Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
Organization
HFF, Inc., a Delaware corporation (the
Company), through its Operating Partnerships, Holliday Fenoglio Fowler, L.P., a Texas limited partnership (HFF LP), and HFF Securities L.P., a Delaware limited partnership and registered broker-dealer (HFF
Securities and together with HFF LP, the Operating Partnerships), is a commercial real estate financial intermediary providing commercial real estate and capital markets services including debt placement, investment sales, equity
placements, investment banking and advisory services, loan sales and loan sale advisory services, commercial loan servicing, and capital markets advice and maintains 23 offices in the United States.
Initial Public Offering and Reorganization
The Company
was formed in November 2006 in connection with a proposed initial public offering of its Class A common stock. On November 9, 2006, the Company filed a registration statement on Form S-1 with the United States Securities and Exchange
Commission (the SEC) relating to a proposed underwritten initial public offering of 14,300,000 shares of Class A common stock of the Company (the Offering). On January 30, 2007, the SEC declared the registration
statement on Form S-1 effective and the Company priced 14,300,000 shares for the initial public offering at a price of $18.00 per share. On January 31, 2007, the Companys common stock began trading on the New York Stock Exchange under the
symbol HF.
In addition to cash received for its sale of all of the shares of Holliday GP and approximately 44.7% of partnership units of each
of the Operating Partnerships (including partnership units in the Operating Partnerships held by Holliday GP), HFF Holdings also received, through the issuance of one share of the Companys Class B common stock to HFF Holdings, an exchange
right that permitted HFF Holdings to exchange interests in the Operating Partnerships for shares of (i) the Companys Class A common stock (the Exchange Right) and (ii) rights under a tax receivable agreement between
the Company and HFF Holdings. Since all of the partnership units had been exchanged as of August 31, 2012, the Class B common stock was transferred to the Company and retired on August 31, 2012 in accordance with the Companys
certificate of incorporation. See Note 12 for further discussion of the tax receivable agreement.
As a result of the reorganization, the Company became a
holding company through a series of transactions pursuant to a sale and purchase agreement. Pursuant to the Offering and reorganization, the Companys sole assets are, through its wholly-owned subsidiary HoldCo LLC, partnership interests of HFF
LP and HFF Securities and all of the shares of Holliday GP.
Basis of Presentation
The accompanying consolidated financial statements of the Company as of September 30, 2016 and December 31, 2015 and for the three and nine month
periods ended September 30, 2016 and September 30, 2015, include the accounts of HFF LP, HFF Securities, and the Companys wholly-owned subsidiaries, Holliday GP and HoldCo LLC. All significant intercompany accounts and transactions
have been eliminated.
Pending Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued changes to the accounting for equity compensation. This update simplifies
several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This update will be effective
for the Company beginning in fiscal year 2017. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In February 2016, the FASB issued new guidance on the accounting for leases. This new guidance will require that a lessee recognize assets and
liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The new lease accounting requirements are effective for the
Companys 2019 fiscal year with a modified retrospective transition approach required, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
8
In May 2014, the FASB issued changes to revenue recognition with customers. This update provides a five-step
analysis of transactions to determine when and how revenue is recognized. An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. This update will be effective for the Company beginning in fiscal year 2018. This update may be applied retrospectively to each prior reporting period presented or retrospectively with the
cumulative effect of initially applying this update recognized at the date of initial application. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
2. Summary of Significant Accounting Policies
These
interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01
of Regulation S-X and should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2015. Accordingly, significant accounting policies and disclosures normally provided have been omitted as
such items are disclosed therein. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair presentation of the results for the interim periods presented have been included. The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. These estimates are based on information available as
of the date of the unaudited consolidated financial statements. Therefore, actual results could differ from those estimates. Furthermore, operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of
the results expected for the year ending December 31, 2016.
