Notes to Consolidated Financial Statements
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Organization and Basis of Presentation
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Organization
HFF, Inc., a Delaware corporation (the “Company”), through its wholly-owned subsidiaries, 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”), HFF Real Estate Limited and HFF Securities Limited, in the United Kingdom, is a commercial real estate financial intermediary providing commercial real estate and capital markets services including debt placement, investment advisory, equity placements, investment banking and advisory services, loan sales and loan sale advisory services, commercial loan servicing, and capital markets advice and maintains offices in 25 cities in the United States and one office in London, United Kingdom. The Company’s operations are impacted by the availability of equity and debt as well as credit and liquidity in the domestic and global capital markets especially in the commercial real estate sector. Significant disruptions or changes in domestic and global capital market flows, as well as credit and liquidity issues in the global and domestic capital markets, regardless of their duration, could adversely affect the supply and demand for capital from investors for commercial real estate investments which could have a significant impact on the Company’s capital market services revenues.
Initial Public Offering and Reorganization
The Company completed its initial public offering (“IPO”) in the first quarter of 2007 and the Company’s Class A Common Stock began trading on the New York Stock Exchange under the symbol “HF.” The proceeds of the initial public offering, including the exercise of the underwriter’s option to purchase additional shares, were used to purchase from HFF Holdings LLC, a Delaware limited liability company (“HFF Holdings”), all of the shares of Holliday GP Corp. (“Holliday GP”) and purchase from HFF Holdings partnership units of the Operating Partnerships (including partnership units in the Operating Partnerships held by Holliday GP). HFF Holdings used a portion of its proceeds to repay all outstanding indebtedness under HFF LP’s credit agreement. Accordingly, the Company did not retain any of the proceeds from the initial public offering.
In addition to cash received for its sale of all of the shares of Holliday GP and approximately 45% of partnership units of each of the Operating Partnerships (including partnership units in the Operating Partnerships held by Holliday GP), HFF Holdings also received, through the issuance of one share of HFF, Inc.’s Class B common stock to HFF Holdings, an exchange right that permitted, subject to certain restrictions, HFF Holdings to exchange interests in the Operating Partnerships for shares of (i) the Company’s Class A common stock (the “Exchange Right”) and (ii) rights under a tax receivable agreement between the Company and HFF Holdings (the “TRA”). See Notes 14 and 18 for further discussion of the tax receivable agreement and the exchange right held by HFF Holdings.
As a result of the reorganization into a holding company structure in connection with the IPO, the Company became a holding company through a series of transactions pursuant to a sale and purchase agreement. As a result of the IPO and reorganization, the Company’s sole assets were partnership interests in Operating Partnerships, that are held through its wholly-owned subsidiary HFF Partnership Holdings, LLC, a Delaware limited liability company (“Partnership Holdings”), and all of the shares of Holliday GP, the sole general partner of each of the Operating Partnerships. The transactions that occurred in connection with the IPO and reorganization are referred to as the “Reorganization Transactions.”
The Reorganization Transactions were treated, for financial reporting purposes, as a reorganization of entities under common control. As of August 31, 2012, HFF Holdings had utilized its Exchange Right to exchange all of its remaining interests in the Operating Partnerships and therefore the Company, through its wholly-owned subsidiaries, became and continues to be the sole equity holder of the Operating Partnerships.
2.
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Summary of Significant Accounting Policies
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Basis of Presentation
The accompanying consolidated financial statements of HFF, Inc. have been prepared by the Company’s management in accordance with generally accepted accounting principles in the United States for financial information and applicable rules and regulations promulgated under the Securities Exchange act of 1934, as amended. The consolidated financial statements include the accounts of HFF LP, HFF Securities, HFF Real Estate Limited and HFF Securities Limited, as well as the Company’s additional wholly-owned subsidiaries, Holliday GP, Partnership Holdings and HFF InvestCo LLC. All significant intercompany accounts and transactions 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 credit risk on cash other than as identified herein.
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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. At December 31, 2018, our cash and cash equivalents were invested or held in a mix of money market funds and bank demand deposit accounts at three financial institutions.
Restricted Cash
Restricted cash represents good faith deposits from borrowers that are held between the time we enter into a rate-lock commitment with the borrower and Freddie Mac’s purchase of the loan. The Company records a corresponding liability for such good faith deposits from borrowers within other current liabilities within the consolidated balance sheets.
Revenue Recognition
Revenue Recognition.
Substantially all of the Company’s revenues are derived from capital markets services. These capital markets services revenues are in the form of fees collected from the Company’s clients, usually negotiated on a transaction-by-transaction basis, which includes origination fees, investment advisory fees earned for brokering sales of commercial real estate, loan sales and loan servicing fees. The Company also earns interest on mortgage notes receivable during the period between the origination of the loan and the subsequent sale to Freddie Mac in connection with the Company’s participation in the Freddie Mac Program.
Capital markets services revenues
. The Company earns its capital markets services revenue through the following activities and sources:
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Origination fees
. Origination fees are earned through the placement of debt and equity or structured financing for commercial real estate transactions. Fees earned by the Securities Subsidiaries for discretionary and non-discretionary equity capital raises and other debt referral transactions are also included within origination fees in the Company’s consolidated statements of comprehensive income.
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Investment advisory fees
. The Company earns investment advisory fees by acting as a broker for commercial real estate owners seeking to sell a property or multiple properties or an interest in a property or multiple properties and by providing investment banking advisory services through the Securities Subsidiaries.
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Loan sales
. The Company generates loan sales fees through assisting its clients in their efforts to sell all or portions of commercial real estate debt notes.
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The Company’s contracts are generally negotiated on a transaction-by-transaction basis with a success-based fee awarded upon the satisfaction of the origination, sale, referral, placement or equity raise. The Company’s agreements generally include such success-based fees for services that are performed over time under one performance obligation. The variable consideration associated with the successful outcome remains constrained until the completion of the transaction, generally at the closing of the applicable financing or funding of the transaction. Once the constraint is lifted, revenue is recognized as the Company’s fee agreements do not include terms or conditions that require the Company to perform any service or fulfill any obligation once the transaction closes. The majority of the Company’s transactions are completed within one year and the Company has utilized the practical expedients within Accounting Standards Codification 606 (“Topic 606”) related to financing components and costs of obtaining a contract due to the short-term nature of the contracts.
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Loan servicing and loan performance fees.
The Company generates loan servicing fees through the provision of collection, remittance, recordkeeping, reporting and other related loan servicing functions, activities and services for either lenders or borrowers on mortgages placed with third-party lenders. The Company also generates loan performance fees associated with indemnification obligations related to the Risk Transfer Agreement. Revenue is recognized as the Company fulfills its stand ready obligation to satisfy such indemnification obligations.
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The revenues associated with loan servicing fees are accounted for in accordance with Topic 860,
Transfers and Servicing
, whereby the Company recognizes loan servicing revenues at the time services are rendered, provided the loans are current and the debt service payments are made by the borrowers.
Interest on mortgage notes receivable.
The Company recognizes interest income on the accrual basis during the holding period based on the contract interest rate in the loan that is to be purchased by Freddie Mac in connection with the Company’s participation in the Freddie Mac Multifamily Approved Seller/Servicer for Conventional and Senior Housing Loans program (“Freddie Mac Program”), provided that the debt service is paid by the borrower.
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Other
. Certain of the Company’s fee agreements provide f
or reimbursement of transaction-related costs which the Company recognizes as other revenue. Reimbursements received from clients for out-of-pocket expenses are characterized as revenue in the consolidated statements of comprehensive income rather than as
a reduction of expenses incurred. Because the Company is the primary obligor, has supplier discretion, and bears the credit risk for such expenses, the Company records reimbursement revenue for such out-of-pocket expenses. Reimbursement revenue is recogniz
ed over time based upon the measure of progress to completion.
Disaggregation of Revenue
The Company disaggregates its revenue from contracts with customers by its multiple platforms, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the Company’s revenue and cash flows are affected by economic factors. The following table provides a reconciliation of the Company’s revenue recognized under Topic 606 to the Company’s consolidated revenues:
Revenue Category
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Three Months Ended
December 31, 2018
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Year Ended
December 31, 2018
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Debt placement origination fees
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$
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81,967
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$
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264,145
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Investment advisory fees
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83,680
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262,890
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Equity placement origination fees
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23,211
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64,209
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Loan sales
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2,190
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5,041
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Capital markets services revenue recognized under Topic 606
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191,048
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596,285
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Loan servicing and loan performance fees
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9,521
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35,189
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Capital markets services revenue
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200,569
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631,474
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Interest on mortgage notes receivable
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13,381
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26,209
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Other
(1)
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1,349
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4,359
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Total revenue
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$
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215,299
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$
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662,042
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(1)- Other revenues are recognized under Topic 606
Mortgage Notes Receivable
The Company is qualified with the Federal Home Loan Mortgage Corporation (“Freddie Mac”) as a Freddie Mac Multifamily Approved Seller/Servicer for Conventional and Senior Housing Loan provider (“Freddie Mac Program”). Under the Freddie Mac Program, the Company originates mortgages based on commitments from Freddie Mac, and then sells the loans to Freddie Mac approximately one month following the loan origination. The Company 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 (see Note 8).
The Company records mortgage loans held for sale at period end at fair value. The fair value of the mortgage notes receivable is considered a Level 2 asset in the fair value hierarchy as it is based on prices observable in the market for similar loans.
Freddie Mac requires HFF LP to meet minimum net worth and liquid assets requirements and to comply with certain other standards. As of December 31, 2018, HFF LP met Freddie Mac’s minimum net worth and liquid assets requirements.
