Transactions, HFF, Inc. will,
through HFF LP and HFF Securities, operate our business. Below
is a brief summary of the HFF LP partnership agreement,
qualified in all respects by reference to the form of agreement
attached hereto.
Purpose
The partnership agreement provides that HFF LP’s purpose
will be to engage in any lawful act or activity for which
limited partnerships may be formed under the Texas Revised
Limited Partnership Act.
Management
and Control
The partnership agreement further provides that Holliday GP, as
general partner, will manage and control the business and
affairs of HFF LP. As noted above, the shares of Holliday GP are
wholly-owned by HoldCo LLC, a wholly-owned subsidiary of HFF,
Inc.
In exercising such control, Holliday GP will act at the
direction of the managing member of HoldCo LLC who will be
appointed by the Board of Directors of HFF, Inc. Holliday GP
will also consult with and consider the non-binding
recommendations of the operating committee of HoldCo LLC which
will be appointed by certain senior officers of the Operating
Partnerships (and will be comprised of 10 employees of the
Operating Partnerships (or either of them)). Additionally, a
managing member and operating committee will be established in
HFF LP. The managing member of HFF LP will be selected in the
same manner as the HoldCo LLC operating committee, and the HFF
LP operating committee will be identical to the HoldCo LLC
operating committee. In performing its duties as general partner
of HFF LP, Holliday GP will consult with and consider the
non-binding recommendations of the HFF LP managing member and
HFF LP operating committee. Additionally, such senior officers,
HFF LP managing member and HFF LP operating committee will
participate in the preparation of the annual budget for
submission to Holliday GP as a non-binding recommendation.
Holliday GP will delegate certain control over HFF LP to certain
officers of HFF LP. The initial officers of HFF LP will be
identical to the officers in place prior to the closing of the
Reorganization Transactions.
Units;
Percentage Interests
Each partner in HFF LP will be issued units representing
interests in HFF LP, and the percentage interest of each partner
will be determined based on the ratio of the number of units
held by such partner to the number of
outstanding units in the partnership. The units to be issued to
the partners upon the closing of the Reorganization Transactions
are as set forth below:
Name
Units
Percentage Interest
Holliday GP
368,000
1
%
HoldCo LLC
13,932,000
38
%
Holdings Sub
22,500,000
61
%
In the event a share of Class A common stock is redeemed,
repurchased, acquired, cancelled or terminated by HFF, Inc., one
unit of HFF LP registered in the name of HoldCo LLC (or in the
event HoldCo LLC no longer holds units, Holliday GP) will
automatically be cancelled for no consideration. Similarly, in
the event HFF, Inc. issues a share of Class A common stock
(other than in connection with the initial public offering), the
net proceeds received by HFF, Inc. with respect to such share
will be concurrently transferred to HoldCo LLC for transfer to
HFF LP and HFF Securities in such manner as Holliday GP shall
determine, each of which will in return issue to HoldCo LLC one
unit in such Operating Partnership.
In the event any member of HFF Holdings forfeits a membership
interest in HFF Holdings in accordance with the HFF Holdings
operating agreement (i.e., as the result of being removed for
cause under the HFF Holdings operating agreement or competing or
soliciting in violation of the HFF Holdings operating
agreement), the HFF LP partnership agreement provides that
Holdings Sub will simultaneously forfeit a portion of the units
it then holds in HFF LP (equal to such forfeiting member’s
indirect ownership interest in HFF LP).
Distributions;
Tax Distributions
Holliday GP has the right to determine when distributions will
be made to the partners of HFF LP and the amount of any such
distribution. All distributions shall be made to the partners
pro rata in accordance with their respective percentage
ownership interests in HFF LP.
The holders of the partnership units in HFF LP, including HoldCo
LLC and Holliday GP, will incur U.S. federal, state and
local income taxes on their proportionate share of any net
taxable income of HFF LP. Net profits and net losses of HFF LP
will generally be allocated to the partners pro rata in
accordance with their respective percentage interests (as
determined in accordance with the HFF LP partnership agreement).
The partnership agreement will provide for cash distributions to
the partners of HFF LP if Holliday GP determines that the
taxable income of HFF LP will give rise to taxable income for
its partners (or their constituent members). Generally these tax
distributions will be computed based on our estimate of the net
taxable income of HFF LP allocable to each partner multiplied by
an assumed rate equal to the highest effective marginal combined
U.S. federal, state and local income tax rate for the
applicable year prescribed for an individual or corporate
resident in New York, New York assuming such taxpayer:
(a) had no itemized deductions or tax credits, (b) was
not subject to the alternative minimum tax, the self employment
tax or other U.S. federal (or comparable state or local)
income taxes not imposed under sections 1 or 11 of the
Internal Revenue Code, and (c) was subject to income tax
only in the jurisdictions where the taxpayer resides or is
commercially domiciled. The assumed tax rate will be the same
for all partners of HFF LP.
Transfers
The partnership agreement requires that each limited partner
obtain Holliday GP’s consent to any sale, assignment,
pledge, transfer, distribution or other disposition of any unit.
Holliday GP may grant or withhold such consent in its sole
discretion, provided that the partnership agreement permits
certain transfers including (a) transfers contemplated
under and in accordance with the Exchange Right,
(b) transfers by the members in HFF Holdings of their
interests (i) by devise or descent or by operation of law
upon the death or disability of a member of HFF Holdings
and (ii) to (x) immediate family members or trusts
established for the benefit of such family members for estate
planning purposes, (y) a charity for gratuitous purposes,
or (z) as otherwise expressly permitted under the HFF Holdings
operating agreement, and (c) transfers of shares of
Class A common stock and Class B common stock of HFF,
Inc.
HFF LP may be dissolved only upon the occurrence of the
voluntary agreement of all partners, any act constituting
dissolution under applicable law or certain other events
specified in the partnership agreement. Upon dissolution, HFF LP
will be liquidated and the proceeds from any liquidation will be
applied and distributed in the following manner: (a) first,
to creditors (including to the extent permitted by law,
creditors who are partners) in satisfaction of the liabilities
of the Partnership, (b) second, to the setting up of any
reserves which Holliday GP may determine to be reasonably
necessary for any contingent liability of HFF LP and
(c) third, to the partners in proportion to their
respective percentage interests.
HFF
Securities Partnership Agreement
As a result of the Reorganization Transactions, HFF, Inc. will,
through HFF LP and HFF Securities, operate our business. Below
is a brief summary of the HFF Securities partnership agreement,
qualified in all respects by reference to the form of agreement
attached hereto.
Purpose
The partnership agreement provides that HFF Securities’
purpose will be to act as a registered broker-dealer in
connection with its efforts, on behalf of its clients, to
(a) raise equity capital for discretionary, commingled real
estate funds marketed to institutional investors, (b) raise
equity capital for real estate projects, (c) raise equity
capital from institutional investors to fund future real estate
acquisitions, recapitalizations, developments, debt investments
and other real estate-related strategies, and (d) execute
private placements of securities in real estate companies. In
addition, the partnership agreement provides that HFF Securities
will provide advisory services on various project or
entity-level strategic assignments such as mergers and
acquisitions, sales and divestitures, recapitalizations and
restructurings, privatizations, management buyouts, and
arranging joint ventures for specific real estate strategies;
and will be entitled to engage in any and all purposes and
activities that are ancillary thereto as permitted under the
Delaware Revised Uniform Limited Partnership Act, Delaware Code
Annotated.
Management
and Control
The partnership agreement of HFF Securities provides that
Holliday GP, as general partner will manage and control the
business and affairs of HFF Securities. Holliday GP will
exercise such management and control in accordance with
applicable securities laws. As noted above, the shares of
Holliday GP are wholly-owned by HoldCo LLC, which is a
wholly-owned subsidiary of HFF, Inc.
Holliday GP will delegate certain control over HFF Securities to
certain officers of HFF Securities, including, without
limitation, one or more executive managing directors, senior
managing directors, directors, supervisory principals and
registered representatives. The officers of HFF Securities
following the Reorganization Transactions will be identical to
the officers in place prior to the closing of the reorganization
transactions.
Each supervisory principal is required to qualify with the NASD
Series 7 and 24 examinations. The executive managing
directors and supervisory principals are responsible for, among
other things, preparing HFF Securities’ annual budget and
business plan, which after approval by the senior officers of
the Operating Partnerships and the Holdco Operating Committee,
will be submitted to the General Partner as a non-binding
recommendation.
Units;
Percentage Interests
Each partner in HFF Securities will be issued units representing
interests in HFF Securities, and the percentage interest of each
partner will be determined based on the ratio of the number of
units held by such partner to the number of outstanding units in
the partnership. The units and associated percentage interests
to be issued to the partners upon the closing of the
Reorganization Transactions are as set forth below:
In the event a share of Class A common stock is redeemed,
repurchased, acquired, cancelled or terminated by HFF, Inc., one
unit of HFF Securities registered in the name of HoldCo LLC (or
in the event Holdco LLC no longer holds units, Holliday GP) will
automatically be cancelled for no consideration. Similarly, in
the event HFF, Inc. issues a share of Class A common stock
(other than in connection with the initial public offering), the
net proceeds received by HFF, Inc. with respect to such share
will be concurrently transferred to HoldCo LLC for transfer to
HFF Securities and HFF LP in such manner as Holliday GP shall
determine, each of which will in return issue to HoldCo LLC one
unit in such Operating Partnership.
In the event any member of HFF Holdings forfeits a membership
interest in HFF Holdings in accordance with the HFF Holdings
operating agreement (i.e., as the result of being removed for
cause under the HFF Holdings operating agreement or competing or
soliciting in violation of the HFF Holdings operating
agreement), the partnership agreement provides that Holdings Sub
will simultaneously forfeit a portion of the units it then holds
in HFF Securities (equal to such forfeiting member’s
indirect ownership interest in HFF Securities).
Distributions;
Tax Distributions
Holliday GP has the right to determine when distributions will
be made to the partners of HFF Securities and the amount of
any such distribution. All distributions will be made to the
partners pro rata in accordance with their respective percentage
ownership interests (as evidenced by units or fractional units
held by each partner) in HFFS.