The Company has a firm profit participation plan, office profit participation plans, and
effective January 1, 2015, an executive bonus plan (the Plans) that each allow for incentive payments to be made, based on the achievement of various performance metrics, either in the form of cash or stock at the election of the
Companys board of directors. The expense associated with the Plans is included within personnel expenses in the consolidated statements of income. The expense recorded for these Plans is estimated during the year based on actual results at
each interim reporting date and an estimate of future results for the remainder of the year. Based on an accounting policy election and consistent with ASC 718,
CompensationStock Compensation
, the expense associated with the estimated
share-based component of the estimated incentive payout is recognized before the grant date of the share-based awards due to the fact that the terms of the Plans have been approved by the Companys board of directors, the employees of the
Company understand the requirements to earn the award, the number of shares is not determined before the grant date and, finally, if the performance metrics are not met during the performance year, the award is not earned and therefore forfeited.
Prior to the grant date, the share-based component expense is recorded as incentive compensation expense within personnel expenses in the Companys consolidated statements of income. Following the award, if any, of the related incentive payout,
the share-based component expense is reclassified as stock compensation costs within personnel expenses and the share-based component of the accrued incentive compensation is reclassified as additional paid-in-capital upon the granting of the awards
on the Companys consolidated balance sheets.
Prior to January 1, 2015, the Companys 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 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.
9
3. Stock Compensation
The stock compensation cost that has been charged against income for the three and nine months ended September 30, 2016 was $2.9 million and $8.9 million,
respectively, which is recorded in personnel expenses in the consolidated statements of income. The stock compensation cost that has been charged against income for the three and nine months ended September 30, 2015 was $1.8 million and $6.4
million, respectively. At September 30, 2016, there was approximately $31.0 million of unrecognized compensation cost related to non-vested restricted stock units with a weighted average remaining contractual term of 2.8 years. As of
September 30, 2016, there were 2,082,189 restricted stock units outstanding, of which 1,892,804 have continued vesting requirements.
During the
three month period ended September 30, 2016, no options were granted, vested, exercised or forfeited.
During the three month period ended
September 30, 2016, 16,756 new restricted stock units were granted, 4,393 restricted stock units vested and were converted to Class A common stock, and no restricted stock units were forfeited.
The fair value of vested restricted stock units was $5.2 million at September 30, 2016.
4. Property and Equipment
Property and equipment consist
of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Furniture and equipment
|
|
$
|
7,685
|
|
|
$
|
7,055
|
|
Computer equipment
|
|
|
1,950
|
|
|
|
1,555
|
|
Capitalized software costs
|
|
|
1,375
|
|
|
|
882
|
|
Leasehold improvements
|
|
|
15,754
|
|
|
|
13,454
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
26,764
|
|
|
|
22,946
|
|
Less accumulated depreciation and amortization
|
|
|
(11,247
|
)
|
|
|
(9,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,517
|
|
|
$
|
13,592
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2016 and December 31, 2015, the Company has recorded, within furniture and equipment, office
equipment under capital leases of $1.9 million and $1.7 million, respectively, including accumulated amortization of $1.2 million and $0.8 million, respectively, which is included within depreciation and amortization expense in the accompanying
consolidated statements of income. See Note 7 for discussion of the related capital lease obligations.
5. Intangible Assets
The Companys intangible assets are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
$
|
58,484
|
|
|
$
|
(26,515
|
)
|
|
$
|
31,969
|
|
|
$
|
49,771
|
|
|
$
|
(22,849
|
)
|
|
$
|
26,922
|
|
Unamortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINRA license
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
58,584
|
|
|
$
|
(26,515
|
)
|
|
$
|
32,069
|
|
|
$
|
49,871
|
|
|
$
|
(22,849
|
)
|
|
$
|
27,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016 and December 31, 2015, the Company serviced $55.2 billion and $48.7 billion, respectively,
of commercial loans. The Company earned $5.8 million and $17.0 million in servicing fees and interest on float and escrow balances for the three and nine month periods ending September 30, 2016, respectively. The Company earned $5.3 million and
$14.7 million in servicing fees and interest on float and escrow balances for the three and nine month periods ending September 30, 2015, respectively. These revenues are recorded as capital markets services revenues in the consolidated
statements of income.