Advertising
Costs associated with advertising are expensed as incurred. Advertising expense was $1.0 million, $0.9 million and $1.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. These amounts are included in other operating expenses in the accompanying consolidated statements of comprehensive income.
Property and Equipment
Property and equipment are recorded at cost. The Company depreciates furniture, office equipment and computer equipment on the straight-line method over three to seven years. Software costs are depreciated using the straight-line method over three years, while capital leases and leasehold improvements are depreciated using the straight-line method over the shorter of the term of the lease or useful life of the asset.
Depreciation expense was $4.6 million, $4.3 million and $3.3 million for the years ended December 31, 2018, 2017 and 2016, respectively.
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.
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Leases
The Company leases all of its facilities under operating lease agreements. These lease agreements typically contain tenant improvement allowances. The Company records tenant improvement allowances as a leasehold improvement asset, included in property and equipment, net in the consolidated balance sheets, and a related deferred rent liability and amortizes them on a straight-line basis over the shorter of the term of the lease or useful life of the asset as additional depreciation expense and a reduction to rent expense, respectively. Lease agreements sometimes contain rent escalation clauses or rent holidays, which are recognized on a straight-line basis over the life of the lease in accordance with ASC 840,
Leases
(ASC 840). Office lease terms generally range from five to ten years. An analysis is performed on all equipment leases to determine whether they should be classified as a capital or an operating lease according to ASC 840.
Computer Software Costs
Certain costs related to the development or purchases of internal-use software are capitalized. 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.
Securities held to Maturity, Collateral Deposits and Guarantees
On July 2, 2018, the Company invested $25.0 million in mandatorily redeemable preferred stock of M&T -RCC in connection with the Risk Transfer Agreement. Through the Risk Transfer Agreement, the Company indemnifies M&T-RCC for their credit recourse obligations associated with loans originated under the Risk Transfer Agreement. The Company’s loss exposure is capped at 33.33% of the unpaid principal balance in excess of the collateral securing such loan. In addition to the $25.0 million investment, the Company deposits a portion of the original principal balance for each loan originated under the Risk Transfer Agreement to serve as collateral for any potential future indemnification obligations.
For loans that have been originated through the Risk Transfer Agreement, the Company records an indemnification accrual equal to the fair value of the guarantee obligations undertaken upon M&T-RCC’s sale of the loan. Subsequently, this accrual is amortized over the estimated life of the loan and recorded as an increase in capital markets services revenues within the consolidated statements of comprehensive income. The Company records a corresponding asset related to loan performance fee rights which will also be amortized over the estimated life of the loan. As of December 31, 2018, the guarantee obligations and corresponding asset were not material to the Company’s consolidated financial position.
Business Combinations
The Company accounts for acquired businesses using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective estimated fair values. The cost to acquire a business is allocated to the underlying net assets of the acquired business based on estimates of their respective fair values. The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets. Acquired intangible assets are amortized over the expected life of the asset. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
Goodwill
Goodwill is required to be tested for impairment at least annually. The Company performs its annual impairment test as of October 1st or more frequently when indicators of impairment are present. The goodwill impairment test involves comparing the fair value of a reporting unit to its carrying value, including goodwill. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The Company uses a combination of a discounted cash flow model (“DCF model”) and a market approach to determine the current fair values of the reporting units. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volume and pricing, costs of services, working capital changes and discount rates.
Intangible Assets
Intangible assets include mortgage servicing rights under agreements with third-party lenders, non-competition agreements and customer relationships.
Servicing rights are capitalized for servicing assumed on loans originated and sold 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. Servicing rights are recorded at the lower of cost or market.
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Mortgage servicing rights do not trade in an active, open market and therefore, do not have readily availab
le observable prices. Since there is no ready market value for the mortgage servicing rights, such as quoted market prices or prices based on sales or purchases of similar assets, the Company determines the fair value of the mortgage servicing rights by es
timating the net present value of future cash flows associated with the servicing of the loans. Management makes certain assumptions and judgments in estimating the fair value of servicing rights. The estimate is based on a number of assumptions, including
the benefits of servicing (contractual servicing fees and interest on escrow and float balances), the cost of servicing, prepayment rates (including risk of default), an inflation rate, the expected life of the cash flows and the discount rate. The cost o
f servicing, prepayment rates and discount rates are the most sensitive factors affecting the estimated fair value of the servicing rights. Management estimates a market participant’s cost of servicing by analyzing the limited market activity and consideri
ng the Company’s own internal servicing costs. Management estimates the discount rate by considering the various risks involved in the future cash flows of the underlying loans which include the cancellation of servicing contracts and the incremental risk
related to large loans. Management estimates the prepayment levels of the underlying mortgages by analyzing recent historical experience. Many of the commercial loans being serviced have financial penalties for prepayment or early payoff before the stated
maturity date. As a result, the Company has consistently experienced a low level of loan runoff. The estimated value of the servicing rights is impacted by changes in these assumptions.
The Company applies the provisions of ASC 860,
Transfers and Servicing
(“ASC 860”) to such services. ASC 860 requires an entity to recognize a servicing asset or servicing liability at fair value each time it undertakes an obligation to service a financial asset by entering into a servicing contract, regardless of whether explicit consideration is exchanged. The guidance also permits a company to choose to either subsequently measure servicing rights at fair value and to report changes in fair value in earnings, or to retain the amortization method whereby servicing rights are recorded at the lower of cost or fair value and are amortized over their expected life. The Company utilizes the amortization method.
The Company evaluates intangible assets on an annual basis, or more frequently if circumstances so indicate, for potential impairment. Indicators of impairment monitored by management include a decline in the level of serviced loans as well as other negative economic conditions.
Prepaid Compensation Under Employment Agreements
The Company entered into employment agreements with certain employees whereby sign-up bonuses and incentive compensation payments were made during 2018, 2017 and 2016. 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 using the straight-line method over the term of the agreements and is included in cost of services on the accompanying consolidated statements of comprehensive income. As of December 31, 2018 and 2017, there was a total of approximately $8.4 million and $12.8 million of unamortized costs, respectively.
Capital Markets Advisor Draws
As part of the Company’s overall compensation program, the Company offers a new capital markets advisor a draw arrangement which generally lasts until such time as a capital markets advisor’s pipeline of business is sufficient to allow the capital markets advisor to earn sustainable commissions. This program is intended to provide the capital markets advisor with a minimal amount of cash flow to allow adequate time for the capital markets advisor to develop business relationships. Similar to traditional salaries, the capital markets advisor draws are paid irrespective of the actual fees generated by the capital markets advisor. At times, these capital markets advisor draws represent the only form of compensation received by the capital markets advisor. It is not the Company’s policy to seek collection of unearned capital markets advisor draws under this arrangement. Capital markets advisors are 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 the Company’s commission programs, less any amount previously paid to the capital markets advisor in the form of a draw. As a result, the Company has concluded that capital markets advisor draws are economically equivalent to commissions paid and, accordingly, charges them to commissions as incurred. These amounts are included in cost of services on the accompanying consolidated statements of comprehensive income.
Earnings Per Share
The Company computes earnings per share in accordance with ASC 260,
Earnings Per Share.
Basic earnings per share is computed by dividing income available to Class A common stockholders by the weighted average of common shares outstanding for the period. Diluted earnings per share reflects the assumed conversion of all dilutive securities (see Note 16).
Firm and Office Profit Participation Plans and Executive Bonus Plan
The Company’s Firm and Office Profit Participation Plans and effective January 1, 2015, an Executive Bonus Plan (the “Plans”) provide for payments in cash and share-based awards if certain performance metrics are achieved during the year. The expense recorded for these Plans is estimated during the year based on actual results at each interim reporting date and an estimate of future results for the remainder of the year. The Plans allow for payments to be made in both cash and share-based awards, the composition of which is determined in the first calendar quarter of the subsequent year. Cash and share-based awards issued under these Plans are subject to vesting conditions over the subsequent year, such that the total expense measured for these Plans is recorded over the period from the beginning of the performance year through the vesting date. Based on an accounting policy election and consistent with ASC 718,
Compensation – Stock
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Compensation
, the expense associated with the estimated share-base
d component of the estimated incentive payout is recognized before the grant date of the stock due to the fact that the terms of the Plans have been approved by the Company’s board of directors, the employees of the Company understand the requirements to e
arn the award, the number of shares is not determined before the grant date and, finally, if the performance metrics are not met during the performance year, the award is not earned and therefore forfeited. Prior to the grant date, the share-based componen
t expense is recorded as incentive compensation within personnel expenses in the Company’s consolidated statements of comprehensive income. Following the award, if any, of the related incentive payout, the share-based component of the accrued incentive com
pensation is reclassified as additional paid-in-capital upon the granting of the awards on the Company’s consolidated balance sheets.
Prior to January 1, 2015, the Company’s Office and Firm Profit Participation Plans allowed for payment to be made in both cash and share-based awards, and the composition of such payment was determined in the first calendar quarter of the subsequent year. A portion of the cash and share-based awards issued under these Office and Firm Profit Participation Plans are subject to time-based vesting conditions over the subsequent twelve months of the grant date, such that the total expense measured for these Plans is recorded over the period from the beginning of the performance year through the vesting date, or 26 months. In addition, prior to January 1, 2015, awards made under the Executive Bonus Plans were historically settled as a cash payment made in the first calendar quarter of the subsequent year, with the entire award recognized as expense in the performance year.