The holders of the partnership units in HFF Securities,
including HoldCo LLC and Holliday GP, will incur
U.S. federal, state and local income taxes on their
proportionate share of any net taxable income of HFFS. Net
profits and net losses of HFF Securities will generally be
allocated to the partners pro rata in accordance with their
respective percentage interests (as determined pursuant to the
HFF Securities partnership agreement). The partnership
agreement will provide for cash distributions to the partners of
HFF Securities if Holliday GP determines that the taxable
income of HFF Securities will give rise to taxable income
for its partners (or their constituent members). Generally these
tax distributions will be computed based on our estimate of the
net taxable income of HFF Securities allocable to each
partner multiplied by an assumed rate equal to the highest
effective marginal combined U.S. federal, state and local
income tax rate prescribed for an individual or corporate
resident in New York, New York assuming such taxpayer:
(a) had no itemized deductions or tax credits, (b) was
not subject to the alternative minimum tax, the self employment
tax or other U.S. federal (or comparable state or local)
income taxes not imposed under sections 1 or 11 of the
Internal Revenue Code, and (c) was subject to income tax
only in the jurisdictions where the taxpayer resides or is
commercially domiciled. The assumed tax rate will be the same
for all partners of HFF Securities.
Transfers
The partnership agreement requires that each limited partner
obtain Holliday GP’s consent to any sale, assignment,
pledge, transfer, distribution or other disposition of any unit.
Holliday GP may grant or withhold such consent in its sole
discretion, provided that the partnership agreement permits
certain transfers including (a) transfers contemplated
under and in accordance with the Exchange Right,
(b) transfers by members in HFF Holdings of their interests
(i) by devise or descent or by operation of law upon the
death or disability of a member of HFF Holdings and (ii) to
(x) immediate family members or trusts established for the
benefit of such family members for estate planning purposes,
(y) a charity for gratuitous purposes, or (z) as
otherwise expressly permitted under the HFF Holdings operating
agreement, and (c) transfers of shares of Class A
common stock and Class B common stock.
Dissolution
HFF Securities may be dissolved only upon the occurrence of
the voluntary agreement of all partners, any act constituting
dissolution under applicable law or certain other events
specified in the partnership agreement. Upon dissolution,
HFF Securities will be liquidated and the proceeds from any
liquidation will be applied and distributed in the following
manner: (a) first, to creditors (including to the extent
permitted by law, creditors who are partners) in satisfaction of
the liabilities of the Partnership, (b) second, to the
setting up of any reserves which Holliday GP may determine to be
reasonably necessary for any contingent liability of
HFF Securities and (c) third, to the partners in
proportion to their respective percentage interests.
The following description of our capital stock as it will be in
effect upon the consummation of this offering is a summary and
is qualified in its entirety by reference to our certificate of
incorporation and bylaws, the forms of which are filed as
exhibits to the registration statement of which this prospectus
forms a part, and by applicable law.
Upon consummation of this offering, our authorized capital stock
will consist of 175,000,000 shares of Class A common
stock, par value $0.01 per share, 1 share of
Class B common stock, par value $0.01 per share and
25,000,000 shares of preferred stock. Unless our board of
directors determines otherwise, we will issue all shares of our
capital stock in uncertificated form.
Common
Stock
Class A
common stock
Holders of our Class A common stock are entitled to one
vote for each share held of record on all matters submitted to a
vote of stockholders.
Holders of our Class A common stock are entitled to receive
dividends when and if declared by our board of directors out of
funds legally available therefor, subject to any statutory or
contractual restrictions on the payment of dividends and to any
restrictions on the payment of dividends imposed by the terms of
any outstanding preferred stock.
Upon our dissolution or liquidation or the sale of all or
substantially all of our assets, after payment in full of all
amounts required to be paid to creditors and to the holders of
preferred stock having liquidation preferences, if any, the
holders of our Class A common stock will be entitled to
receive pro rata our remaining assets available for distribution.
Holders of our Class A common stock do not have preemptive,
subscription, redemption or conversion rights.
Subject to the transfer restrictions set forth in the Operating
Partnerships’ partnership agreements, HFF Holdings may
exchange partnership units in the Operating Partnerships (other
than those held by us) for shares of our Class A common
stock on the basis of two partnership units (one of each
Operating Partnership) for one share of Class A common
stock, subject to customary conversion rate adjustments for
stock splits, stock dividends and reclassifications.
Class B
common stock
Holders of our Class B common stock (other than HFF, Inc.
or any of its subsidiaries) will be entitled to a number of
votes that is equal to the total number of shares of
Class A common stock for which the partnership units that
HFF Holdings holds in the Operating Partnerships are
exchangeable.
Holders of our Class A common stock and Class B common
stock will vote together as a single class on all matters
presented to our stockholders for their vote or approval, except
with respect to the amendment of certain provisions of the
certificate of incorporation or as otherwise required by
applicable law.
Holders of our Class B common stock will not have any right
to receive dividends or to receive a distribution upon a
liquidation or winding up of HFF, Inc.
Preferred
Stock
Our certificate of incorporation authorizes our board of
directors to establish one or more series of preferred stock
(including convertible preferred stock). Unless required by law
or by any stock exchange, the authorized shares of preferred
stock will be available for issuance without further action by
you. Our board of directors is able to determine, with respect
to any series of preferred stock, the terms and rights of that
series, including:
•
the designation of the series;
•
the number of shares of the series, which our board may, except
where otherwise provided in the preferred stock designation,
increase or decrease, but not below the number of shares then
outstanding;
whether dividends, if any, will be cumulative or non-cumulative
and the dividend rate of the series;
•
the dates at which dividends, if any, will be payable;
•
the redemption rights and price or prices, if any, for shares of
the series;
•
the terms and amounts of any sinking fund provided for the
purchase or redemption of shares of the series;
•
the amounts payable on shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or
winding-up
of the affairs of our company;
•
whether the shares of the series will be convertible into shares
of any other class or series, or any other security, of our
company or any other entity, and, if so, the specification of
the other class or series or other security, the conversion
price or prices or rate or rates, any rate adjustments, the date
or dates as of which the shares will be convertible and all
other terms and conditions upon which the conversion may be made;
•
restrictions on the issuance of shares of the same series or of
any other class or series; and
•
the voting rights, if any, of the holders of the series.
We could issue a series of preferred stock that could, depending
on the terms of the series, impede or discourage an acquisition
attempt or other transaction that some, or a majority, of you
might believe to be in your best interests or in which you might
receive a premium for your Class A common stock over the
market price of the Class A common stock.
Authorized
but Unissued Capital Stock
Delaware law does not require stockholder approval for any
issuance of authorized shares. However, the listing requirements
of the New York Stock Exchange, which would apply so long as the
Class A common stock remains listed on the New York Stock
Exchange, require stockholder approval of certain issuances
equal to or exceeding 20% of the then outstanding voting power
or then outstanding number of shares of Class A common
stock. These additional shares may be used for a variety of
corporate purposes, including future public offerings, to raise
additional capital or to facilitate acquisitions.
One of the effects of the existence of unissued and unreserved
common stock or preferred stock may be to enable our board of
directors to issue shares to persons friendly to current
management, which issuance could render more difficult or
discourage an attempt to obtain control of our company by means
of a merger, tender offer, proxy contest or otherwise, and
thereby protect the continuity of our management and possibly
deprive the stockholders of opportunities to sell their shares
of common stock at prices higher than prevailing market prices.
Anti-Takeover
Effects of Provisions of Delaware Law
We are subject to Section 203 of the General Corporation
Law of Delaware. Subject to certain exceptions, Section 203
prevents a publicly held Delaware corporation from engaging in a
“business combination” with any “interested
stockholder” for three years following the date that the
person became an interested stockholder, unless the interested
stockholder attained such status with the approval of our board
of directors or held 85% of our voting stock at the time of the
consummation of the transaction in which such person attained
the status of an “interested stockholder” or unless
the business combination is approved in a prescribed manner. A
“business combination” includes, among other things, a
merger, consolidation, stock sale or any sale of more than 10%
of our assets involving us and the “interested
stockholder,” or any other transaction resulting in a
financial benefit to the “interested stockholder.” In
general, an “interested stockholder” is any entity or
person (other than the corporation and any direct or indirect
majority-owned subsidiary of the corporation) that beneficially
owns 15% or more of our outstanding voting stock or any entity
or person affiliated with or controlling or controlled by any
such entity or person.
Under certain circumstances, Section 203 makes it more
difficult for a person who would be an “interested
stockholder” to effect various business combinations with a
corporation for a three-year period. The provisions of
Section 203 may encourage companies interested in acquiring
our company to negotiate in advance with our board of directors
because the stockholder approval requirement would be avoided if
our board of directors approves
either the business combination or the transaction that results
in the stockholder becoming an interested stockholder. These
provisions also may make it more difficult to accomplish
transactions that stockholders may otherwise deem to be in their
interests.
Anti-Takeover
Effects of Provisions of the Amended and Restated Certificate of
Incorporation and Bylaws
Certain provisions of our certificate of incorporation and
bylaws could have anti-takeover effects. These provisions are
intended to enhance the likelihood of continuity and stability
in the composition of our corporate policies formulated by our
board of directors. In addition, these provisions also are
intended to ensure that our board of directors will have
sufficient time to act in what our board of directors believes
to be in the best interests of us and our stockholders. These
provisions also are designed to reduce our vulnerability to an
unsolicited proposal for our takeover that does not contemplate
the acquisition of all of our outstanding shares or an
unsolicited proposal for the restructuring or sale of all or
part of us. The provisions are also intended to discourage
certain tactics that may be used in proxy fights. However, these
provisions could delay or frustrate the removal of incumbent
directors or the assumption of control of us by the holder of a
large block of common stock, and could also discourage or make
more difficult a merger, tender offer, or proxy contest, even if
such event would be favorable to the interest of our
stockholders.
Classified Board of Directors. Upon the
consummation of this offering, our certificate of incorporation
and bylaws will provide for our board of directors to be divided
into three classes, with staggered three-year terms. Only one
class of directors will be elected at each annual meeting of our
stockholders, with the other classes continuing for the
remainder of their respective three-year terms.
The classified board provision will help to assure the
continuity and stability of our board of directors and our
business strategies and policies as determined by our board of
directors. The classified board provision could have the effect
of discouraging a third party from making an unsolicited tender
offer or otherwise attempting to obtain control of us without
the approval of our board of directors. In addition, the
classified board provision could delay stockholders who do not
like the policies of our board of directors from electing a
majority of our board of directors for two years. Since our
board of directors has the power to retain and discharge our
officers, these provisions could also make it more difficult for
our stockholders or a third party to effect a change in our
management without the consent of the board of directors.
Written Consent of Stockholders. Our
certificate of incorporation and bylaws provide that any action
required or permitted to be taken by our stockholders must be
taken at a duly called meeting of stockholders and not by
written consent except as specifically provided therein with
respect to the Class B common stock. Elimination of actions
by written consent of stockholders may lengthen the amount of
time required to take stockholder actions because actions by
written consent are not subject to the minimum notice
requirement of a stockholder’s meeting. The elimination of
actions by written consent of the stockholders may deter hostile
takeover attempts. Without the availability of actions by
written consent of the stockholders, a holder controlling a
majority of our capital stock would not be able to amend our
bylaws without holding a stockholders meeting. To hold such a
meeting, the holder would have to obtain the consent of a
majority of the board of directors, the chairman of the board or
the chief executive officer to call a stockholders’ meeting
and satisfy the applicable notice provisions set forth in our
bylaws.