The total commercial loan servicing portfolio includes loans for which there are no corresponding mortgage servicing rights
recorded on the balance sheet, as these servicing rights were assumed prior to the Companys adoption of ASC 860,
Transfers and Servicing
(ASC 860) on January 1, 2007 and involved no initial consideration paid by the Company. The
Company recorded mortgage servicing rights of $32.0 million and $26.9 million on $53.6 billion and $45.2 billion, respectively, of the total loans serviced as of September 30, 2016 and December 31, 2015.
10
The Company stratifies its servicing portfolio based on the type of loan, including life company loans,
commercial mortgage backed securities (CMBS), Freddie Mac and limited-service life company loans.
Changes in the carrying value of mortgage
servicing rights for the nine month periods ended September 30, 2016 and 2015, were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
12/31/15
|
|
|
Capitalized
|
|
|
Amortized
|
|
|
Sold /
Transferred
|
|
|
9/30/16
|
|
Freddie Mac
|
|
$
|
7,074
|
|
|
$
|
8,460
|
|
|
$
|
(1,576
|
)
|
|
$
|
(2,450
|
)
|
|
$
|
11,508
|
|
CMBS
|
|
|
16,768
|
|
|
|
778
|
|
|
|
(3,001
|
)
|
|
|
1,948
|
|
|
|
16,493
|
|
Life company
|
|
|
2,729
|
|
|
|
2,154
|
|
|
|
(1,448
|
)
|
|
|
|
|
|
|
3,435
|
|
Life company limited
|
|
|
351
|
|
|
|
404
|
|
|
|
(222
|
)
|
|
|
|
|
|
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,922
|
|
|
$
|
11,796
|
|
|
$
|
(6,247
|
)
|
|
$
|
(502
|
)
|
|
$
|
31,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
12/31/14
|
|
|
Capitalized
|
|
|
Amortized
|
|
|
Sold /
Transferred
|
|
|
9/30/15
|
|
Freddie Mac
|
|
$
|
5,199
|
|
|
$
|
9,220
|
|
|
$
|
(1,083
|
)
|
|
$
|
(4,797
|
)
|
|
$
|
8,539
|
|
CMBS
|
|
|
13,021
|
|
|
|
1,120
|
|
|
|
(2,479
|
)
|
|
|
3,821
|
|
|
|
15,483
|
|
Life company
|
|
|
1,913
|
|
|
|
1,865
|
|
|
|
(1,069
|
)
|
|
|
|
|
|
|
2,709
|
|
Life company limited
|
|
|
414
|
|
|
|
167
|
|
|
|
(191
|
)
|
|
|
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,547
|
|
|
$
|
12,372
|
|
|
$
|
(4,822
|
)
|
|
$
|
(976
|
)
|
|
$
|
27,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 for the CMBS and life company tranches. The Company recorded mortgage servicing rights retained upon the sale of originated loans to Freddie Mac of $2.2 million and $8.5 million
on $0.6 billion and $2.8 billion of loans, respectively, during the three and nine month periods ending September 30, 2016, respectively and $3.3 million and $9.2 million on $1.2 billion and $4.2 billion of loans, respectively, during the three
and nine month periods ending September 30, 2015, respectively. The Company recorded mortgage servicing rights acquired without the exchange of initial consideration on the CMBS and Life company tranches of $0.8 million and $3.3 million on $1.8
billion and $8.4 billion of loans, respectively, during the three and nine month periods ending September 30, 2016, respectively and $1.4 million and $3.2 million on $2.5 billion and $6.9 billion of loans, respectively, during the three and
nine month periods ending September 30, 2015. During the nine months ending September 30, 2016 and 2015, the Company sold the cashiering portion of certain Freddie Mac mortgage servicing rights. While the Company transferred the risks and
rewards of ownership of the cashiering portion of the mortgage servicing rights, the Company continues to perform limited servicing activities on these loans for a reduced market-based fee. Therefore, the remaining servicing rights were transferred
to the CMBS servicing tranche. The net result of these transactions was that the Company recorded a gain in the three and nine months ending September 30, 2016 of $0.0 million and $1.8 million, respectively, and $1.5 million and $2.9 million
during the three and nine month periods ending September 30, 2015, respectively, within interest and other income, net in the consolidated statements of income. The Company also received securitization compensation in relation to the
securitization of certain Freddie Mac loans for which the Company services in the three and nine months ending September 30, 2016 of $1.3 million and $4.2 million, respectively, and $1.6 million and $4.7 million during the three and nine month
periods ending September 30, 2015, respectively. The securitization compensation is recorded within interest and other income, net in the consolidated statements of income.