Effective January 1, 2015, the Company amended the Plans, which will now provide for an overall increase in the allocation of share-based awards. The cash portion of the awards will not be subject to time-based vesting conditions and will be expensed during the performance year. The share-based portion of the awards is subject to a three-year time-based vesting schedule beginning on the first anniversary of the grant (which is made in the first calendar quarter of the subsequent year). As a result, the total expense for the share-based portion of the awards is recorded over the period from the beginning of the performance year through the vesting date, or 50 months. Therefore, under the new design of the Plans, the expense recognized during the performance year will be less than the expense that would have been recognized in the performance year under the previous Plan design. The Company expects that difference will be recognized as an increase in expense over the subsequent three years, irrespective of the Company’s financial performance in the future periods.
Stock Based Compensation
ASC 718,
Compensation — Stock Compensation
(ASC 718), requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors, including employee stock options and other forms of equity compensation based on estimated fair values. The Company estimates the grant-date fair value of stock options using the Black-Scholes option-pricing model. The fair value of the restricted stock unit awards is calculated as the market value of the Company’s Class A common stock on the date of grant. The Company’s awards are subject to graded or cliff vesting. Compensation expense is adjusted for forfeitures as they occur and is recognized on a straight-line basis over the requisite service period of the award.
Income Taxes
HFF, Inc. and Holliday GP are corporations, and the Operating Partnerships are limited partnerships. The Operating Partnerships are subject to state and local income taxes. Income and expenses of the Operating Partnerships are passed through and reported on the corporate income tax returns of HFF, Inc. and Holliday GP. Income taxes shown on the Company’s consolidated statements of comprehensive income reflect federal income taxes of the corporation and business and corporate income taxes in various jurisdictions including the UK Subsidiaries.
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax losses and tax credit carryforwards, if any. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized in income in the period of the tax rate change. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The 2017 Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. During 2018 the Company completed its analysis related to the impacts of 2017 Tax Act in connection with the finalization of its tax returns. There were no adjustments from previously estimated amounts as a result of the completion of the Company’s assessment.
Cost of Services
The Company considers personnel expenses directly attributable to providing services to its clients, such as salaries, commissions and transaction bonuses to capital markets advisors and analysts, and certain purchased services to be directly attributable to the generation of capital markets services revenue and has classified these expenses as cost of services in the consolidated statements of comprehensive income.
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Segment Reporting
The Company operates in one reportable segment, the commercial real estate financial intermediary segment and offers debt placement, investment advisory, equity placement and investment banking services, loan sales and loan servicing, through its 26 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.
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.
Treasury Stock
The Company records common stock purchased for treasury at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the first-in, first-out basis.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and subsequently issued a series of amendments to the new revenue standard. Topic 606 supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. Topic 606 implements a five-step model for determining when and how revenue is recognized along with expanded disclosure requirements. Under the model, an entity will be required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Topic 606 also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method).
The Company adopted the requirements of the new standard on January 1, 2018, using the modified retrospective approach. Under this method, the Company could elect to apply the cumulative effect method to either all contracts as of the date of initial application or only to contracts that are not complete as of that date. The Company elected to apply the modified retrospective method to contracts that are not complete as of the date of initial application. Comparative information has not been adjusted and continues to be reported under the prior revenue recognition accounting guidance. The Company recorded a $1.3 million cumulative effect adjustment to retained earnings related to the adoption of the new standard. As a result of the adoption of Topic 606, the Company now estimates the variable consideration associated with equity capital raising fees and recognizes the revenue once the constraint on revenue is lifted, which generally occurs once capital is committed.
In February 2016, the FASB issued new guidance on the accounting for leases. This new guidance will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The Company adopted the new standard on January 1, 2019 on a modified retrospective basis and will not restate comparative periods. Upon adoption, the Company elected to utilize the package of practical expedients permitted under the transition guidance, which allows the Company to carryforward (i) the historical lease classification, (ii) its assessment on whether a contract is or contains a lease and (iii) previously capitalized initial direct costs for any leases that exist prior to adoption of the new standard. The Company will also elect to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of comprehensive income on a straight-line basis over the least term. Upon adoption, approximately $38 million will be recognized as a right-of-use asset and approximately $49 million will be recorded as a lease liability on our consolidated statement of financial position as of January 1, 2019. The new standard also requires expanded disclosure regarding the amounts, timing and uncertainties of cash flows related to a company’s lease portfolio. We are evaluating these disclosure requirements and are incorporating the collection of relevant data into our processes in preparation for disclosure in 2019. Other than disclosed, we do not expect the adoption of the new standard to have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for annual and interim financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. The Company is currently evaluating this standard to determine the impact of adoption on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, “Stock Compensation (Topic 718): Scope of Modification Accounting”. ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. The adoption of ASU 2017-09 had no impact on the Company’s consolidated financial statements.
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In June 2018, the FASB issued ASU 2018-07 “Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting”, to simplify the accounting for share–based payments granted to nonemploye
es by aligning the accounting with the requirements for employee share–based compensation. ASU 2018-07 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. The Company does not expect the adoption of thi
s guidance to have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820):
Disclosure Framework – Changes to the Disclosure Requirements for the Fair Value Measurement.
The update eliminates the disclosure requirements associated with (a) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (b) policies related to the timing and transfers between levels of the fair value hierarchy and (c) the valuation processes for Level 3 fair value measurements. ASU 2018-13 will require disclosures related to the range and weighted averages used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for the Company on January 1, 2020 with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements or disclosures.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of operations is required to be filed. This final rule became effective on November 5, 2018. On September 25, 2018, the SEC released guidance advising that it will not object to a registrant adopting the requirement to include changes in stockholders’ equity in the Form 10-Q for the first quarter beginning after the effective date of the rule. The Company anticipates adopting SEC Release No. 33-10532 in its Quarterly Report on Form 10-Q filing for the quarter ending March 31, 2019.
ASC 718 requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors including employee stock options and other forms of equity compensation based on estimated fair values. The Company estimates the grant-date fair value of stock options using the Black-Scholes option-pricing model. For stock options, the Company uses the simplified method to determine the expected term of the option. Expected volatility used to value stock options is based on the Company’s historical volatility. The Company has not granted any stock options since 2010. The fair value of the restricted stock unit awards is calculated as the market value of the Company’s Class A common stock on the date of grant. The Company’s awards are subject to graded or cliff vesting. Compensation expense is adjusted for forfeitures as they occur and is recognized on a straight-line basis over the requisite service period of the award. A summary of the cost of the awards granted during the years ended December 31, 2018 and 2017 is provided below.
Equity Incentive Plan
Prior to the effective date of the initial public offering, the stockholder of HFF, Inc. and the Board of Directors adopted the HFF, Inc. 2006 Omnibus Incentive Compensation Plan (the “2006 Plan”). The 2006 Plan authorized the grant of deferred stock, restricted stock, stock options, stock appreciation rights, stock units, stock purchase rights and cash-based awards. Upon the effective date of the registration statement, grants were awarded under the 2006 Plan to certain employees and non-employee members of the board of directors. The 2006 Plan imposed limits on the awards that may be made to any individual during a calendar year. The number of shares available for awards under the terms of the 2006 Plan was 3,500,000 (subject to stock splits, stock dividends and similar transactions). On May 26, 2016, the stockholders of HFF, Inc. adopted the 2016 Equity Incentive Plan (the “2016 Equity Plan”). The 2016 Equity Plan replaces the 2006 Plan and reserves for 3,859,524 (including 109,524 shares not previously awarded under the 2006 Plan) shares for issuance of awards. The 2016 Equity Plan authorizes the grant of options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards.
The stock compensation cost that has been charged against income for the years ended December 31, 2018, 2017 and 2016 was $25.2 million, $17.4 million and $12.3 million, respectively, which is recorded in personnel expenses in the consolidated statements of comprehensive income. At December 31, 2018, there was approximately $37.4 million of unrecognized compensation cost related to share-based awards.
The fair value of stock options is estimated on the grant date using a Black-Scholes option-pricing model. The following table presents the weighted average assumptions for stock options still outstanding as of December 31, 2018:
Dividend yield
|
|
|
0.0
|
%
|
Expected volatility
|
|
|
71.5
|
%
|
Risk-free interest rate
|
|
|
2.1
|
%
|
Expected life (in years)
|
|
|
6.0
|
|
49
The following table presents options
outstanding for the years ended December 31, 201
8
, 201
7
and 201
6
and their related weighted average exercise price, weighted average remaining contractual term and intrinsic value:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
(in ‘000’s)
|
|
Balance at December 31, 2015
|
|
|
24,992
|
|
|
$
|
9.25
|
|
|
3.5 years
|
|
|
$
|
777
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(5,338
|
)
|
|
|
17.41
|
|
|
0.2 years
|
|
|
|
159
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31, 2016
|
|
|
19,654
|
|
|
$
|
7.04
|
|
|
3.1 years
|
|
|
$
|
595
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31, 2017
|
|
|
19,654
|
|
|
$
|
7.04
|
|
|
2.1 years
|
|
|
$
|
956
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(7,335
|
)
|
|
|
6.13
|
|
|
0.8 years
|
|
|
|
359
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31, 2018
|
|
|
12,319
|
|
|
$
|
7.58
|
|
|
1.3 years
|
|
|
$
|
408
|
|
No options were granted, vested, forfeited or expired during the years ended December 31, 2018, 2017 and 2016. During the year ended December 31, 2018, 7,335 options were exercised for which treasury shares were re-issued.