Amendment of the Bylaws. Under Delaware law,
the power to adopt, amend or repeal a corporation’s bylaws
is conferred upon the stockholders. A corporation may, however,
in its certificate of incorporation also confer upon the board
of directors the power to adopt, amend or repeal its bylaws. Our
certificate of incorporation and bylaws grant our board the
power to alter, amend and repeal our bylaws, or adopt new
bylaws, on the affirmative vote of a majority of the directors
then in office. Our stockholders may alter, amend or repeal our
bylaws, or adopt new bylaws, but only at a regular or special
meeting of stockholders by an affirmative vote of not less than
662/3%
in voting power of all outstanding shares of our capital stock
entitled to vote generally at an election of directors, voting
together as a single class.
Amendment of Certificate of Incorporation. The
provisions of our certificate of incorporation that could have
anti-takeover effects as described above are subject to
amendment, alteration, repeal, or rescission require approval by
(i) our board of directors and (ii) the affirmative
vote of not less than
662/3%
in voting power of all outstanding shares of our capital stock
entitled to vote generally at an election of directors, voting
together as a single class,
depending on the subject provision. This requirement makes it
more difficult for stockholders to make changes to the
provisions in our certificate of incorporation which could have
anti-takeover effects by allowing the holders of a minority of
the voting securities to prevent the holders of a majority of
voting securities from amending these provisions.
Special Meetings of Stockholders. Our bylaws
preclude our stockholders from calling special meetings of
stockholders or requiring the board of directors or any officer
to call such a meeting or from proposing business at such a
meeting. Our bylaws provide that only a majority of our board of
directors, the chairman of the board or the chief executive
officer can call a special meeting of stockholders. Because our
stockholders do not have the right to call a special meeting, a
stockholder cannot force stockholder consideration of a proposal
over the opposition of the board of directors by calling a
special meeting of stockholders prior to the time a majority of
the board of directors, the chairman of the board or the chief
executive officer believes the matter should be considered or
until the next annual meeting provided that the requestor met
the notice requirements. The restriction on the ability of
stockholders to call a special meeting means that a proposal to
replace board members also can be delayed until the next annual
meeting.
Other Limitations on Stockholder
Actions. Advance notice is required for
stockholders to nominate directors or to submit proposals for
consideration at meetings of stockholders. This provision may
have the effect of precluding the conduct of certain business at
a meeting if the proper notice is not provided and may also
discourage or deter a potential acquirer from conducting a
solicitation of proxies to elect the acquirer’s own slate
of directors or otherwise attempting to obtain control of our
company. In addition, the ability of our stockholders to remove
directors without cause is precluded.
Transfer
Agent and Registrar
The transfer agent and registrar for our Class A common
stock is American Stock Transfer & Trust Company.
Listing
We have applied to list our Class A common stock on the New
York Stock Exchange under the symbol “HF.”
Prior to this offering, there has been no public market for our
Class A common stock. No prediction can be made as to the
effect, if any, future sales of shares, or the availability for
future sales of shares, will have on the market price of our
Class A common stock prevailing from time to time. The sale
of substantial amounts of our Class A common stock in the
public market, or the perception that such sales could occur,
could harm the prevailing market price of our Class A
common stock.
Upon completion of this offering we will have a total of
14,300,000 shares of our Class A common stock
outstanding, or 16,445,000 shares assuming the underwriters
exercise in full their option to purchase additional shares. All
of these shares will have been sold in this offering and will be
freely tradable without restriction or further registration
under the Securities Act by persons other than our
“affiliates.” Under the Securities Act, an
“affiliate” of a company is a person that directly or
indirectly controls, is controlled by or is under common control
with that company.
In addition, upon consummation of this offering, HFF Holdings
will beneficially own 22,500,000 partnership units in each
of the Operating Partnerships. Pursuant to the terms of our
amended and restated certificate of incorporation, HFF Holdings
could from time to time exchange its partnership units in the
Operating Partnerships for shares of our Class A common
stock on the basis of two partnership units, one of each
Operating Partnership, for one share of Class A common
stock, subject to customary conversion rate adjustments for
stock splits, stock dividends and reclassifications. The
following table reflects the exchangeability of HFF
Holdings’ rights to exchange its partnership units in
the Operating Partnerships for shares of our Class A common
stock, pursuant to contractual provisions in the HFF Holdings
Operating Agreement. However, these contractual provisions may
be waived, amended or terminated by a vote of the members
holding 65% of the interests of HFF Holdings following
consultation with our board of directors.
Percentage of HFF
Number of
Holdings’ Partnership
Additional Shares
Units in the
of Class A Common
Operating
Stock Expected to
Partnerships
Become Available
Becoming Eligible
Anniversary of the
Offering
for Exchange
for Exchange
Second
5,625,000
25
%
Third
5,625,000
25
%
Fourth
5,625,000
25
%
Fifth
5,625,000
25
%
Total
22,500,000
100
%
These shares of Class A common stock would be
“restricted securities,” as defined in Rule 144.
As a result, absent registration under the Securities Act or
compliance with Rule 144 thereunder or an exemption
therefrom, these shares of Class A common stock will not be
freely transferable to the public. We intend, however, to enter
into a registration rights agreement with HFF Holdings that
would require us to register under the Securities Act these
shares of Class A common stock. See
“— Registration Rights” and “Certain
Relationships and Related Party Transactions —
Registration Rights Agreement.”
In addition, we expect to grant awards of deferred stock,
restricted stock, options, stock appreciation rights, stock
units, stock purchase rights and other stock-based awards under
our 2006 Omnibus Incentive Compensation Plan. The number of
shares of our Class A common stock available for awards
under the terms of the plan is 3,500,000 (subject to adjustments
for stock splits, stock dividends and the like) which equals
approximately 9.5% shares of our Class A common stock
outstanding immediately following this offering plus the number
of shares of Class A common stock for which the partnership
units HFF Holdings holds in the Operating Partnerships are
exchangeable. We intend to file one or more registration
statements on
Form S-8
under the Securities Act to register Class A common stock
issued or reserved for issuance under the plan. Any such
Form S-8
registration statement will automatically become effective upon
filing. Accordingly, shares registered under such registration
statement will be available for sale in the open market, unless
such shares are subject to vesting restrictions with HFF, Inc.
or the
lock-up
restrictions described below.
We will enter into a registration rights agreement with HFF
Holdings pursuant to which we will be required to register under
the Securities Act, under certain circumstances and subject to
certain restrictions, shares of our Class A common stock
(and other securities convertible into or exchangeable or
exercisable for shares of our Class A common stock) held or
acquired by HFF Holdings, its affiliates and certain of its
transferees. Such securities registered under any registration
statement will be available for sale in the open market unless
restrictions apply.
Lock-Up
Arrangements
We, HFF Holdings and our directors and officers have agreed,
without the prior written consent of Goldman, Sachs &
Co. and Morgan Stanley & Co. Incorporated, not to
offer, sell, contract to sell, pledge, grant any option to
purchase, make any short sale or otherwise dispose of any shares
of our Class A common stock, or any options or warrants to
purchase any shares of our Class A common stock, or any
securities convertible into, exchangeable for or that represent
the right to receive shares of our Class A common stock or
any such substantially similar securities for a period of
180 days after the date of this prospectus. This
restriction expressly precludes us, HFF Holdings and our
directors and officers from engaging in any hedging or other
transaction which is designed or could be expected to result in
a sale or disposition of shares of Class A common stock
(even if such shares would be disposed of by some other person).
The 180-day
restricted period described in the preceding paragraph will be
extended if:
•
during the last 17 days of the
180-day
restricted period, we release earnings results or announce
material news or a material event relating to us; or
•
prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during a
15-day
period following the last day of the
180-day
restricted period.
In each case, the
180-day
restricted period will be automatically extended until the
expiration of an
18-day
period beginning on the date of the release of earnings results
or the announcement of the material news or material event, as
applicable. The underwriters have advised the Company that there
is no specific criteria for the waiver of the lock-up
restrictions and that they grant waivers after evaluating the
unique facts and circumstances of each individual’s request
for such a waiver. Such waivers are subject to the sole
discretion of the underwriters.
Rule 144
In general, under Rule 144, a person (or persons whose
shares are aggregated), including any person who may be deemed
our affiliate, is entitled to sell within any three month
period, a number of restricted securities that does not exceed
the greater of 1% of the then outstanding common stock and the
average weekly trading volume during the four calendar weeks
preceding each such sale, provided that at least one year has
elapsed since such shares were acquired from us or any affiliate
of ours and certain manner of sale, notice requirements and
requirements as to availability of current public information
about us are satisfied. Any person who is deemed to be our
affiliate must comply with the provisions of Rule 144
(other than the one year holding period requirement) in order to
sell shares of Class A common stock which are not
restricted securities (such as shares acquired by affiliates
either in this offering or through purchases in the open market
following this offering). In addition, under Rule 144(k), a
person who is not our affiliate, and who has not been our
affiliate at any time during the 90 days preceding any
sale, is entitled to sell such shares without regard to the
foregoing limitations, provided that at least two years have
elapsed since the shares were acquired from us or any affiliate
of ours.
The following is a summary of the material United States federal
income and estate tax consequences of the ownership and
disposition of shares of our Class A common stock to a
non-United States holder. For purposes of this discussion, a
non-United States holder is any beneficial owner that for United
States federal income tax purposes is not a United States
person; the term United States person means:
•
an individual citizen or resident of the United States;
•
a corporation or other entity taxable as a corporation or a
partnership or other entity taxable as a partnership created or
organized in the United States or under the laws of the United
States or any political subdivision thereof;
•
an estate whose income is subject to United States federal
income tax regardless of its source; or
•
a trust (x) whose administration is subject to the primary
supervision of a United States court and which has one or more
United States persons who have the authority to control all
substantial decisions of the trust or (y) which has made a
valid election to be treated as a United States person.
If a partnership or other pass-through entity holds Class A
common stock, the tax treatment of a partner or member in the
partnership or other entity will generally depend on the status
of the partner or member and upon the activities of the
partnership or other entity. Accordingly, we urge partnerships
or other pass-through entities which hold shares of our
Class A common stock and partners or members in these
partnerships or other entities to consult their tax advisors.