Amortization expense related to intangible assets was $2.2 million and $6.2 million during the three and nine month periods ended September 30, 2016 and
$1.7 million and $4.8 million during the three and nine month periods ending September 30, 2015, respectively, and is recorded in depreciation and amortization in the consolidated statements of income.
Estimated amortization expense for the next five years is as follows (dollars in thousands):
|
|
|
|
|
Remainder of 2016
|
|
$
|
2,095
|
|
2017
|
|
|
7,580
|
|
2018
|
|
|
6,082
|
|
2019
|
|
|
4,246
|
|
2020
|
|
|
3,394
|
|
2021
|
|
|
2,910
|
|
11
The weighted-average life of the mortgage servicing rights intangible asset was 6.3 years at September 30,
2016.
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 liabilitys classification within the hierarchy is determined based on the lowest level input that is significant to the fair value
measurement.
In the normal course of business, the Company enters into contractual commitments to originate (purchase) and sell multifamily mortgage
loans at fixed prices with fixed expiration dates. The commitments become effective when the borrowers lock-in a specified interest rate. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to
borrowers, the Company enters into a sale commitment with Freddie Mac simultaneously with the rate lock commitment with the borrower. The terms of the contract with Freddie Mac and the rate lock with the borrower are matched in substantially all
respects to eliminate interest rate risk. Both the rate lock commitments to borrowers and the forward sale contracts to Freddie Mac are undesignated derivatives and, accordingly, are marked to fair value through 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 the variability in interest rate
movements on the value of the mortgage notes receivable.
The following table sets forth the Companys financial assets that were accounted for at
fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
Fair Value Measurements Using:
|
|
|
|
Carrying
Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes receivable
|
|
$
|
826,851
|
|
|
$
|
|
|
|
$
|
826,851
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring fair value measurements
|
|
$
|
826,851
|
|
|
$
|
|
|
|
$
|
826,851
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. There are no financial assets accounted for at fair value on a recurring basis at December 31, 2015.
In accordance with GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. These assets may include mortgage
servicing rights and prior to January 1, 2016, mortgage notes receivable. The mortgage servicing rights are recorded at fair value upon initial recording and were not re-measured at fair value during the third quarter of 2016 because the
Company continues to utilize the amortization method under ASC 860 and the fair value of the mortgage servicing rights exceeds the carrying value at September 30, 2016.
12
The following table sets forth the Companys financial assets that were accounted for at fair value on a
nonrecurring basis by level within the fair value hierarchy as of September 30, 2016 and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Carrying
Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Nonrecurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
$
|
31,969
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
43,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonrecurring fair value measurements
|
|
$
|
31,969
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
43,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes receivable
|
|
$
|
318,951
|
|
|
$
|
|
|
|
$
|
318,951
|
|
|
$
|
|
|
Mortgage servicing rights
|
|
|
26,922
|
|
|
|
|
|
|
|
|
|
|
|
35,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonrecurring fair value measurements
|
|
$
|
345,873
|
|
|
|
|
|
|
$
|
318,951
|
|
|
$
|
35,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Mortgage servicing rights do not trade in an active, open market with readily-available observable prices. Since
there is no ready market value for the mortgage servicing rights, such as quoted market prices or prices based on sales or purchases of similar assets, the Company determines the fair value of the mortgage servicing rights by estimating the present
value of future cash flows associated with the servicing of the loans. Management makes certain assumptions and judgments in estimating the fair value of servicing rights, including the benefits of servicing (contractual servicing fees and interest
on escrow and float balances), the cost of servicing, prepayment rates (including risk of default), an inflation rate, the expected life of the cash flows and the discount rate. The significant assumptions utilized to value servicing rights as of
September 30, 2016 and December 31, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Expected life of cash flows
|
|
|
3 years to 11 years
|
|
|
|
3 years to 10 years
|
|
Discount rate (1)
|
|
|
14% to 20%
|
|
|
|
14% to 20%
|
|
Prepayment rate
|
|
|
0% to 8%
|
|
|
|
0% to 8%
|
|
Inflation rate
|
|
|
2%
|
|
|
|
2%
|
|
Cost of service per loan
|
|
|
$1,600 to $3,996
|
|
|
|
$1,600 to $4,033
|
|
(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 managements judgments and estimates of
future changes in the risks related to future cash flows and interest rates. Changes in these factors would cause a corresponding increase or decrease in the prepayment rates and discount rates used in the Companys valuation model.