A summary of restricted stock units (“RSU”) activity and related information during the period was as follows:
|
|
RSU’s with no
vesting period
|
|
|
RSU’s with graded
or cliff vesting
period
|
|
|
Total
|
|
Balance at January 1, 2016
|
|
|
156,250
|
|
|
|
1,139,599
|
|
|
|
1,295,849
|
|
Granted
|
|
|
12,372
|
|
|
|
1,060,434
|
|
|
|
1,072,806
|
|
Dividend on unissued RSU’s
|
|
|
11,576
|
|
|
|
70,960
|
|
|
|
82,536
|
|
Converted to common stock
|
|
|
(2,035
|
)
|
|
|
(341,519
|
)
|
|
|
(343,554
|
)
|
Forfeited or expired
|
|
|
—
|
|
|
|
(26,745
|
)
|
|
|
(26,745
|
)
|
Balance at December 31, 2016
|
|
|
178,163
|
|
|
|
1,902,729
|
|
|
|
2,080,892
|
|
Granted
|
|
|
14,598
|
|
|
|
818,282
|
|
|
|
832,880
|
|
Dividend on unissued RSU’s
|
|
|
9,046
|
|
|
|
86,602
|
|
|
|
95,648
|
|
Converted to common stock
|
|
|
(2,927
|
)
|
|
|
(598,078
|
)
|
|
|
(601,005
|
)
|
Forfeited or expired
|
|
|
—
|
|
|
|
(18,867
|
)
|
|
|
(18,867
|
)
|
Balance at December 31, 2017
|
|
|
198,880
|
|
|
|
2,190,668
|
|
|
|
2,389,548
|
|
Granted
|
|
|
14,460
|
|
|
|
733,485
|
|
|
|
747,945
|
|
Dividend on unissued RSU’s
|
|
|
7,520
|
|
|
|
71,867
|
|
|
|
79,387
|
|
Converted to common stock
|
|
|
(2,860
|
)
|
|
|
(827,786
|
)
|
|
|
(830,646
|
)
|
Forfeited or expired
|
|
|
—
|
|
|
|
(23,652
|
)
|
|
|
(23,652
|
)
|
Balance at December 31, 2018
|
|
|
218,000
|
|
|
|
2,144,582
|
|
|
|
2,362,582
|
|
As of December 31, 2018, there were 2,362,582 RSU’s outstanding. The fair value of vested RSU’s was $7.6 million and $10.2 million at December 31, 2018 and December 31, 2017, respectively. The RSU exercises will be settled through either the issuance of new shares of Class A common stock or treasury shares.
The weighted average remaining contractual term of the unvested restricted stock units is 1.7 years as of December 31, 2018.
On February 20, 2019, the board of directors for the Company granted 234,806 restricted stock units with a fair value of $10.0 million. The grant will vest over a five-year period with 20% vesting increments starting on the first anniversary of the grant. Additionally, on February 20, 2019, the board of directors for the Company granted 441,693 restricted stock units with a fair value of $18.8 million in connection with the 2018 Office and Firm Profit Participation Plans and Executive Bonus Plan which vest over a three-year period with one-third vesting on each of the first, second and third anniversary of the grant.
50
4.
|
Property and Equipment
|
Property and equipment consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Furniture and equipment
|
|
$
|
8,426
|
|
|
$
|
8,192
|
|
Computer equipment
|
|
|
1,759
|
|
|
|
2,139
|
|
Capitalized software costs
|
|
|
3,665
|
|
|
|
2,567
|
|
Leasehold improvements
|
|
|
21,065
|
|
|
|
19,536
|
|
Subtotal
|
|
|
34,915
|
|
|
|
32,434
|
|
Less accumulated depreciation and amortization
|
|
|
(17,719
|
)
|
|
|
(14,537
|
)
|
|
|
$
|
17,196
|
|
|
$
|
17,897
|
|
At December 31, 2018 and 2017, the Company has recorded capital leased office equipment within furniture and equipment of $1.2 million and $1.7 million, respectively, including accumulated amortization of $1.0 million and $1.3 million, respectively, which is included within depreciation and amortization expense on the accompanying consolidated statements of comprehensive income.
5.
|
Business Combinations, Goodwill and Intangible Assets
|
During the first quarter of 2017, the Company completed two acquisitions for approximately $6.2 million, net of cash received. The acquisitions of businesses in New York and the United Kingdom provide capital advisory and investment banking services to the commercial real estate market. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date, with the remaining unallocated amount recognized as goodwill. The goodwill represents the expected synergies and the Company’s ability to control the assembled workforces of the acquired businesses and approximately $1.8 million is deductible for tax purposes.
The Company’s goodwill is summarized as follows (in thousands):
Balance at December 31, 2017
|
|
$
|
8,688
|
|
Additions through acquisitions
|
|
|
-
|
|
Foreign currency translation
|
|
|
(176
|
)
|
Balance at December 31, 2018
|
|
$
|
8,512
|
|
The Company performs goodwill impairment tests annually during the fourth quarter, and also performs interim goodwill impairment tests if it is determined that it is more likely than not that the fair value of a reporting unit is less than the carrying amount. The results of the current year annual impairment review concluded that no impairment existed as the fair value of our reporting units was in excess of their carrying value.
The Company’s intangible assets are summarized as follows (in thousands):
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
|
(in thousands)
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
$
|
116,683
|
|
|
$
|
(43,039
|
)
|
|
$
|
73,644
|
|
|
$
|
92,856
|
|
|
$
|
(34,373
|
)
|
|
$
|
58,483
|
|
Other
|
|
|
940
|
|
|
|
(722
|
)
|
|
|
218
|
|
|
|
959
|
|
|
|
(605
|
)
|
|
|
354
|
|
Total intangible assets
|
|
$
|
117,623
|
|
|
$
|
(43,761
|
)
|
|
$
|
73,862
|
|
|
$
|
93,815
|
|
|
$
|
(34,978
|
)
|
|
$
|
58,837
|
|
The Company’s intangible assets consist of mortgage servicing rights, non-competition agreements and customer relationships. The non-competition agreements and customer relationships intangible assets were assigned a five- and one-year useful life, respectively, and relate to the acquisitions completed during the first quarter of 2017.
As of December 31, 2018, 2017 and 2016, the Company serviced $81.2 billion, $69.8 billion and $58.0 billion, respectively, of commercial loans. The Company earned $35.2 million, $29.1 million and $23.2 million in servicing fees for the years ended December 31, 2018, 2017 and 2016, respectively. These revenues are recorded as capital markets services revenues in the consolidated statements of comprehensive income.
The total commercial loan servicing portfolio includes loans for which there is no corresponding mortgage servicing right recorded on the balance sheet, as these servicing rights were assumed prior to January 1, 2007 and involved no initial consideration paid by the Company. The Company has recorded mortgage servicing rights of $73.6 million and $58.5 million on $80.3 billion and $68.8 billion, respectively, of the total loans serviced as of December 31, 2018 and 2017.
The Company stratifies its servicing portfolio based on the type of loan, including Freddie Mac, commercial mortgage backed securities (CMBS), life company loans and limited-service life company loans.
51
Changes in the carrying value of mortgage servicing rights for the years ended December 31,
201
8
and 201
7
(in thousands):
Category
|
December 31, 2017
|
|
|
Capitalized
|
|
|
Amortized
|
|
|
December 31, 2018
|
|
Freddie Mac
|
$
|
40,468
|
|
|
$
|
29,793
|
|
|
$
|
(12,514
|
)
|
|
$
|
57,747
|
|
CMBS
|
|
13,514
|
|
|
|
1,244
|
|
|
|
(3,444
|
)
|
|
|
11,314
|
|
Life company
|
|
3,833
|
|
|
|
3,032
|
|
|
|
(2,768
|
)
|
|
|
4,097
|
|
Life company – limited
|
|
668
|
|
|
|
249
|
|
|
|
(431
|
)
|
|
|
486
|
|
Total
|
$
|
58,483
|
|
|
$
|
34,318
|
|
|
$
|
(19,157
|
)
|
|
$
|
73,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
December 31, 2016
|
|
|
Capitalized
|
|
|
Amortized
|
|
|
December 31, 2017
|
|
Freddie Mac
|
$
|
16,234
|
|
|
$
|
29,546
|
|
|
$
|
(5,312
|
)
|
|
$
|
40,468
|
|
CMBS
|
|
16,247
|
|
|
|
1,169
|
|
|
|
(3,902
|
)
|
|
|
13,514
|
|
Life company
|
|
3,567
|
|
|
|
2,791
|
|
|
|
(2,525
|
)
|
|
|
3,833
|
|
Life company – limited
|
|
566
|
|
|
|
465
|
|
|
|
(363
|
)
|
|
|
668
|
|
Total
|
$
|
36,614
|
|
|
$
|
33,971
|
|
|
$
|
(12,102
|
)
|
|
$
|
58,483
|
|
Amounts capitalized represent mortgage servicing rights retained upon the sale of originated loans to Freddie Mac and mortgage servicing rights acquired without the exchange of initial consideration. The Company recorded mortgage servicing rights retained upon the sale of originated loans to Freddie Mac of $29.8 million and $29.5 million on $7.2 billion and $6.6 billion of loans, respectively, during the years ended December 31, 2018 and 2017, respectively. The Company recorded mortgage servicing rights acquired without the exchange of initial consideration on the CMBS and Life company tranches of $4.5 million and $4.4 million on $11.3 billion and $12.4 billion of loans, respectively, during the years ended December 31, 2018 and 2017. These amounts are recorded in interest and other income, net in the consolidated statements of comprehensive income. The Company also received securitization compensation in relation to securitization of certain Freddie Mac mortgage servicing rights in the years ended December 31, 2018, 2017 and 2016 of $14.5 million, $15.5 million and $5.5 million, respectively. The securitization compensation is recorded within interest and other income, net in the consolidated statements of comprehensive income.