This discussion assumes that non-United States holders will hold
shares of our Class A common stock issued pursuant to the
offering as a capital asset (generally, property held for
investment). This discussion does not address all aspects of
United States federal income taxation that may be relevant in
light of a non-United States holder’s special tax status or
special tax situations. United States expatriates, life
insurance companies, tax-exempt organizations, dealers in
securities or currency, banks or other financial institutions,
pension funds and investors that hold shares of Class A
common stock as part of a hedge, straddle or conversion
transaction are among those categories of potential investors
that are subject to special rules not covered in this
discussion. This discussion does not address any non-income tax
consequences except as noted under “— Federal
Estate Tax” or any income tax consequences arising under
the laws of any state, local or non-United States taxing
jurisdiction. Furthermore, the following discussion is based on
current provisions of the Internal Revenue Code, Treasury
Regulations and administrative and judicial interpretations
thereof, all as in effect on the date hereof, and all of which
are subject to change, possibly with retroactive effect.
Additionally, we have not sought any ruling from the IRS, with
respect to statements made and conclusions reached in this
discussion, and there can be no assurance that the IRS will
agree with these statements and conclusions. We urge each
prospective purchaser to consult a tax advisor regarding the
United States federal, state, local and non-United States income
and other tax consequences of acquiring, holding and disposing
of shares of our Class A common stock.
Dividends
If we make distributions on our Class A common stock, those
payments will constitute dividends for United States tax
purposes to the extent paid from our current or accumulated
earnings and profits, as determined under United States federal
income tax principles. To the extent those distributions exceed
our current and accumulated earnings and profits, the
distributions will constitute a return of capital and will first
reduce a holder’s basis, but not below zero, and then will
be treated as gain from the sale of shares and may be subject to
United States federal income tax as described below.
Any dividend (out of earnings and profits) paid to a non-United
States holder of common shares generally will be subject to
United States withholding tax either at a rate of 30% of the
gross amount of the dividend or such lower rate as may be
specified by an applicable tax treaty. In order to receive a
reduced treaty rate, a non-United States
holder must provide us with an IRS
Form W-8BEN
or other appropriate version of IRS
Form W-8
certifying qualification for the reduced rate.
Dividends received by a non-United States holder that are
effectively connected with a United States trade or business
conducted by the non-United States holder (and are attributable
to a non-United States holder’s permanent establishment in
the United States if a tax treaty applies) are exempt from this
withholding tax. In order to obtain this exemption, a non-United
States holder must provide us with an IRS
Form W-8ECI
properly certifying this exemption. Effectively connected
dividends, although not subject to withholding tax, are taxed at
the same graduated rates applicable to United States persons,
net of certain deductions and credits. In addition, dividends
received by a corporate non-United States holder that are
effectively connected with a United States trade or business of
the corporate non-United States holder (and are attributable to
a corporate non-United States holder’s permanent
establishment in the United States if a tax treaty applies) may
also be subject to a branch profits tax at a rate of 30% (or
such lower rate as may be specified in a tax treaty).
A non-United States holder of common shares that is eligible for
a reduced rate of withholding tax pursuant to a tax treaty may
obtain a refund of any excess amounts currently withheld if an
appropriate claim for refund is filed with the IRS.
Gain on
Disposition of Shares of Class A Common Stock
A non-United States holder generally will not be subject to
United States federal income tax on gain realized upon the sale
or other disposition of shares of our Class A common stock
unless:
•
the gain is effectively connected with a United States trade or
business of the non-United States holder (and is attributable to
a permanent establishment in the United States if a tax treaty
applies), which gain, in the case of a corporate non-United
States holder, must also be taken into account for branch
profits tax purposes;
•
the non-United States holder is an individual who holds his or
her common shares as a capital asset (generally, an asset held
for investment purposes) and who is present in the United States
for a period or periods aggregating 183 days or more during
the taxable year in which the sale or disposition occurs and
certain other conditions are met; or
•
our Class A common stock constitutes a United States real
property interest by reason of our status as a “United
States real property holding corporation” for United States
federal income tax purposes at any time within the shorter of
the five-year period preceding the disposition or the
holder’s holding period for shares of our Class A
common stock. We believe that we are not currently, and we
believe that we will not become, a “United States real
property holding corporation” for United States federal
income tax purposes. If we are or become a “United States
real property holding corporation,” so long as our
Class A common stock continues to be regularly traded on an
established securities market, only a non-United States holder
who, actually or constructively, holds or held (at any time
during the shorter of the five year period preceding the date of
disposition of the holder’s holding period) more than 5% of
shares of our Class A common stock will be subject to
United States federal income tax on the disposition of shares of
our Class A common stock.
Backup
Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of
dividends paid, the name and address of the recipient, and the
amount, if any, of tax withheld. A similar report is sent to the
holder. Pursuant to tax treaties or other agreements, the IRS
may make its reports available to tax authorities in the
recipient’s country of residence.
Payments of dividends or of proceeds on the disposition of
shares made to a non-United States holder may be subject to
additional information reporting and backup withholding at the
then effective rate unless the non-United States holder
establishes an exemption, for example, by properly certifying
its non-United States status on an IRS
Form W-8BEN
or another appropriate version of
Form W-8.
Notwithstanding the foregoing, information reporting and backup
withholding may apply if either we or our paying agent has
actual knowledge, or reason to know, that the holder is a United
States person.
Backup withholding is not an additional tax. Rather, the United
States income tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund or
credit may be obtained, provided that the required information
is furnished to the IRS in a timely manner.
Federal
Estate Tax
An individual non-United States holder who is treated as the
owner, or has made certain lifetime transfers, of an interest in
our Class A common stock will be required to include the
value thereof in his or her gross estate for United States
federal estate tax purposes, and may be subject to United States
federal estate tax unless an applicable estate tax treaty
provides otherwise.
We and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered.
Subject to certain conditions, each underwriter has severally
agreed to purchase the number of shares indicated in the
following table. Goldman, Sachs & Co. and Morgan
Stanley & Co. Incorporated are acting as joint
book-running managers of this offering and as the
representatives of the underwriters.
Underwriters
Number of Shares
Goldman, Sachs & Co.
Morgan Stanley & Co.
Incorporated
Banc of America Securities LLC
Wachovia Capital Markets, LLC
Lehman Brothers Inc.
JPMorgan Securities Inc.
Total
14,300,000
The underwriters are committed to take and pay for all of the
shares being offered, if any are taken, other than the shares
covered by the option described below unless and until this
option is exercised.
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy
up to an additional 2,145,000 shares from us to cover such
sales. They may exercise that option for 30 days. If any
shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting
discounts and commissions to be paid to the underwriters by us.
Such amounts are shown assuming both no exercise and full
exercise of the underwriters’ option to purchase 2,145,000
additional shares.
Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per share from the initial
public offering price. Any such securities dealers may resell
any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to
$ per share from the initial
public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change
the offering price and the other selling terms.
We, HFF Holdings and our directors and officers have agreed with
the underwriters, subject to certain exceptions, not to dispose
of or hedge any of their Class A common stock or securities
convertible into or exchangeable for shares of Class A
common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the
representatives. This agreement does not apply to any existing
employee benefit plans. See “Shares Eligible for
Future Sale” for a discussion of certain transfer
restrictions. The underwriters have advised the Company that
there is no specific criteria for the waiver of the lock-up
restrictions and that they grant waivers after evaluating the
unique facts and circumstances of each individual’s request
for such a waiver. Such waivers are subject to the sole
discretion of the underwriters.
The 180-day
restricted period described in the preceding paragraph will be
automatically extended if: (1) during the last 17 days
of the
180-day
restricted period we issue an earnings release or announces
material news or a material event; or (2) prior to the
expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
180-day
period, in which case the
restrictions described in the preceding paragraph will continue
to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event.
Prior to the offering, there has been no public market for the
shares. The initial public offering price has been negotiated
among us and the representatives. Among the factors to be
considered in determining the initial public offering price of
the shares, in addition to prevailing market conditions, will be
our historical performance, estimates of our business potential
and earnings prospects, an assessment of our management and the
consideration of the above factors in relation to market
valuation of companies in related businesses.
We have applied to list the Class A common stock on the New York
Stock Exchange under the symbol “HF”. In order to meet
one of the requirements for listing the Class A common
stock on the NYSE, the underwriters have undertaken to sell lots
of 100 or more shares to a minimum of 2,000 beneficial holders.
In connection with the offering, the underwriters may purchase
and sell shares of Class A common stock in the open market.
These transactions may include short sales, stabilizing
transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a
greater number of shares than they are required to purchase in
the offering. “Covered” short sales are sales made in
an amount not greater than the underwriters’ option to
purchase additional shares from us in the offering. The
underwriters may close out any covered short position by either
exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source
of shares to close out the covered short position, the
underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase additional shares pursuant
to the option granted to them. “Naked” short sales are
any sales in excess of such option. The underwriters must close
out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the Class A common stock in the
open market after pricing that could adversely affect investors
who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of Class A common stock
made by the underwriters in the open market prior to the
completion of the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of our stock, and
together with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of the
Class A common stock. As a result, the price of the
Class A common stock may be higher than the price that
otherwise might exist in the open market. If these activities
are commenced, they may be discontinued at any time. These
transactions may be effected on the New York Stock Exchange, in
the
over-the-counter
market or otherwise.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
“Relevant Member State”), each underwriter has
represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that
Relevant Member State (the “Relevant Implementation
Date”) it has not made and will not make an offer of shares
to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the shares which has
been approved by the competent authority in that Relevant Member
State or, where appropriate, approved in another Relevant Member
State and notified to the competent authority in that Relevant
Member State, all in accordance with the Prospectus Directive,
except that it may, with effect from and including the Relevant
Implementation Date, make an offer of shares to the public in
that Relevant Member State at any time:
(a) to legal entities which are authorised or regulated to
operate in the financial markets or, if not so authorised or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than
€43,000,000 and (3) an annual net turnover of more
than €50,000,000, as shown in its last annual or
consolidated accounts; or
(c) in any other circumstances which do not require the
publication by the Issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an offer of
shares to the public in relation to any shares in any Relevant
Member State means the communication in any form and by any
means of sufficient information on the terms of the offer and
the Shares to be offered so as to enable an investor to decide
to purchase or subscribe the Shares, as the same may be varied
in that Relevant Member State by any measure implementing the
Prospectus Directive in that Relevant Member State and the
expression Prospectus Directive means Directive 2003/71/EC and
includes any relevant implementing measure in each Relevant
Member State.