FASB ASC Topic 825,
Financial Instruments
also requires disclosure of fair value information about financial instruments, whether or not recognized in
the accompanying consolidated balance sheets. Our financial instruments, excluding those included in the preceding fair value tables above, are as follows:
Cash and Cash Equivalents
: These balances include cash and cash equivalents with maturities of less than three months. The carrying amount approximates
fair value due to the short-term maturities of these instruments; these are considered Level 1 fair values.
Warehouse line of credit
: Due to the
short-term nature and variable interest rates of this instrument, fair value approximates carrying value; these are considered Level 2 fair values.
14
7. Capital Lease Obligations
Capital lease obligations consist of the following at September 30, 2016 and December 31, 2015 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Capital lease obligations
|
|
$
|
790
|
|
|
$
|
1,014
|
|
Less current maturities
|
|
|
574
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
216
|
|
|
$
|
514
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations consist primarily of office equipment leases that expire at various dates through November 2019. A
summary of future minimum lease payments under capital leases at September 30, 2016 is as follows (dollars in thousands):
|
|
|
|
|
Remainder of 2016
|
|
$
|
136
|
|
2017
|
|
|
432
|
|
2018
|
|
|
198
|
|
2019
|
|
|
24
|
|
|
|
|
|
|
|
|
$
|
790
|
|
|
|
|
|
|
8. Warehouse Line of Credit
HFF LP maintains two uncommitted warehouse revolving lines of credit for the purpose of funding the Freddie Mac mortgage loans that it originates in connection
with its services as a Freddie Mac Multifamily Approved Seller/Servicer for Conventional and Senior Housing Loans. The Company is a party to an uncommitted $450 million financing arrangement with PNC Bank, N.A. (PNC) that can be
increased to $550 million four times a year for a period of 45 calendar days. The Company utilized a portion of this increase in September 2016. The Company is also party to an uncommitted $125 million financing arrangement with The Huntington
National Bank (Huntington) that can be increased to $150 million three times in a one-year period for 30 business days. On September 30, 2016, 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 Mandatory Funding Date (as defined in the agreement) occurring within the fourth quarter of 2016, to February 15, 2017. In connection with the extended funding
agreement with Freddie Mac, PNC agreed to increase the financing arrangement to $2.0 billion. Once the extended funding agreement with Freddie Mac expires on February 15, 2017, the capacity under the PNC warehouse agreement will revert to $450
million.
Each funding is separately approved on a transaction-by-transaction basis and is collateralized by a loan and mortgage on a multifamily property
that is ultimately purchased by Freddie Mac. The PNC and Huntington financing arrangements are only for the purpose of supporting the Companys participation in Freddie Macs Multifamily Approved Seller/Servicer for Conventional and Senior
Housing Loans program and cannot be used for any other purpose. As of September 30, 2016 and December 31, 2015, HFF LP had $824.5 million and $318.6 million, respectively, outstanding on the warehouse lines of credit. Interest on the
warehouse lines of credit is at the 30-day LIBOR rate (0.52% and 0.24% at September 30, 2016 and December 31, 2015, respectively) plus a spread. HFF LP is also paid interest on its loan secured by a multifamily loan at the rate in the
Freddie Mac note.