Amortization expense related to intangible assets was $19.3 million, $12.7 million, and $8.6 million for the years ended December 31, 2018, 2017 and 2016, respectively, and is reported in depreciation and amortization in the consolidated statements of comprehensive income.
Estimated amortization expense for the next five years is as follows (in thousands):
2019
|
|
$
|
15,186
|
|
2020
|
|
|
12,924
|
|
2021
|
|
|
10,989
|
|
2022
|
|
|
9,512
|
|
2023
|
|
|
8,466
|
|
|
|
|
|
|
The weighted-average remaining life of the mortgage servicing rights intangible asset was 6.6 years and 6.0 years at December 31, 2018 and 2017, respectively.
6.
|
Fair Value Measurement
|
ASC Topic 820,
Fair Value Measurement
(ASC 820) establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into the following three levels: Level 1 inputs which are quoted market prices in active markets for identical assets or liabilities; Level 2 inputs which are observable market-based inputs or unobservable inputs corroborated by market data for the asset or liability; and Level 3 inputs which are unobservable inputs based on our own assumptions that are not corroborated by market data. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
52
In the normal course of business, the Company enters into co
ntractual commitments to originate and sell multifamily mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate. To mitigate the effect of the interest rate risk in
herent in providing rate lock commitments to borrowers, the Company enters into a sale commitment with Freddie Mac simultaneously with the rate lock commitment with the borrower. The terms of the contract with Freddie Mac and the rate lock with the borrowe
r are matched in substantially all respects to eliminate interest rate risk. Both the rate lock commitments to borrowers and the forward sale contracts to buyers are undesignated derivatives with level 2 inputs and, accordingly, are marked to fair value th
rough earnings. The impact on our financial position and earnings resulting from loan commitments is not significant. The Company elected the fair value option for all mortgage notes receivable originated after January 1, 2016 to eliminate the impact of th
e variability in interest rate movements on the value of the mortgage notes receivable.
The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2018 and 2017 (in thousands):
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
December 31, 2018
|
|
Carrying
Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Mortgage notes receivable
|
|
$
|
351,194
|
|
|
$
|
—
|
|
|
$
|
351,194
|
|
|
$
|
—
|
|
Total recurring fair value measurements
|
|
$
|
351,194
|
|
|
$
|
—
|
|
|
$
|
351,194
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
December 31, 2017
|
|
Carrying
Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Mortgage notes receivable
|
|
$
|
450,821
|
|
|
$
|
—
|
|
|
$
|
450,821
|
|
|
$
|
—
|
|
Total recurring fair value measurements
|
|
$
|
450,821
|
|
|
$
|
—
|
|
|
$
|
450,821
|
|
|
$
|
—
|
|
The valuation of mortgage notes receivable is calculated based on already locked in interest rates. These assets are classified as Level 2 in the fair value hierarchy as all inputs are reasonably observable.
In accordance with GAAP, from time to time, the Company measures mortgage servicing rights at fair value on a nonrecurring basis. The mortgage serving rights are recorded at fair value upon initial recording and were not re-measured during 2018 or 2017 because the Company continued to utilize the amortization method under ASC 860 and the fair value of the mortgage serving rights exceeds the carrying value at December 31, 2018. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. As such, mortgage servicing rights are subject to measurement at fair value on a nonrecurring basis.
The following tables sets forth the Company’s financial assets that were accounted for at fair value on a nonrecurring basis by level within the fair value hierarchy as of December 31, 2018 and 2017 (in thousands):
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
December 31, 2018
|
|
Carrying
Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Mortgage servicing rights
|
|
$
|
73,644
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91,787
|
|
Total nonrecurring fair value measurements
|
|
$
|
73,644
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
December 31, 2017
|
|
Carrying
Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Mortgage servicing rights
|
|
$
|
58,483
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,899
|
|
Total nonrecurring fair value measurements
|
|
$
|
58,483
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,899
|
|
Mortgage servicing rights do not trade in an active, open market with readily available observable prices. Since there is no ready market value for the mortgage servicing rights, such as quoted market prices or prices based on sales or purchases of similar assets, the Company determines the fair value of the mortgage servicing rights by estimating the present value of future cash flows associated with servicing the loans. Management makes certain assumptions and judgments in estimating the fair value of servicing rights. These assumptions include the benefits of servicing (contractual servicing fees and interest on escrow and float balances), the cost of servicing, prepayment rates (including risk of default), an inflation rate, the expected life of the cash flows and the discount rate.
53
The significant assumptions utilized to value servicing rights as of December 31, 2018 and 2017 are as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Expected life of cash flows
|
|
3 years to 10 years
|
|
|
3 years to 10 years
|
|
Discount rate
(1)
|
|
10% to 16%
|
|
|
10% to 16%
|
|
Prepayment rate
|
|
0% to 8%
|
|
|
0% to 8%
|
|
Inflation rate
|
|
|
2
|
%
|
|
|
2
|
%
|
Cost of service per loan
|
|
$1,920 to $4,743
|
|
|
$1,920 to $4,780
|
|
(1)
|
Reflects the time value of money and the risk of future cash flows related to the possible cancellation of servicing contracts, transferability restrictions on certain servicing contracts, concentration in the life company portfolio and large loan risk.
|
The above assumptions are subject to change based on management’s judgments and estimates of future changes in the risks related to future cash flows and interest rates. Changes in these factors would cause a corresponding increase or decrease in the prepayment rates and discount rates used in our valuation model.
FASB ASC Topic 825,
Financial Instruments
also requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. Our financial instruments, excluding those included in the preceding fair value tables above, are as follows:
Cash and Cash Equivalents and Restricted Cash
: These balances include cash and cash equivalents with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments; these are considered Level 1 fair values.
Securities held-to-maturity:
The Company’s $25.0 million investment in securities held to maturity are classified as level 2 within the fair value hierarchy and carried at amortized cost. The securities are required to be redeemed upon the completion of the three-year term of the Risk Transfer Agreement, as defined in Note 8, and will be redeemed for $25.0 million.
Note payable:
The Company has a $3.8 million note payable which matured and was paid on January 15, 2019. At December 31, 2018, the note payable is classified as level 2 within the fair value hierarchy.
Warehouse line of credit
: Due to the short-term nature and variable interest rates of this instrument, fair value approximates carrying value; these are considered Level 2 fair values.
On September 17, 2018, one of the Company’s wholly-owned subsidiaries entered into a securities purchase agreement to facilitate the Company’s $5.5 million investment in Kensington CA, LLC, a third-party provider of service offerings related to derivative product transactions (the “Joint Venture”). Pursuant to the securities purchase agreement and the operating agreement of the Joint Venture, to which the Company’s wholly owned subsidiary, HFF InvestCo LLC, is a party, the Company indirectly owns a 50% interest in the Joint Venture and is entitled to a 50% interest in the profits and losses of the Joint Venture.
The Company’s investment in the Joint Venture is subject to a customary post-closing purchase price adjustments and is recorded within other noncurrent assets. The consideration paid by the Company at closing consisted of approximately $1.7 million in cash and a note payable of $3.8 million, which matured on January 15, 2019. Through the Company’s 50% interest in the Joint Venture, the Company has the ability to exert significant influence over the Joint Venture but does not have control. As such, the Joint Venture is accounted for as an equity method investment. The Company recorded $0.3 million of equity income within interest and other income, net for the year ended December 31, 2018.
8
.
|
Securities Held-to-Maturity
|
On July 2, 2018, the Company invested $25.0 million in mandatorily redeemable preferred stock of M&T-RCC in connection with the Risk Transfer Agreement, which is expected to enable the Company to increase the Company’s share of Fannie Mae’s Delegated Underwriting and Servicing (“DUS®”) business. Through the Risk Transfer Agreement, the Company sources multifamily property loans to M&T-RCC, which funds the loans through its Fannie Mae DUS® loan platform.
In connection with the Risk Transfer Agreement, the Company indemnifies M&T-RCC for their credit recourse obligations associated with loans originated under the Risk Transfer Agreement. In addition to the $25.0 million investment, the Company deposits a portion of the original principal balance for each loan originated under the Risk Transfer Agreement to serve as collateral for any potential future indemnification obligations. As of December 31, 2018, collateral deposits of $1.7 million have been recorded within other noncurrent assets. For additional information on the Company’s indemnification obligation under the Risk Transfer Agreement see Note 19.
54
9
.
|
Warehouse Line of Credit
|
HFF LP maintains two uncommitted warehouse revolving lines of credit for the purpose of funding Freddie Mac mortgage loans that it originates under the Freddie Mac Program. The Company is a party to an uncommitted $600 million financing arrangement with PNC Bank, N.A. (“PNC”). The PNC arrangement was modified during the first quarter of 2018 to increase the maximum capacity from $600 million to $1.0 billion. On October 1, 2018, HFF LP entered into an Extended Funding Agreement with Freddie Mac whereby Freddie Mac can extend the required purchase date for each mortgage that has an Original Funding Date (as defined in the agreement) occurring within the fourth quarter of 2018, to February 15, 2019. In connection with the Extended Funding Agreement with Freddie Mac, PNC agreed to increase its financing arrangement to $2.5 billion. The maximum capacity under the PNC arrangement will revert to $1.0 billion after the expiration of the Extended Funding Agreement. The Company is also party to an uncommitted $150 million financing arrangement with The Huntington National Bank (“Huntington”). The Huntington arrangement was amended in July 2017 to increase the uncommitted amount from $125 million to $150 million, which can be increased to $175 million three times in a one-year period for 45 calendar days and may be increased to $175 million from October 1, 2018 through February 15, 2019.