Each of the underwriters has represented and agreed that:
(a) it has not made or will not make an offer of shares to
the public in the United Kingdom within the meaning of
section 102B of the Financial Services and Markets Act 2000
(as amended) (FSMA) except to legal entities which are
authorised or regulated to operate in the financial markets or,
if not so authorised or regulated, whose corporate purpose is
solely to invest in securities or otherwise in circumstances
which do not require the publication by us of a prospectus
pursuant to the Prospectus Rules of the Financial Services
Authority (FSA);
(b) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of section 21 of FSMA) to persons who
have professional experience in matters relating to investments
falling within Article 19(5) of the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005 or in
circumstances in which section 21 of FSMA does not, apply
to us; and
(c) it has complied with, and will comply with all
applicable provisions of FSMA with respect to anything done by
it in relation to the shares in, from or otherwise involving the
United Kingdom.
The shares may not be offered or sold by means of any document
other than to persons whose ordinary business is to buy or sell
shares or debentures, whether as principal or agent, or in
circumstances which do not constitute an offer to the public
within the meaning of the Companies Ordinance (Cap. 32) of
Hong Kong, and no advertisement, invitation or document relating
to the shares may be issued, whether in Hong Kong or elsewhere,
which is directed at, or the contents of which are likely to be
accessed or read by, the public in Hong Kong (except if
permitted to do so under the securities laws of Hong Kong) other
than with respect to shares which are or are intended to be
disposed of only to persons outside Hong Kong or only to
“professional investors” within the meaning of the
Securities and Futures Ordinance (Cap. 571) of Hong Kong
and any rules made thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore (the “SFA”),
(ii) to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries’ rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
The securities have not been and will not be registered under
the Securities and Exchange Law of Japan (the Securities and
Exchange Law) and each underwriter has agreed that it will not
offer or sell any securities, directly or indirectly, in Japan
or to, or for the benefit of, any resident of Japan (which term
as used herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan),
or to others for re-offering or resale, directly or indirectly,
in Japan or to a resident of Japan, except pursuant to an
exemption from the registration requirements of, and otherwise
in compliance with, the Securities and Exchange Law and any
other applicable laws, regulations and ministerial guidelines of
Japan.
At our request, the underwriters have reserved for sale to our
employees, directors, families of employees and directors at the
initial public offering price up to 5% of the shares being
offered by this prospectus. The sale of the reserved shares to
these purchasers will be made by Morgan Stanley & Co.
Incorporated. If purchased by these persons, these shares will
be subject to a
180-day
lock-up restriction. We do not know if our employees, directors,
families of employees and directors will choose to purchase all
or any portion of the reserved shares, but any purchases they do
make will reduce the number of shares available to the general
public. If all of these reserved shares are not purchased, the
underwriters will offer the remainder to the general public on
the same terms as the other shares offered by this prospectus.
A prospectus in electronic format will be made available on the
websites maintained by one or more of the representatives of
this offering and may also be made available on websites
maintained by other underwriters. The underwriters may agree to
allocate a number of shares of Class A common stock to
underwriters for sale to their online brokerage account holders.
Internet distributions will be allocated by the representatives
to underwriters that may make Internet distributions on the same
basis as other allocations.
The underwriters do not expect sales to discretionary accounts
to exceed five percent of the total number of shares offered.
We estimate that our share of the total expenses of the
offering, excluding underwriting discounts and commissions, will
be approximately $3.7 million.
We have agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities
Act of 1933.
An affiliate of Banc of America Securities LLC is the lender
under our credit agreement and, accordingly, will receive the
proceeds of this offering used to repay those borrowings.
Because an affiliate of Banc of America Securities LLC may
indirectly receive more than 10% of the net proceeds of this
offering, it may be deemed to have a “conflict of
interest” under Rule 2710(h) of the Conduct Rules of
the National Association of Securities Dealers. Accordingly,
this offering will be made in compliance with the applicable
provisions of Rule 2720 of the Conduct Rules. In accordance
with this rule, the initial public offering price can be no
higher than that recommended by a “qualified independent
underwriter” meeting certain standards. In accordance with
such requirements, Morgan Stanley & Co. Incorporated
has agreed to serve as a “qualified independent
underwriter” and has conducted due diligence and
recommended a maximum price for the shares of Class A
common stock. We have agreed to indemnify Morgan
Stanley & Co. Incorporated for acting as a qualified
independent underwriter against certain liabilities, including
under the Securities Act.
Certain of the underwriters and their respective affiliates
have, from time to time, performed, and may in the future
perform, various financial advisory and investment banking
services for us, for which they received or will receive
customary fees and expenses. In addition, affiliates of certain
of the underwriters have participated, and may in the future
participate, from time to time, in transactions where we
provided commercial real estate and capital market services.
The validity of the Class A common stock will be passed
upon for us by Dechert LLP, Philadelphia, Pennsylvania. Certain
legal matters in connection with this offering will be passed
upon for the underwriters by Simpson Thacher & Bartlett
LLP, New York, New York.
The statement of financial condition of HFF, Inc. as of
December 12, 2006, and the consolidated financial
statements of HFF Holdings, LLC and subsidiaries as of and for
the nine months ended September 30, 2006 and as of and for
the years ended December 31, 2005 and 2004, all included in
this prospectus and registration statement, have been audited by
Ernst & Young LLP, our independent registered public
accounting firm, as set forth in their reports thereon appearing
elsewhere herein and are included in reliance upon such reports
given on the authority of such firm as experts in accounting and
auditing.
We have filed with the Securities and Exchange Commission a
registration statement on
Form S-1
under the Securities Act with respect to the Class A common
stock offered in this prospectus. This prospectus, filed as part
of the registration statement, does not contain all of the
information set forth in the registration statement and its
exhibits and schedules, portions of which have been omitted as
permitted by the rules and regulations of the Securities and
Exchange Commission. For further information about us and our
Class A common stock, we refer you to the registration
statement and to its exhibits and schedules. Statements in this
prospectus about the contents of any contract, agreement or
other document are not necessarily complete and, in each
instance, we refer you to the copy of such contract, agreement
or document filed as an exhibit to the registration statement,
with each such statement being qualified in all respects by
reference to the document to which it refers. Anyone may inspect
the registration statement and its exhibits and schedules
without charge at the public reference facilities the Securities
and Exchange Commission maintains at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain copies of all or any
part of these materials from the Securities and Exchange
Commission upon the payment of certain fees prescribed by the
Securities and Exchange Commission. You may obtain further
information about the operation of the Securities and Exchange
Commission’s Public Reference Room by calling the
Securities and Exchange Commission at
1-800-SEC-0330.
You may also inspect these reports and other information without
charge at a website maintained by the Securities and Exchange
Commission. The address of this site is http://www.sec.gov.
In addition, you may request copies of this filing and such
other reports as we may determine or as the law requires at no
cost, by telephone at
(713) 852-3500
or by mail to HFF, Inc., 429 Fourth Avenue, Suite 200,
Pittsburgh, PA15219, Attention: Investor Relations. Upon
completion of this offering, we will become subject to the
informational requirements of the Securities Exchange Act of
1934, as amended, and will be required to file reports, proxy
statements and other information with the Securities and
Exchange Commission. You will be able to inspect and copy these
reports, proxy statements and other information at the public
reference facilities maintained by the Securities and Exchange
Commission at the address noted above or inspect them without
charge at the Securities and Exchange Commission’s website.
We intend to furnish our stockholders with annual reports
containing consolidated financial statements audited by an
independent registered public accounting firm.
Consolidated Statements of
Members’ Equity (Deficiency) for the nine months ended
September 30, 2006 and each of the two years in the period
ended December 31, 2005
Report of
Independent Registered Public Accounting Firm
To the Stockholder of HFF, Inc.
We have audited the accompanying statement of financial
condition of HFF, Inc. as of December 12, 2006. This
statement of financial condition is the responsibility of the
Company’s management. Our responsibility is to express an
opinion on this statement of financial condition based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of financial
condition is free of material misstatement. We were not engaged
to perform an audit of the Company’s internal control over
financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our opinion, the statement of financial condition presents
fairly, in all material respects, the financial position of HFF,
Inc. as of December 12, 2006, in conformity with accounting
principles generally accepted in the United States.
Class A Common Stock, par
value $.01 per share, 1,000 shares authorized
1 share issued and outstanding
$
—
Additional Paid in Capital
1
Total Stockholder’s Equity
$
1
NOTES TO
STATEMENT OF FINANCIAL CONDITION
1.
Organization
HFF, Inc., a Delaware corporation (the “Company”), was
formed in November 2006 in connection with a proposed initial
public offering of Class A common stock of the Company (the
“Offering”). The Company has not engaged in any
business or other activities except in connection with its
formation.
As a result of a reorganization into a holding company structure
to be effected simultaneously with the Offering, the Company
will become a holding company through a series of transactions
pursuant to a sale and purchase agreement. Upon consummation of
the Offering and reorganization, the Company’s sole assets
will be, through its wholly-owned subsidiary HFF Partnership
Holdings LLC, a Delaware limited liability company (“HoldCo
LLC”), partnership interests in Holliday Fenoglio Fowler,
L.P., a Texas limited partnership (“HFF LP”) and HFF
Securities L.P., a Delaware limited partnership and registered
broker-dealer (“HFF Securities” and together with HFF
LP, the “Operating Partnerships”) and all of the
shares of Holliday GP Corp., a Delaware corporation and the sole
general partner of each of the Operating Partnerships
(“Holliday GP”).
As the controlling owner of Holliday GP, the sole general
partner of the Operating Partnerships, the Company will operate
and control all of the business and affairs of the Operating
Partnerships and continue to conduct the business now conducted
by the Operating Partnerships, acting as a financial
intermediary and advisor in the commercial real estate industry,
and engaging in debt, private equity, and structured financing
placements, as well as investment sales, note sales, and loan
servicing out of offices in 18 cities nationwide.
The Company. will consolidate the financial results of the
Operating Partnerships and the ownership interest of HFF
Holdings in the Operating Partnerships will be treated as a
minority interest in HFF, Inc.’s consolidated financial
statements.
2.
Summary
of Significant Accounting Policies
Basis of
Presentation
The statement of financial condition has been prepared in
accordance with accounting principles generally accepted in the
United States. Separate statements of income, changes in
stockholders’ equity and cash flows have not been presented
in the financial statements because there have been no
activities of this entity.
3.
Stockholders’
Equity
The Company is authorized to issue 1,000 shares of
Class A common stock, $.01 par value per share. The Company
has issued one share of Class A common stock in exchange
for $1.00.