9. Lease Commitments
The Company
leases various corporate offices (which leases sometime include parking spaces) and office equipment under noncancelable operating leases. These leases have initial terms of three to eleven years. Several of the leases have termination clauses
whereby the term may be reduced by two to seven years upon prior notice and payment of a termination fee by the Company. Total rental expense charged to operations was $3.0 million and $8.6 million, respectively, during the three and nine month
periods ended September 30, 2016 and $2.7 million and $7.4 million, respectively, during the three and nine month periods ending September 30, 2015 and is recorded within occupancy expense in the consolidated statements of income.
15
Future minimum rental payments for the next five years under operating leases with noncancelable terms in excess
of one year and without regard to early termination provisions are as follows (dollars in thousands):
|
|
|
|
|
Remainder of 2016
|
|
$
|
2,250
|
|
2017
|
|
|
10,231
|
|
2018
|
|
|
9,860
|
|
2019
|
|
|
8,951
|
|
2020
|
|
|
8,116
|
|
2021
|
|
|
6,696
|
|
Thereafter
|
|
|
12,283
|
|
|
|
|
|
|
|
|
$
|
58,387
|
|
|
|
|
|
|
The Company subleases certain office space to subtenants, which subleases may be canceled at any time. The rental income
received from these subleases is included as a reduction of occupancy expenses in the accompanying consolidated statements of income.
The Company also
leases certain office equipment under capital leases that expire at various dates through 2019. See Note 4 and Note 7 above for further description of the assets and related obligations recorded under these capital leases at September 30, 2016
and December 31, 2015, respectively.
10. Servicing
The Company services commercial real estate loans for lenders. The unpaid principal balance of the servicing portfolio totaled $55.2 billion and $48.7 billion
at September 30, 2016 and December 31, 2015, respectively.
In connection with its servicing activities, the Company holds funds in escrow for
the benefit of mortgagors for hazard insurance, real estate taxes and other financing arrangements. At September 30, 2016 and December 31, 2015, the funds held in escrow totaled $212.7 million and $177.5 million, respectively. These funds,
and the offsetting liabilities of the borrowers to external parties, are not presented in the Companys consolidated financial statements as they do not represent the assets and liabilities of the Company. Pursuant to the requirements of the
various investors for which the Company services loans, the Company maintains bank accounts, holding escrow funds, which have balances in excess of the FDIC insurance limit. The fees earned on these escrow funds are reported in capital markets
services revenue in the consolidated statements of income.
11. Legal Proceedings
The Company is party to various litigation matters, in most cases involving ordinary course and routine claims incidental to its business. The Company cannot
estimate with certainty its ultimate legal and financial liability with respect to any pending matters. In accordance with ASC 450,
Contingencies,
a reserve for estimated losses is recorded when the amount is probable and can be reasonably
estimated. However, the Company does not believe, based on examination of such pending matters, that a material loss related to these matters is reasonably possible.