Each funding is separately approved on a transaction-by-transaction basis and is collateralized by a loan and mortgage on a multifamily property that is ultimately purchased by Freddie Mac. The PNC and Huntington financing arrangements are only for the purpose of supporting the Company’s participation in the Freddie Mac Program and cannot be used for any other purpose. As of December 31, 2018 and December 31, 2017, HFF LP had $348.4 million and $450.3 million, respectively, outstanding on the warehouse lines of credit. Interest on the warehouse lines of credit is at the 30-day LIBOR rate (2.50% and 1.56% at December 31, 2018 and 2017, respectively) plus a spread. HFF LP is also paid interest on the mortgage note receivable secured by a multifamily loan at the rate in the Freddie Mac note.
The Company leases various corporate offices and office equipment under noncancelable operating leases. These leases have initial terms of three to eleven years. Several of the leases have termination clauses whereby the term may be reduced by two to eight years upon prior notice and payment of a termination fee by the Company. Total rental expense charged to operations was $13.3 million, $13.3 million, and $11.7 million for the years ended December 31, 2018, 2017 and 2016, respectively, and is recorded within occupancy expense in the consolidated statements of comprehensive income.
Future minimum rental payments for the next five years under operating leases with noncancelable terms in excess of one year and without regard to early termination provisions are as follows (in thousands):
|
|
Future minimum
rent payments
|
|
|
|
(in thousands)
|
|
2019
|
|
$
|
11,958
|
|
2020
|
|
|
12,189
|
|
2021
|
|
|
10,750
|
|
2022
|
|
|
8,540
|
|
2023
|
|
|
5,721
|
|
Thereafter
|
|
|
13,987
|
|
|
|
|
63,145
|
|
The Company subleases certain office space to subtenants, some of 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 comprehensive income.
The Company also leases certain office equipment under capital leases that expire at various dates through 2023. See Note 4 for further information on the assets recorded under these capital leases at December 31, 2018 and 2017, respectively.
HFF Holdings is not an obligor under, nor does it guarantee, any of the Company’s leases.
The Company maintains a retirement savings plan for all eligible 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. The Company makes matching contributions equal to 50% of the first 6% of both deferred and after-tax salary contributions, up to a maximum of $5,000. The Company’s contributions charged to expense for the plan were $3.4 million, $3.0 million, and $2.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.
55
The Company services commercial real estate loans for investors. The servicing portfolio totaled $81.2 billion, $69.8 billion, and $58.0 billion at December 31, 2018, 2017 and 2016, respectively.
In connection with its servicing activities, the Company holds funds in escrow for the benefit of mortgagors for hazard insurance, real estate taxes and other financing arrangements. At December 31, 2018 the funds held in escrow totaled $566.9 million. These funds, and the offsetting obligations, are not presented in the Company’s financial statements as they do not represent 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. Certain fees earned on these escrow funds are reported in interest and other income, net in the consolidated statements of comprehensive income.
The Company is party to various litigation matters, in most cases involving ordinary course and routine claims incidental to its business. The Company cannot estimate with certainty its ultimate legal and financial liability with respect to any pending matters. In accordance with ASC 450,
Contingencies
, a reserve for estimated losses is recorded when the amount is probable and can be reasonably estimated. However, the Company does not believe, based on examination of such pending matters, that a material loss related to these matters is reasonably possible.
Income tax expense includes current and deferred taxes as follows (in thousands):
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Year Ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
20,564
|
|
|
$
|
9,343
|
|
|
$
|
29,907
|
|
State
|
|
|
7,304
|
|
|
|
1,061
|
|
|
|
8,365
|
|
Foreign
|
|
|
—
|
|
|
|
(737
|
)
|
|
|
(737
|
)
|
|
|
$
|
27,868
|
|
|
$
|
9,667
|
|
|
$
|
37,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Year Ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
38,321
|
|
|
$
|
60,587
|
|
|
$
|
98,908
|
|
State
|
|
|
6,764
|
|
|
|
2,126
|
|
|
|
8,890
|
|
Foreign
|
|
|
-
|
|
|
|
(1,030
|
)
|
|
|
(1,030
|
)
|
|
|
$
|
45,085
|
|
|
$
|
61,683
|
|
|
$
|
106,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Year Ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
28,515
|
|
|
$
|
15,772
|
|
|
$
|
44,287
|
|
State
|
|
|
5,987
|
|
|
|
762
|
|
|
|
6,749
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
34,502
|
|
|
$
|
16,534
|
|
|
$
|
51,036
|
|
The reconciliation between the income tax computed by applying the U.S. federal statutory rate and the effective tax rate on net income is as follows for the years ended December 31, 2018, 2017 and 2016 (dollars in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Income tax expense / (benefit)
|
|
|
|
|
|
Rate
|
|
|
|
|
|
|
Rate
|
|
|
|
|
|
|
Rate
|
|
Taxes computed at federal rate
|
|
$
|
32,240
|
|
|
|
21.0
|
%
|
|
$
|
70,639
|
|
|
|
35.0
|
%
|
|
$
|
44,881
|
|
|
|
35.0
|
%
|
State and local taxes, net of federal tax benefit
|
|
|
8,218
|
|
|
|
5.3
|
%
|
|
|
6,398
|
|
|
|
3.2
|
%
|
|
|
5,258
|
|
|
|
4.1
|
%
|
Rate differential on non-US income
|
|
|
94
|
|
|
|
0.1
|
%
|
|
|
954
|
|
|
|
0.5
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Effect of deferred rate change
|
|
|
(1,249
|
)
|
|
|
(0.8
|
)%
|
|
|
41,834
|
|
|
|
20.7
|
%
|
|
|
(1,188
|
)
|
|
|
-0.9
|
%
|
Change in income tax benefit payable to shareholder
|
|
|
258
|
|
|
|
0.2
|
%
|
|
|
(13,724
|
)
|
|
|
(6.8
|
)%
|
|
|
359
|
|
|
|
0.3
|
%
|
Effect of (windfalls) shortfalls related to equity compensation
|
|
|
(4,622
|
)
|
|
|
(3.0
|
)%
|
|
|
(1,139
|
)
|
|
|
(0.6
|
)%
|
|
|
-
|
|
|
|
—
|
|
Provision to return adjustment
|
|
|
163
|
|
|
|
0.1
|
%
|
|
|
(131
|
)
|
|
|
(0.1
|
)%
|
|
|
196
|
|
|
|
0.1
|
%
|
Meals and entertainment
|
|
|
1,747
|
|
|
|
1.1
|
%
|
|
|
1,757
|
|
|
|
0.9
|
%
|
|
|
1,484
|
|
|
|
1.2
|
%
|
Other
|
|
|
686
|
|
|
|
0.4
|
%
|
|
|
180
|
|
|
|
0.1
|
%
|
|
|
46
|
|
|
|
0.0
|
%
|
Income tax expense
|
|
$
|
37,535
|
|
|
|
24.4
|
%
|
|
$
|
106,768
|
|
|
|
52.9
|
%
|
|
$
|
51,036
|
|
|
|
39.8
|
%
|
56
Deferred income tax assets and liabilities consist of the following at December 31, 2018 and 2017 (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Section 754 election tax basis step-up
|
|
$
|
49,367
|
|
|
$
|
57,766
|
|
Tenant improvements
|
|
|
3,132
|
|
|
|
2,678
|
|
Restricted stock units
|
|
|
8,925
|
|
|
|
6,830
|
|
Intangible asset
|
|
|
207
|
|
|
|
228
|
|
Net operating loss
|
|
|
1,687
|
|
|
|
1,070
|
|
Other
|
|
|
468
|
|
|
|
779
|
|
Deferred income tax asset
|
|
|
63,786
|
|
|
|
69,351
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(561
|
)
|
|
|
(669
|
)
|
Servicing rights
|
|
|
(19,467
|
)
|
|
|
(15,150
|
)
|
Deferred rent
|
|
|
(1,934
|
)
|
|
|
(1,428
|
)
|
Compensation
|
|
|
(314
|
)
|
|
|
(851
|
)
|
Investment in partnership
|
|
|
(386
|
)
|
|
|
(379
|
)
|
Deferred income tax liability
|
|
|
(22,662
|
)
|
|
|
(18,477
|
)
|
Net deferred income tax asset
|
|
$
|
41,124
|
|
|
$
|
50,874
|
|
The 2017 Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. The Company has completed its analysis related to the impacts of the 2017 Tax Act in connection with the finalization of its tax returns. There were no adjustments from previously estimated amounts as a result of the completion of the Company’s assessment.
The Company’s primary deferred tax asset represents a tax basis step-up election under Section 754 of the Internal Revenue Code, as amended (“Section 754”), made by HFF, Inc. relating to the initial purchase of units of the Operating Partnerships in connection with the Reorganization Transactions and a tax basis step-up on subsequent exchanges of Operating Partnership units for the Company’s Class A common stock since the date of the Reorganization Transactions. As a result of the step-up in basis from these transactions, the Company is entitled to annual future tax benefits in the form of amortization for income tax purposes. The amortization on the Section 754 basis step up and past payments under the tax receivable agreement was approximately $34.0 million at December 31, 2018.