The Operating Committee and Members of
HFF Holdings, LLC:
We have audited the accompanying consolidated balance sheets of
HFF Holdings, LLC and subsidiaries as of September 30,2006, December 31, 2005 and December 31, 2004, and the
related consolidated statements of income, members’ equity
(deficiency) and cash flows for the nine months ended
September 30, 2006, and years ended December 31, 2005
and 2004. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of HFF Holdings, LLC and subsidiaries as of
September 30, 2006, December 31, 2005 and
December 31, 2004, and the consolidated results of their
operations and their cash flows for the nine months ended
September 30, 2006 and years ended December 31, 2005
and 2004, in conformity with accounting principles generally
accepted in the United States.
HFF Holdings, LLC (Holdings) was incorporated as a Delaware
Limited Liability Company on June 16, 2003. Holdings then
formed HFF LP Acquisition LLC (HFF LP), Holliday GP Acquisition
LLC (HFF GP), and Holliday GP Corp. (Holliday GP) in connection
with Holdings’ acquisition of Holliday Fenoglio Fowler,
L.P. (HFF) from the prior owners. Upon such acquisition, HFF LP
became (and remains) the sole limited partner of HFF, HFF GP
became a general partner of HFF, and Holliday GP became the
managing general partner of HFF. HFF GP subsequently merged into
Holliday GP; as a result, Holliday GP became (and remains) the
sole general partner of HFF. HFF is a financial intermediary and
advisor in the commercial real estate industry, and engages in
debt, private equity, and structured financing placements, as
well as investment sales, note sales, and loan servicing in 18
major cities nationwide.
The acquisition was financed primarily with long-term borrowings
and was accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, Business
Combinations (SFAS No. 141). The total purchase
price of $8.8 million (as adjusted from a base purchase
price of $10.0 million for the difference between estimated
net assets and closing net assets and for other adjustments and
costs of completing the closing) was allocated to the assets
acquired and liabilities assumed based on estimated fair values
at the date of acquisition.
During 2004, HFF LP and Holliday GP formed HFF Securities L.P.
(HFFS). HFFS is a broker-dealer that performs private placements
of securities by raising equity capital from institutional
investors for discretionary, commingled real estate funds to
execute real estate acquisitions, recapitalizations,
developments, debt investments, and other real estate-related
strategies. HFFS may also provide other investment banking and
advisory services on various project or entity-level strategic
assignments such as mergers and acquisitions, sales and
divestitures, recapitalizations and restructurings,
privatizations, management buyouts, and arranging joint ventures
for specific real estate strategies.
These financial statements present the consolidated financial
position of Holdings and its wholly-owned subsidiaries
(collectively referred to as the Company) as of
September 30, 2006, December 31, 2005 and
December 31, 2004, and the consolidated results of the
Company for the nine months ended September 30, 2006, and
2005, and the years ended December 31, 2005 and 2004. All
amounts shown in the consolidated financial statements and
accompanying notes for the nine months ended September 30,2005 are shown for comparability purposes and are unaudited.
Capital
Contributions
At inception, Holdings’ members made capital contributions
of $7.0 million. In accordance with the Operating
Agreement, additional capital contributions may be required upon
recommendation by the Operating Committee and approval by 65% of
the members.
Percentage interests of the members may be adjusted every three
years upon recommendation by a committee appointed by the
members and then subsequently approved by 65% of the members. If
the recommended adjustments are approved, additional capital
contributions will be required from members whose percentage
interests (or new members) are increased, and members whose
interests are decreased will be entitled to receive payments
from Holdings, based on a comparison of the fair value of
Holdings immediately prior to and as of the reset date.
During 2006, the Company reset the ownership percentages of
existing members and admitted six new members. The equity reset
and addition of new members resulted in an increase or decrease
in ownership percentage for existing members. The purchase of
additional ownership interests by the new and existing members
was funded by $9.8 million and promissory notes receivable
of $5.6 million from members to the Company. The cash
received was paid to existing members based upon the percentage
dilution of their ownership. The notes receivable are payable to
the Company in three equal installments over a three year period
(January 2007 - 2009) with full recourse secured by each
member’s interest in Holdings and all amounts payable to
the member by
Notes to
Consolidated Financial
Statements — (Continued)
Holdings. The remaining amounts due to the members whose
ownership interest was diluted by the reset are contingent on
the payment of cash by the new member under the notes. The note
receivable of $5.6 million plus accrued interest of
$0.1 million and the related payable plus accrued interest
due diluted members are reflected on the Company’s
consolidated financial statements as components of members’
equity under the provisions of Staff Accounting
Bulletin No. 40.
The liability of Holdings’ members is generally limited to
their capital contributions.
Distributions
Distributions of distributable cash flow (as defined) are made
upon approval of the Operating Committee. Such distributions
generally must be made to members first to the extent of unpaid
cumulative preferred returns (15% per year) on the initial
capital contribution, and second in proportion to their
respective percentage interests.
Redemption
Withdrawing members may require Holdings to redeem their
interests for an amount equal to the Redemption Price as
defined in the Operating Agreement, except in cases such as
termination for cause or competing or solicitation as defined in
the Operating Agreement. In the event a withdrawing member
subsequently competes or solicits as defined in the Operating
Agreement, his right to receipt of the redemption price is
subject to reduction based on the time period within which such
activity occurs. Upon withdrawing, Holdings is required to pay
the withdrawing member his initial capital contribution and
redemption payments over five years starting one year after the
withdrawal date. The redemption payments are based on the
Redemption Price determined by the Operating Committee, as
defined in the Operating Agreement, and are subject to available
cash flow, as defined in the Operating Agreement.
2.
Summary
of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
Holdings and its wholly-owned subsidiaries, HFF LP, Holliday GP,
HFFS and HFF. All intercompany accounts have been eliminated.
Concentrations
of Credit Risk
The Company’s financial instruments that are exposed to
concentrations of credit risk consist primarily of cash. The
Company places its cash with financial institutions in amounts
which at times exceed the FDIC insurance limit. The Company has
not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on cash.
Cash
and Cash Equivalents
Cash and cash equivalents include cash on hand and in bank
accounts, and short-term investments with original maturities of
three months or less.
Revenue
Recognition
Capital markets services revenues consist of origination fees,
investment sale fees, note sale fees, placement fees, and
servicing fees. Origination fees are earned for the placement of
debt, equity, or structured financing for real estate
transactions. Investment sales and note sales fees are earned
for brokering sales of real estate
and/or
notes. Placement fees are earned by HFFS for discretionary and
nondiscretionary equity capital raises and other investment
banking services. These fees are negotiated between the Company
and its clients, generally on a case-by-case basis and are
recognized and generally collected at the closing and the
funding of the transaction. The
Notes to
Consolidated Financial
Statements — (Continued)
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 and revenue is
recognized. Servicing fees are compensation for providing
collection, remittance, recordkeeping, reporting, and other
services for either lenders or borrowers on mortgages placed
with third-party lenders. Servicing fees are recognized when
cash is collected as these fees are contingent upon the borrower
making its payments on the loan.
Certain of the Company’s fee agreements provide for
reimbursement of employee-related costs which the Company
recognizes as revenue. In accordance with
EITF 00-14,
Income Statement Characterization of Reimbursements Received
for
“Out-of-Pocket”
Expenses Incurred, certain reimbursements received from
clients for
out-of-pocket
expenses are characterized as revenue in the statement of income
rather than as a reduction of expenses incurred. Since 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 when the fees for
the related transaction are collected at the closing of the
transaction. Reimbursement revenue is classified as other
revenue in the consolidated statements of income.
Mortgage
Notes Receivable
HFF is qualified with the Federal Home Loan Mortgage Corporation
(Freddie Mac) as a Freddie Mac Multifamily Program
Plus®
Seller/Servicer. Under this Program, HFF originates mortgages
based on commitments from Freddie Mac, and then sells the loans
to Freddie Mac approximately one month following the loan
originations. HFF recognizes interest income on the accrual
basis during this holding period based on the contract interest
rate in the loan that will be purchased by Freddie Mac.
The loans are initially recorded and then subsequently sold to
Freddie Mac at HFF’s cost. The Company monitors the market
value of these loans for declines in value from the origination
date to the sale date. Based on the Company’s evaluation,
no valuation allowance for lower of cost or market adjustments
was necessary as of September 30, 2006, December 31,2005 and December 31, 2004.
Freddie Mac requires HFF to meet minimum net worth and capital
requirements and to comply with certain other standards.
Following the closing of the Credit Agreement in March 2006 and
the distribution of the proceeds to the members, the Company did
not meet such minimum net worth and capital requirements. The
Company has recently reached agreement with Freddie Mac on an
alternative arrangement to satisfy those requirements and is in
the process of implementing the alternative arrangement.
Advertising
Costs associated with advertising are expensed as incurred.
Advertising expense was $0.6 million and $0.6 million
for the nine months ended September 30, 2006 and 2005, and
$0.8 million and $0.6 million for the years ended
December 31, 2005 and 2004. These amounts are included in
other operating expenses in the accompanying consolidated
statements of income.
Property
and Equipment
Property and equipment are recorded at cost, except for those
assets acquired on June 16, 2003, which were recorded at
their estimated fair values. Depreciation of furniture and
computer equipment is computed using accelerated methods over
five to seven years. Depreciation of software costs is computed
using the straight-line method over three years.
Expenditures for routine maintenance and repairs are charged to
expense as incurred. Renewals and betterments which
substantially extend the useful life of an asset are capitalized.
Notes to
Consolidated Financial
Statements — (Continued)
Leases
The Company leases most of its facilities under operating lease
agreements. These lease agreements typically contain tenant
improvement allowances and rent holidays. In instances where one
or more of these items are included in a lease agreement, the
Company records these allowances as a leasehold improvement
asset, included in property and equipment, net in the
consolidated balance sheet, and a related deferred rent
liability and amortizes these items 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, which are recognized on a straight-line
basis over the life of the lease in accordance with
SFAS No. 13, Accounting for Leases. Lease terms
generally range from one to eight years. Before entering into a
lease, an analysis is performed to determine whether a lease
should be classified as a capital or an operating lease
according to SFAS No. 13 as amended.
Computer
Software Costs
Certain costs related to the development or purchases of
internal-use software are capitalized in accordance with the
American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 98-1 Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.
Internal computer software costs that are incurred in the
preliminary project stage are expensed as incurred. Direct
consulting costs as well as payroll and related costs, which are
incurred during the development stage of a project are
capitalized and amortized using the straight-line method over
estimated useful lives of three years when placed into
production.
Goodwill
Goodwill of $3.7 million represents the excess of cost over
estimated fair value of the net assets of HFF on June 16,2003 (see Note 1). In accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets, the Company does not amortize goodwill, but
evaluates goodwill on an annual basis for potential impairment.