To the extent that the Company does not have sufficient taxable income in a year to fully utilize this annual deduction, the unused benefit is recharacterized as a net operating loss and can then be carried forward indefinitely. The Company measured the deferred tax asset based on the estimated income tax effects of the increase in the tax basis of the assets owned by the Operating Partnerships utilizing the enacted tax rates at the date of the transaction. In accordance with ASC 740, the tax effects of transactions with shareholders that result in changes in the tax basis of a company’s assets and liabilities are recognized in equity. Changes in the measurement of the deferred tax assets or the valuation allowance due to changes in the enacted tax rates upon the finalization of the income tax returns for the year of the exchange transaction were recorded in equity. All subsequent changes in the measurement of the deferred tax assets due to changes in the enacted tax rates or changes in the valuation allowance are recorded as a component of income tax expense.
In evaluating the realizability of the deferred tax assets, management makes estimates and judgments regarding the level and timing of future taxable income, including projecting future revenue growth and changes to the cost structure. In order to realize the anticipated pre-tax benefit associated with the Section 754 basis step up and payments under the tax receivable agreement of approximately $38.5 million, the Company needs to generate approximately $418 million in revenue each year, assuming a constant cost structure. In the event that the Company cannot realize the anticipated pre-tax benefit of $38.5 the shortfall becomes a net operating loss that can be carried forward indefinitely to offset future taxable income. Based on this analysis and other quantitative and qualitative factors, management believes that it is currently more likely than not that the Company will be able to generate sufficient taxable income to realize the net deferred tax assets resulting from the basis step up transactions (initial sale of units in the Operating Partnerships and subsequent exchanges of Operating Partnership units since the date of the Reorganization Transactions).
The Company has analyzed the need for a reserve for unrecognized tax benefits under ASC 740-10 and has determined that any such tax benefits do not have a material impact on the financial statements. It is not expected that there will be a significant increase or decrease in the amount of unrecognized tax benefits within the next 12 months. With few exceptions, the Company is no longer subject to U.S. federal or state and local tax examinations by tax authorities before 2015.
57
The Company will recognize interest and penalties related to unrecognized tax benefits in interest and other income, net in the consolidated statements of comprehensive income. There were no interest or penalties recorded in the twelve mo
nths ended December 31,
2018,
2017 or 201
6
.
Tax Receivable Agreement
In connection with the Reorganization Transactions, HFF LP and HFF Securities made an election under Section 754 for 2007 and maintained that election in effect for each taxable year in which an exchange of Operating Partnership units for shares of the Company’s Class A common stock occurred. The initial sale as a result of the offering and the subsequent exchanges of partnership units increased the tax basis of the assets owned by HFF LP and HFF Securities to their fair market value. This increase in tax basis allows the Company to reduce the amount of future tax payments to the extent that the Company has future taxable income. As a result of the increase in tax basis, as of December 31, 2018, the Company is entitled to future tax benefits of $49.4 million and has recorded this amount as a deferred tax asset on its consolidated balance sheet. The Company is obligated, however, pursuant to its Tax Receivable Agreement with HFF Holdings, to pay to HFF Holdings, 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes as a result of these increases in tax basis and as a result of certain other tax benefits arising from the Company entering into the tax receivable agreement and making payments under that agreement. For purposes of the tax receivable agreement, actual cash savings in income tax will be computed by comparing the Company’s actual income tax liability to the amount of such taxes that it would have been required to pay had there been no increase to the tax basis of the assets of HFF LP and HFF Securities as a result of the initial sale and later exchanges and had the Company not entered into the tax receivable agreement.
The Company accounts for the income tax effects and corresponding tax receivable agreement effects as a result of the initial purchase and the sale of units of the Operating Partnerships in connection with the Reorganization Transactions and exchanges of Operating Partnership units for the Company’s Class A shares by recognizing a deferred tax asset for the estimated income tax effects of the increase in the tax basis of the assets owned by the Operating Partnerships, based on enacted tax rates at the date of the transaction, less any tax valuation allowance the Company believes is required. In accordance with ASC 740, the tax effects of transactions with shareholders that result in changes in the tax basis of a company’s assets and liabilities will be recognized in equity. If transactions with shareholders result in the recognition of deferred tax assets from changes in the company’s tax basis of assets and liabilities, the valuation allowance initially required upon recognition of these deferred assets will be recorded in equity. Subsequent changes in enacted tax rates or any valuation allowance are recorded as a component of income tax expense.
The Company believes it is more likely than not that it will realize the benefit represented by the deferred tax asset, and, therefore, the Company recorded 85% of this estimated amount of the increase in deferred tax assets, as a liability to HFF Holdings under the tax receivable agreement and the remaining 15% of the increase in deferred tax assets directly in additional paid-in capital in stockholders’ equity.
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 generated in the future, changes in future tax rates, the value of individual assets, the portion of the Company’s payments under the tax receivable agreement constituting imputed interest and increases in the tax basis of the Company’s assets resulting in payments to HFF Holdings, the Company has estimated that the payments that will be made to HFF Holdings will be $50.3 million and has recorded this obligation to HFF Holdings as a liability on the consolidated balance sheet. During the year ended December 31, 2018, the tax rates and apportionment used to measure the deferred tax assets were updated which resulted in an increase of deferred tax assets of $1.2 million and a corresponding increase in the payable under the tax receivable agreement of $1.2 million. The tax rates used to measure the deferred tax assets were also updated during the year ended December 31, 2017 to reflect the reduction in statutory rates inclusive of the 2017 Tax Act, which resulted in a decrease of deferred tax assets of $41.8 million and a corresponding decrease in the payable under the tax receivable agreement of $39.2 million. To the extent the Company does not realize all of the tax benefits in future years, this liability to HFF Holdings may be reduced.
In conjunction with filing of the Company’s 2017 federal and state tax returns, the benefit for 2017 relating to the Section 754 basis step-up was finalized resulting in $14.0 million of tax benefits being realized by the Company. As discussed above, the Company is obligated to remit to HFF Holdings 85% of any such cash savings in federal and state tax. As such during 2018, the Company paid $11.9 million to HFF Holdings under the tax receivable agreement. In conjunction with the filing of the Company’s 2016 federal and state tax returns, the benefit for 2016 relating to the Section 754 basis step-up was finalized resulting in $13.2 million in tax benefits realized by the Company for 2016. During 2017, the Company paid $11.2 million to HFF Holdings under this tax receivable agreement. As of December 31, 2018, the Company has made payments to HFF Holdings pursuant to the terms of the tax receivable agreement in an aggregate amount of approximately $97.3 million and the Company anticipates making a payment of approximately $8.3 million to HFF Holdings in 2019.
1
5
.
|
Stockholders’ Equity
|
The Company is authorized to issue 175,000,000 shares of Class A common stock, par value $0.01 per share. Each share of Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally. The Company had issued 39,143,253 and 38,742,698 shares of Class A common stock as of December 31, 2018 and 2017, respectively.
58
On January
31
, 201
9
, our board of directors declared a special cash
dividend of $1.75 per
share of Class A common stock to
stockholders of record on February
11
, 201
9
. The aggregate dividend payment was paid on February 2
7
, 201
9
and totaled approximately $6
8
.
7
million
based on the number of shares of Class A common stock then outstanding. Additionally,
79,3
24
restricted stock units (dividend equivalent units) were granted for those unvested and vested but not issued restricted stock units as of the
record date of February
11
, 201
9
. These dividend equivalent units follow the same vesting terms as the underlying
restricted stock units.
On January 26, 2018, our board of directors declared a special cash dividend of $1.75 per share of Class A common stock to stockholders of record on February 9, 2018. The aggregate dividend payment was paid on February 21, 2018 and totaled approximately $67.8 million based on the number of shares of Class A common stock then outstanding. Additionally, 79,387 restricted stock units (dividend equivalent units) were granted for those unvested and vested but not issued restricted stock units as of the record date of February 9, 2018. These dividend equivalent units follow the same vesting terms as the underlying restricted stock units.
On January 24, 2017, our board of directors declared a special cash dividend of $1.57 per share of Class A common stock to stockholders of record on February 9, 2017. The aggregate dividend payment was paid on February 21, 2017 and totaled approximately $60.0 million based on the number of shares of Class A common stock then outstanding. Additionally, 95,648 restricted stock units (dividend equivalent units) were granted for those unvested and vested but not issued restricted stock units as of the record date of February 9, 2017. These dividend equivalent units follow the same vesting terms as the underlying restricted stock units.
The calculations of basic and diluted earnings per share amounts for the years ended December 31, 2018, 2017 and 2016 are described and presented below.
Basic Earnings per Share
Numerator
— net income for the years ended December 31, 2018, 2017 and 2016, respectively.
Denominator
— the weighted average shares of Class A common stock for the years ended December 31, 2018, 2017 and 2016, including 230,302, 210,707 and 193,946 restricted stock units that have vested and whose issuance is no longer contingent as of December 31, 2018, 2017 and 2016, respectively.
Diluted Earnings per Share
Numerator
— net income for the year ended December 31, 2018, 2017 and 2016, respectively.
Denominator
— the weighted average shares of Class A common stock year ended December 31, 2018, 2017 and 2016 including 230,302, 210,707 and 193,946 restricted stock units that have vested and whose issuance is no longer contingent as of December 31, 2018, 2017 and 2016, respectively, plus the dilutive effect of the unvested restricted stock units, restricted stock and stock options. There were no anti-dilutive unrestricted stock units and stock options in 2018, 2017 and 2016.
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share of Class A Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
115,988
|
|
|
$
|
94,960
|
|
|
$
|
77,195
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of Class A common
stock outstanding
|
|
|
39,205,214
|
|
|
|
38,662,118
|
|
|
|
38,245,682
|
|
Basic earnings per share of Class A common stock
|
|
$
|
2.96
|
|
|
$
|
2.46
|
|
|
$
|
2.02
|
|
Diluted Earnings Per Share of Class A Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
115,988
|
|
|
$
|
94,960
|
|
|
$
|
77,195
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares of Class A
common stock
|
|
|
39,205,214
|
|
|
|
38,662,118
|
|
|
|
38,245,682
|
|
Add—dilutive effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock units
|
|
|
1,059,879
|
|
|
|
995,402
|
|
|
|
586,121
|
|
Stock options
|
|
|
11,636
|
|
|
|
15,632
|
|
|
|
11,353
|
|
Weighted average common shares outstanding — diluted
|
|
|
40,276,729
|
|
|
|
39,673,152
|
|
|
|
38,843,156
|
|
Diluted earnings per share of Class A common stock
|
|
$
|
2.88
|
|
|
$
|
2.39
|
|
|
$
|
1.99
|
|
59
A significant portion of the Company’s capital markets services revenues is derived from transactions involving commercial real estate located in specific geographic areas. During 2018, approximately 19.1%, 12.0%, 6.7%, 5.9% and 5.5% of the Company’s capital markets services revenues were derived from transactions involving commercial real estate located in Texas, California, Florida, Illinois, and the region consisting of the District of Columbia, Maryland, and Virginia, respectively. During 2017, approximately 17.8%, 13.9%, 6.1%, 5.7% and 4.4% of the Company’s capital markets services revenues were derived from transactions involving commercial real estate located in Texas, California, Florida, New York, and the region consisting of the District of Columbia, Maryland, and Virginia, respectively. As a result, a significant portion of the Company’s business is dependent on the economic conditions in general and the markets for commercial real estate in these areas.
1
8
.
|
Related Party Transactions
|
As a result of the Company’s initial public offering, the Company entered into a tax receivable agreement with HFF Holdings that provides for the payment by the Company to HFF Holdings of 85% of the amount of the cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes as a result of the increase in tax basis of the assets owned by HFF LP and HFF Securities and as a result of certain other tax benefits arising from entering into the tax receivable agreement and making payments under that agreement. As members of HFF Holdings, each of Mark Gibson, the Company’s chief executive officer, Jody Thornton, the Company’s president and member of the Company’s board of directors and a capital markets advisor of the Operating Partnerships, and John Fowler, a current director emeritus of the Company’s board of directors and a capital markets advisor of the Operating Partnerships, and Matthew D. Lawton, Gerard T. Sansosti and Manuel A. de Zarraga, and Michael J. Tepedino, each an Executive Managing Director and a capital markets advisor of the Operating Partnerships, is entitled to participate in such payments, in each case on a pro rata basis based upon such person’s ownership of interests in each series of tax receivable payments created by the initial public offering or subsequent exchange of Operating Partnership units. During the third quarter of 2018, Messrs. Gibson, Thornton, Fowler, Lawton, Sansosti, Tepedino, and de Zarraga received payments of $1.0 million, $1.0 million, $0.8 million, $0.3 million, $0.4 million, $0.2 million and $0.3 million in connection with the Company’s payment of $11.9 million to HFF Holdings under the tax receivable agreement. During the third quarter of 2017, Messrs. Gibson, Thornton, Fowler, Lawton, Sansosti, Tepedino, and de Zarraga received payments of $1.1 million, $1.1 million, $0.9 million, $0.3 million, $0.5 million, $0.2 million and $0.3 million in connection with the Company’s payment of $11.2 million to HFF Holdings under the tax receivable agreement. The Company will retain the remaining 15% of cash savings, if any, in income tax that it realizes. For purposes of the tax receivable agreement, cash savings in income tax will be computed by comparing the Company’s actual income tax liability to the amount of such taxes that it would have been required to pay had there been no increase to the tax basis of the assets of HFF LP and HFF Securities allocable to the Company as a result of the initial sale and later exchanges and had the Company not entered into the tax receivable agreement. The term of the tax receivable agreement commenced upon consummation of the offering and will continue until all such tax benefits have been utilized or have expired. See Note 14 for further information regarding the tax receivable agreement and Note 19 for the amount recorded in relation to this agreement.
1
9
.
|
Commitments and Contingencies
|
Tax Receivable Agreement
The Company is obligated, pursuant to its tax receivable agreement with HFF Holdings, to pay to HFF Holdings 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes as a result of the increases in tax basis under Section 754 and as a result of certain other tax benefits arising from the Company entering into the tax receivable agreement and making payments under that agreement. During the year ended December 31, 2018, the Company paid HFF Holdings $11.9 million, which represents 85% of the actual cash savings realized by the Company in 2017. During the year ended December 31, 2017, the Company paid HFF Holdings $11.2 million, which represents 85% of the actual cash savings realized by the Company in 2016. The Company has recorded $50.3 million and $60.9 million for this obligation to HFF Holdings as a liability on the consolidated balance sheets as of December 31, 2018 and 2017, respectively. The Company anticipates making a payment to HFF Holdings of approximately $8.3 million in 2019.
Employment Arrangements
In recent years, the Company has entered into arrangements with newly-hired capital markets advisors whereby these capital markets advisors would be paid additional compensation if certain performance targets are met over a defined period. These payments will be made to the capital markets advisors only if they enter into an employment agreement at the end of the performance period. The Company begins to accrue for these payments when it is deemed probable that payments will be made; therefore, on a quarterly basis, the Company evaluates the probability of each of the capital markets advisors achieving the performance targets and the
probability of each of the capital markets advisors signing an employment agreement. As of December 31, 2018, no such arrangements existed. As of December 31, 2017, $0.6 million had been accrued for these arrangements within the consolidated balance sheet.
60
Risk Transfer Agreement
In connection with the Risk
Transfer Agreement, the Company will indemnify M&T-RCC’s loan loss exposure for each loan originated under the Risk Transfer Agreement. The Company’s loss exposure is capped at 33.33% of the unpaid principal balance in excess of the collateral securing such loan. As of December 31, 2018, the Company’s maximum quantifiable loss exposure associated with the Company’s indemnification obligation is $56.3 million on $168.9 million of unpaid principal balances. The maximum quantifiable liability is not representative of the actual loss the Company may incur as the Company would only be liable for this amount in the event that all of the loans for which the Company indemnifies M&T-RCC were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement. There were no actual losses incurred under this arrangement during the three months ended December 31, 2018.
For loans that have been sold through the Risk Transfer Agreement, the Company records an indemnification accrual equal to the fair value of the guarantee obligations undertaken upon M&T-RCC’s sale of the loan. Subsequently, this accrual is amortized over the estimated life of the loan and recorded as an increase in capital markets services revenues within the consolidated statements of comprehensive income. The Company records a corresponding asset related to loan performance fee rights which will also be amortized over the estimated life of the loan. As of December 31, 2018, the Company recorded approximately $0.2 million related to guarantee obligations and a corresponding loan performance fee right which have been recorded within other noncurrent liabilities and other noncurrent assets, respectively.
20.
|
Selected Quarterly Financial Data (unaudited, in thousands except for per share data)
|
|
|
Quarter Ended
|
|
2018
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Net revenue
|
|
$
|
131,618
|
|
|
$
|
153,731
|
|
|
$
|
161,394
|
|
|
$
|
215,299
|
|
Operating income
|
|
|
2,707
|
|
|
|
21,529
|
|
|
|
25,973
|
|
|
|
44,525
|
|
Interest and other income, net
|
|
|
15,171
|
|
|
|
11,743
|
|
|
|
14,305
|
|
|
|
18,811
|
|
Decrease in payable under the tax receivable agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,226
|
)
|
|
|
-
|
|
Net income
|
|
|
17,068
|
|
|
|
24,339
|
|
|
|
29,617
|
|
|
|
44,964
|
|
Per share data (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.62
|
|
|
$
|
0.75
|
|
|
$
|
1.15
|
|
Diluted earnings per share
|
|
$
|
0.42
|
|
|
$
|
0.61
|
|
|
$
|
0.73
|
|
|
$
|
1.11
|
|
|
|
Quarter Ended
|
|
2017
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Net revenue
|
|
$
|
138,806
|
|
|
$
|
137,364
|
|
|
$
|
148,022
|
|
|
$
|
185,286
|
|
Operating income
|
|
|
20,764
|
|
|
|
19,397
|
|
|
|
24,646
|
|
|
|
40,521
|
|
Interest and other income, net
|
|
|
10,794
|
|
|
|
13,042
|
|
|
|
12,209
|
|
|
|
21,164
|
|
Increase in payable under the tax receivable agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
479
|
|
|
|
38,733
|
|
Net income
|
|
|
19,656
|
|
|
|
19,462
|
|
|
|
21,603
|
|
|
|
34,239
|
|
Per share data (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.51
|
|
|
$
|
0.50
|
|
|
$
|
0.56
|
|
|
$
|
0.88
|
|
Diluted earnings per share
|
|
$
|
0.50
|
|
|
$
|
0.49
|
|
|
$
|
0.54
|
|
|
$
|
0.85
|
|
(1)
|
Earnings per share were computed independently for each of the periods presented; therefore, the sum of the earnings per share amounts for the quarters may not equal the total for the year.
|