Prepaid
Compensation Under Employment Agreements
The Company has employment agreements with certain employees
whereby
sign-up
bonuses and incentive compensation payments were made during
2004 and 2005. In most cases, the
sign-up
bonuses and the incentive compensation are to be repaid to the
Company upon voluntary termination by the employee or
termination by cause (as defined) by the Company prior to the
termination of the employment agreement. The total cost of the
employment agreements is being amortized by the straight-line
method over the term of the agreements and is included in cost
of services on the accompanying consolidated statements of
income.
Producer
Draws
As part of the Company’s overall compensation program, HFF
offers a new producer draw arrangement which generally lasts
until such time as a producer’s pipeline of business is
sufficient to allow the producer to earn sustainable
commissions. This program is intended to provide the producer
with a minimal amount of cash flow to allow adequate time for
the producer to develop business relationships. Similar to
traditional salaries, the producer draws are paid irrespective
of the actual fees generated by the producer. Often these
producer draws represent the only form of compensation received
by the producer. Furthermore, it is not HFF’s policy to
seek collection of unearned producer draws under this
arrangement. As a result, HFF has concluded that producer draws
are economically equivalent to salaries paid and accordingly,
charges them to compensation as incurred. The producer is also
entitled to earn a commission on closed revenue transactions.
Commissions are calculated as the commission that would have
been earned by the broker under one of HFF’s commission
programs, less any amount previously paid to the producer in the
form of a draw.
Notes to
Consolidated Financial
Statements — (Continued)
Intangible
Assets
Intangible assets include servicing rights under agreements with
third-party lenders, costs associated with obtaining a NASD
license, and deferred financing costs.
Servicing rights were recorded at their estimated fair value of
$5.4 million on June 16, 2003 and are being amortized
over the expected life of the mortgage servicing rights in
proportion to the estimated future net servicing income.
Additionally, servicing rights are capitalized on loans
originated and sold to FHLMC with servicing retained based on an
allocation of the carrying amount of the loan and the servicing
right in proportion to the relative fair values at the date of
sale. These servicing rights are recorded at the lower of cost
or fair value and are being amortized over their expected life.
The determination of fair value of the servicing rights is
determined using a discounted cash flow model which considers
various factors such as estimated prepayment speeds of the
underlying mortgages, the estimated life of the mortgages, the
estimated cost to service the loans, and the discount rate.
Deferred financing costs were deferred and are being amortized
by the straight-line method over four years.
HFFS has recognized an intangible asset in the amount of
$0.1 million for the costs of obtaining a NASD license as a
broker-dealer. The license is determined to have an indefinite
useful economic life and is, therefore, not being amortized.
The Company periodically evaluates the remaining useful lives
and carrying values of the intangible assets to determine
whether events and circumstances indicate that a change in the
useful life or impairment in value may have occurred. Indicators
of impairment monitored by management include the level and
run-off of the outstanding principal balance of the loans
underlying the recorded servicing rights. No indicators of
impairment were noted as a result of management’s
evaluation. This evaluation is performed at least annually.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Income
Taxes
The Company consists of two limited liability companies
(Holdings and HFF LP), a corporation (Holliday GP), and two
limited partnerships (HFF and HFFS). The limited liability
companies and the limited partnerships are not taxpaying
entities for federal or state purposes and their income and
expenses are passed through and reported on the individual
income tax returns of the members of Holdings. Income taxes
shown on the Company’s consolidated statements of income
reflect federal income taxes of the corporation and business and
corporate income taxes in various jurisdictions. For tax
purposes, HFF’s goodwill of $9.0 million is being
amortized by the straight-line method over 15 years.
Cost
of Services
The Company considers personnel expenses directly attributable
to providing services to its clients, such as salaries,
commission and bonuses to producers and analysts, and certain
purchased services to be directly attributable to the generation
of capital markets services revenue and has classified these
expenses as costs of services in the consolidated statements of
income.
Notes to
Consolidated Financial
Statements — (Continued)
Segment
Reporting
The Company operates in one reportable segment, the commercial
real estate financial intermediary segment and offers debt
placement, investment sales, note sales, structured finance,
equity placement and investment banking services through its 18
offices. The results of each office have been aggregated for
segment reporting purposes as they have similar economic
characteristics and provide similar services to a similar class
of customer.
Recent
Accounting Pronouncements
SFAS 123(R). On December 16, 2004,
the Financial Accounting Standards Board (“FASB”)
issued SFAS No. 123 (revised 2003), Share-Based
Payment, or SFAS 123(R), which is a revision of
SFAS No. 123 Accounting for Stock-Based
Compensation. SFAS 123(R) supersedes Accounting
Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to Employees, and amends
SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123(R) is similar to the
approach described in SFAS 123. However, SFAS 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the consolidated
statements of income based on their fair values. Pro forma
disclosure is no longer an option. We have operated as a series
of partnerships and limited liability companies and have not
historically issued stock-based compensation awards. The Company
adopted SFAS 123(R) on January 1, 2006, using the
modified prospective method. The impact of adopting
SFAS 123(R) will depend on the nature and level of
share-based awards granted in the future.
SFAS 154. In May 2005, the FASB issued
SFAS No. 154, Accounting Changes and Error
Corrections, or SFAS 154. SFAS 154 replaces APB
Opinion No. 20, Accounting Changes, and FASB
SFAS No. 3, Reporting Accounting Charges in Interim
Financial Statements. SFAS 154 requires that a
voluntary change in accounting principle be applied
retrospectively with all prior period financial statements
presented on the new accounting principle, unless it is
impracticable to do so. SFAS 154 also provides that a
correction of errors in previously issued financial statements
should be termed a “restatement.” The new standard is
effective for accounting changes and correction of errors
beginning July 1, 2005. The Company adopted SFAS 154
on January 1, 2006. The adoption of SFAS 154 did not
have a material effect on the Company’s consolidated
financial condition or result of operations.
SFAS 156. In March 2006, the FASB issued
SFAS No. 156, Accounting for Servicing of Financial
Assets — an amendment of FASB Statement
No. 140, or SFAS 156. SFAS 156 requires an
entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial
asset by entering into a servicing contract based on certain
conditions. The statement permits a company to choose either the
amortized cost method or fair value method for each class of
separately recognized servicing assets. The provisions of
SFAS 156 are effective for fiscal years beginning after
September 15, 2006. The Company is currently analyzing the
impact of adopting SFAS 156 on our consolidated financial
statements.
SFAS 157. In September 2006, the FASB
issued No. 157, Fair Value Measurements
(SFAS 157 or Statement). The Statement was issued to define
fair value, establish a framework for measuring fair value in
generally accepted accounting principles (GAAP), and to expand
fair value disclosure requirements. Prior to issuance of this
Statement, different definitions of fair value existed within
GAAP and there was limited guidance available on applying
existing fair value definitions. The Statement does not require
any new fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. Prior to adoption, we will
evaluate the impact of adopting SFAS 157 on our
consolidated financial statements.
FIN 48. In June 2006, the FASB issued
FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS No. 109,
Accounting for Income Taxes, or FIN 48. FIN 48
clarifies the accounting for uncertainty in income taxes.
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 requires that we recognize in the
financial statements the impact of a tax position if that
position is more likely than
Notes to
Consolidated Financial
Statements — (Continued)
not of being sustained on audit, based on the technical merits
of the position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, and disclosure. The provisions of
FIN 48 are effective for fiscal years beginning after
December 15, 2006, with the cumulative effect of the change
in accounting principle recorded as an adjustment to opening
retained earnings. We are currently evaluating the impact of
adopting FIN 48 on our consolidated financial statements.
3.
Property
and Equipment
Property and equipment consist of the following (in thousands):
September 30
December 31
2006
2005
2004
Furniture and equipment
$
2,749
$
2,199
$
1,799
Computer equipment
1,429
1,199
919
Capitalized software costs
815
739
438
Leasehold improvements
4,954
3,718
3,180
Subtotal
9,947
7,855
6,336
Less accumulated depreciation and
amortization
(5,044
)
(3,579
)
(1,971
)
$
4,903
$
4,276
$
4,365
At September 30, 2006, December 31, 2005 and
December 31, 2004, the Company has recorded office
equipment, within furniture and equipment, under capital leases
of $0.4 million, $0.4 million, and $0.3 million,
respectively, including accumulated amortization of
$0.3 million, $0.2 million and $0.1 million,
respectively, which is included within depreciation and
amortization expense on the accompanying consolidated statements
of income. See Note 7 for discussion of the related capital
lease obligations.
4.
Intangible
Assets
The Company’s intangible assets are summarized as follows
(in thousands):
Amortization expense related to intangible assets was
$0.8 million, $1.1 million, and $1.2 million for
the nine months ended September 30, 2006 and the years
ended December 31, 2005 and 2004, respectively.
Estimated amortization expense for the remainder of 2006 and the
next five years is as follows (in thousands):
In connection with Holdings’ acquisition of HFF from the
prior owners, Holdings entered into a Credit Agreement (Credit
Agreement) with a financial institution which was comprised of a
$10.0 million term loan and a revolving line of credit. The
bank term note payable required quarterly principal installments
of $0.1 million by Holdings. The bank term note payable at
December 31, 2004 was $7.4 million. In December 2005,
this note was paid in full.
Interest on the note was payable at the applicable LIBOR rate
plus 2.50%. The interest rate could be converted to prime plus
1.50% at the option of Holdings. In June 2005, Holdings agreed
to a fixed rate of 6.12% through December 2005.
In 2005, borrowings under the revolving credit agreement were
limited to $7.0 million. Interest on outstanding balances
is payable at the 30-day LIBOR rate (4.39% at December 31,2005) plus 2.50%. HFF has the option to convert revolving
credit borrowings, subject to certain restrictions, to Base
Note Rates upon which interest is calculated at the greater
of the bank’s prime rate (7.25% at December 31,2005) or the Federal Funds Effective Rate (4.16% at
December 31, 2005) plus .50%. The agreement also
requires payment of a commitment fee of .35% on the unused
amount of credit. HFF did not borrow on this revolving credit
facility during 2005 and 2004.
The loan agreements for the term note and revolving credit
arrangement contain various restrictive covenants relating to
financial ratios, permitted investments, incurrence of
indebtedness, distributions to members, and transactions with
related parties. Obligations outstanding under the revolving
credit agreement are collateralized by the ownership interests
in HFF LP, Holliday GP, HFFS, and HFF.
(b)
The
New Credit Agreement
In March 2006, HFF entered into a new credit agreement (The New
Credit Agreement) with a financial institution. The New Credit
Agreement was comprised of a $60.0 million term loan and a
$20.0 million revolving credit facility, which replaced the
revolving credit agreement above. HFF distributed the
$60.0 million proceeds from the term loan to the members
generally based on their respective ownership interests, which
are reflected as distributions in the consolidated statements of
members’ equity (deficiency). The terms of the New Credit
Agreement require quarterly payments of $1.25 million and
annual payments equal to 22.5% of adjusted annual net income. In
connection with The New Credit Agreement, each member signed a
revised operating agreement which requires each member to repay
their portion of the remaining outstanding balance of the loan
in the event the member leaves the Company prior to the loan
being repaid in full. The Company is obligated under the New
Credit
Notes to
Consolidated Financial
Statements — (Continued)
Agreement to remit all amounts collected from withdrawing
members to the financial institution for repayment of the loan.
The New Credit Agreement expires in March 29, 2010 and may
be extended for one year at the option of HFF. Interest on
outstanding balances is payable at the 30-day LIBOR rate (5.32%
at September 30, 2006) plus 2.50%. HFF has the option
to convert revolving credit borrowings, subject to certain
restrictions, to Base Note Rates upon which interest is
calculated at the greater of the bank’s prime rate plus
1.50% (9.75% at September 30, 2006) or the Federal
Funds Effective Rate plus 2.00% (7.34% at September 30,2006). The agreement also requires payment of a commitment fee
of .35% on the unused amount of credit. HFF did not borrow on
this revolving credit facility during the period ended
September 30, 2006.
The New Credit Agreement contains various restrictive covenants
relating to financial ratios, permitted investments, incurrence
of indebtedness, distributions to members, and transactions with
related parties. Obligations outstanding under the revolving
credit agreement are collateralized by the ownership interests
in HFF LP, Holliday GP, and HFF.
(c)
Letters
of Credit and Capital Lease Obligations
Holdings has outstanding letters of credit of approximately
$0.2 million, $0.2 million and $0.5 million at
September 30, 2006, December 31, 2005 and
December 31, 2004, respectively, with the same bank as the
term note and revolving credit arrangements, to comply with
bonding requirements of certain state regulatory agencies and as
security for two leases. HFF segregated cash in a separate bank
account to collateralize the letters of credit. The letters of
credit expire through 2007 but are automatically extended for
one year.
Capital lease obligations consist primarily of office equipment
leases that expire at various dates through May 2010 and bear
interest at rates ranging from 3.65% to 6.19%. A summary of
future minimum lease payments under capital leases at
September 30, 2006, is as follows (in thousands):
In 2005, HFF obtained an uncommitted warehouse line of credit
for the purpose of funding the Freddie Mac mortgage loans that
it originates. Each funding is separately approved on a
transaction-by-transaction
basis and is collateralized by a loan and mortgage on a
multifamily property that is ultimately purchased by Freddie
Mac. As of September 30, 2006 and December 31, 2005,
HFF had $39.6 million and $14.7 million, respectively,
outstanding on the warehouse line of credit and a corresponding
amount of mortgage notes receivable. Interest on the warehouse
line of credit is at the 30-day LIBOR rate plus a spread (5.89%
at September 30, 2006 and 5.40% at December 31,2005) and HFF is also paid interest on its loan secured by
a multifamily loan at the rate in the Freddie Mac note.
7.
Lease
Commitments
HFF leases various corporate offices, parking spaces, and office
equipment under noncancelable operating leases. These leases
have initial terms of two to eight years. The majority of the
leases have termination clauses whereby the term may be reduced
by two to four years upon prior notice and payment of a
termination fee by HFF.
Notes to
Consolidated Financial
Statements — (Continued)
Total rental expense charged to operations was
$3.4 million, $3.9 million, and $3.6 million for
the nine months ended September 30, 2006, and the years
ended December 31, 2005 and December 31, 2004,
respectively.
Future minimum rental payments for the remainder of 2006 and 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 (in thousands):
HFF subleases certain office space to subtenants which may be
canceled at any time. The rental income received from these
subleases is included as a reduction of occupancy expenses in
the accompanying consolidated statements of income.
HFF also leases certain office equipment under capital leases
that expire at various dates through 2010. See Note 3 and
Note 5 above for further description of the assets and
related obligations recorded under these capital leases at
September 30, 2006, December 31, 2005 and
December 31, 2004, respectively.
Holdings is not an obligor, nor does it guarantee any of the HFF
leases.
8.
Retirement
Plan
HFF maintains a retirement savings plan for all employees, in
which employees may make deferred salary contributions up to the
maximum amount allowable by the IRS. After-tax contributions may
also be made up to 50% of compensation within limits allowable
by the IRS. HFF makes matching contributions equal to 50% of the
first 6% of both deferred and after-tax salary contributions, up
to a maximum of $0.05 million. The HFF match is fully
vested after two years of service although HFF contributed to
the match starting the first anniversary of the start of service
in 2003, 2004 and 2005, and after one month of service effective
January 1, 2006. HFF contributions charged to expense for
the plan were $1.0 million, $0.9 million, and
$0.7 million for the nine months ended September 30,2006, and the years ended December 31, 2005 and 2004,
respectively.
Notes to
Consolidated Financial
Statements — (Continued)
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, 2006 and at December 31, 2005 and
2004, the funds held in escrow totaled $104.3 million,
$113.0 million and $107.0 million, respectively. These
funds, and the offsetting liabilities, 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 income.
10.
Subsequent
Event
The Company is contemplating an initial public offering of
common equity. If an initial public offering by the Company does
occur, the Company also plans to consummate a number of internal
reorganization transactions to transition the Company to a
corporate structure form.
Our goal is to always put the client’s interest ahead of
the Firm and any individual within the Firm.
We will continue to strategically grow to achieve our
objective of becoming the best and most dominant
“one-stop” commercial real estate and capital markets
intermediary offering the following:
•
Investment Banking and Advisory Services;
•
Investment Sales Services;
•
Notes Sales and Note Sale Advisory Services;
•
Entity and Project Level Equity Services and Placements
as well as all forms of Structured Finance Solutions;
•
All forms of Debt Solutions and Services; and
•
Commercial Loan Servicing (Primary and
Sub-servicing).
We will hire and retain associates throughout the Firm who
have the highest ethical standards with the best reputation in
the industry. By doing this, we will preserve our culture of
integrity, trust and respect which will promote and encourage
teamwork, thus guaranteeing our clients have the “best team
on the field” for each transaction. Simply stated, without
the best people, we cannot be the best firm.
To ensure we achieve our goals and aspirations and provide
outstanding results for our stockholders, we must maintain a
flexible compensation and ownership package to appropriately
recognize and reward our existing and future associates who
profoundly contribute to our success through their value-added
performance. The ability to reward extraordinary performance is
essential in providing superior results for our clients while
appropriately aligning our interests with our stockholders.
No dealer, salesperson or other
person is authorized to give any information or to represent
anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus
is an offer to sell only the shares offered hereby, but only
under circumstances and in jurisdictions where it is lawful to
do so. The information contained in this prospectus is current
only as of its date.
Unless otherwise indicated, all
information in this prospectus assumes that the
underwriters’ over-allotment option will not be exercised.
Through and
including ,
2007 (the
25th day
after the date of this prospectus), all dealers that effect
transitions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is
in addition to the dealer’s obligation to deliver a
prospectus when acting as an underwriter and with respect to
unsold allotment or subscription.
14,300,000 Shares
Class A Common Stock
Joint Book-Running Managers
Goldman, Sachs &
Co.
Morgan Stanley
Banc of America Securities
LLC
Wachovia Securities
JPMorgan
Lehman Brothers
The following table sets forth the expenses payable by the
Registrant in connection with the issuance and distribution of
the Class A common stock being registered hereby. All of
such expenses are estimates, other than the filing and listing
fees payable to the Securities and Exchange Commission, the New
York Stock Exchange and the National Association of Securities
Dealers, Inc.
Registration Fee —
Securities and Exchange Commission
$
30,000
Listing Fee — New York
Stock Exchange
150,000
Filing Fee — National
Association of Securities Dealers
10,500
Fees and expenses of counsel
1,950,000
Printing expenses
350,000
Fees and expenses of accountants
810,000
Blue Sky Fees and expenses
10,000
Transfer Agent Fees and expenses
3,500
Miscellaneous expenses
410,000
Total
$
3,724,000
* To be filed by amendment.
Item 14.
Indemnification
of Directors and Officers.
Section 145 of the General Corporation Law of the State of
Delaware (the “DGCL”) grants each corporation
organized thereunder the power to indemnify any person who is or
was a director, officer, employee or agent of a corporation or
enterprise, against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of being or
having been in any such capacity, if he acted in good faith in a
manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal
action, or proceeding, had no reasonable cause to believe his
conduct was unlawful, except that with respect to an action
brought by or in the right of the corporation such
indemnification is limited to expenses (including attorneys
fees). Our amended and restated certificate of incorporation
provides that we must indemnify our directors and officers to
the fullest extent permitted by Delaware law.
Section 102(b)(7) of the DGCL enables a corporation, in its
certificate of incorporation or an amendment thereto, to
eliminate or limit the personal liability of a director to the
corporation or its stockholders for monetary damages for
violations of the directors’ fiduciary duty, except
(i) for any breach of the director’s duty of loyalty
to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to
Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock
purchases or redemptions) or (iv) for any transaction from
which a director derived an improper personal benefit. Our
certificate of incorporation provides for such limitations on
liability for our directors.
In connection with this offering, we will obtain liability
insurance for our directors and officers. Such insurance would
be available to our directors and officers in accordance with
its terms.
Reference is made to the form of underwriting agreement filed as
Exhibit 1.1 hereto for provisions providing that the
underwriters are obligated under certain circumstances, to
indemnify our directors, officers and controlling persons
against certain liabilities under the Securities Act of 1933, as
amended.
On November 2, 2006, the Registrant issued 1 share of
the Registrant’s common stock, par value $0.01 per share,
to Gregory R. Conley for $1.00. The issuance of such share
of common stock was not registered under the Securities Act of
1933, as amended (the “Securities Act”), because the
share was offered and sold in a transaction exempt from
registration under Section 4(2) of the Securities Act.
(a) The undersigned Registrant hereby undertakes to provide
to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Pittsburgh, Pennsylvania, on the
8th day
of January, 2007.
HFF, INC.
By:
/s/ John
H. Pelusi, Jr.
Name: John H. Pelusi, Jr.
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the
following persons in the capacities indicated on the
8th day
of January, 2007.
Signature
Title
/s/ Gregory
R. Conley
Gregory
R. Conley
Chief Financial Officer
(principal financial officer
and principal accounting officer)
*
John
P. Fowler
Director and Executive Managing
Director
*
Mark
D. Gibson
Director and Executive Managing
Director
/s/ John
H. Pelusi, Jr.
John
H. Pelusi, Jr.
Chief Executive Officer, Director
and Executive Managing Director
(principal executive officer)