12. Income Taxes
Income tax expense includes current and
deferred taxes as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
14,897
|
|
|
$
|
13,528
|
|
|
$
|
28,425
|
|
State
|
|
|
2,925
|
|
|
|
546
|
|
|
|
3,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,822
|
|
|
$
|
14,074
|
|
|
$
|
31,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Nine months ended September 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
20,157
|
|
|
$
|
9,577
|
|
|
$
|
29,734
|
|
State
|
|
|
3,627
|
|
|
|
2,717
|
|
|
|
6,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,784
|
|
|
$
|
12,294
|
|
|
$
|
36,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
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 nine months ended September 30, 2016 and 2015 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Income tax expense / (benefit)
|
|
|
|
|
Rate
|
|
|
|
|
|
Rate
|
|
Taxes computed at federal rate
|
|
$
|
28,573
|
|
|
|
35.0
|
%
|
|
$
|
30,071
|
|
|
|
35.0
|
%
|
State and local taxes, net of federal tax benefit
|
|
|
3,288
|
|
|
|
4.0
|
%
|
|
|
3,261
|
|
|
|
3.8
|
%
|
Effect of deferred tax rate change
|
|
|
(1,188
|
)
|
|
|
(1.5
|
)%
|
|
|
2,621
|
|
|
|
3.1
|
%
|
Change in income tax benefit payable to stockholder
|
|
|
206
|
|
|
|
0.3
|
%
|
|
|
(451
|
)
|
|
|
(0.5
|
)%
|
Provision to return adjustment
|
|
|
196
|
|
|
|
0.2
|
%
|
|
|
(130
|
)
|
|
|
(0.2
|
)%
|
Meals and entertainment
|
|
|
789
|
|
|
|
1.0
|
%
|
|
|
693
|
|
|
|
0.8
|
%
|
Other
|
|
|
32
|
|
|
|
0.0
|
%
|
|
|
13
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
31,896
|
|
|
|
39.1
|
%
|
|
$
|
36,078
|
|
|
|
42.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities consist of the following at September 30, 2016 and December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Section 754 election tax basis step-up
|
|
$
|
120,806
|
|
|
$
|
129,862
|
|
Tenant improvements
|
|
|
3,456
|
|
|
|
3,118
|
|
Restricted stock units
|
|
|
7,286
|
|
|
|
6,229
|
|
Compensation
|
|
|
(160
|
)
|
|
|
4,267
|
|
Intangible asset
|
|
|
399
|
|
|
|
425
|
|
Other
|
|
|
627
|
|
|
|
465
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax asset
|
|
|
132,414
|
|
|
|
144,366
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(1,272
|
)
|
|
|
(1,262
|
)
|
Servicing rights
|
|
|
(13,860
|
)
|
|
|
(10,827
|
)
|
Deferred rent
|
|
|
(1,683
|
)
|
|
|
(1,822
|
)
|
Investment in partnership
|
|
|
(582
|
)
|
|
|
(578
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax liability
|
|
|
(17,397
|
)
|
|
|
(14,489
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
115,017
|
|
|
$
|
129,877
|
|
|
|
|
|
|
|
|
|
|
The primary deferred tax asset represents a tax basis step-up election under Section 754 of the Internal Revenue Code
(Section 754) made by the Company relating to the initial purchase of units of the Operating Partnerships in connection with the Reorganization Transactions and a tax basis step-up on subsequent exchanges of Operating Partnership units
for shares of the Companys Class A common stock since the date of the Reorganization Transactions. As a result of the step-up in basis from these transactions, the Company is entitled to annual future tax benefits in the form of
amortization for income tax purposes. The annual pre-tax benefit on the Section 754 step-up and past payments under the tax receivable agreement was approximately $120.8 million at September 30, 2016. To the extent that the Company does
not have sufficient taxable income in a year to fully utilize this annual deduction, the unused benefit is recharacterized as a net operating loss and can then be carried back two years or carried forward for twenty years. The Company measured the
deferred tax asset based on the estimated income tax effects of the increase in the tax basis of the assets owned by the Operating Partnerships utilizing the enacted tax rates at the date of the transaction. All subsequent changes in the measurement
of the deferred tax assets due to changes in the enacted tax rates or changes in the valuation allowance, if any, are recorded as a component of income tax expense.
In evaluating the realizability of the deferred tax assets, management makes estimates and judgments regarding the level and timing of future taxable income,
including projecting future revenue growth and changes to the cost structure. In order to realize the anticipated 2016 pre-tax benefit of approximately $34.6 million, the Company needs to generate approximately $305 million in revenue
during 2016, assuming a constant cost structure. In the event that the Company cannot realize the anticipated 2016 pre-tax benefit of $34.6 million, the shortfall becomes a net operating loss that can be carried back two years to offset
prior years taxable income or carried forward twenty years to offset future taxable income. Based on this analysis and other quantitative and qualitative factors, management believes that it is currently more likely than not that the
Company will be able to generate sufficient taxable income to realize the net deferred tax assets resulting from the basis step up transactions (initial sale of units in the Operating Partnerships and subsequent exchanges of Operating Partnership
units since the date of the Reorganization Transactions). The Company has no federal or state net operating losses at September 30, 2016.
17
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 US federal or state and local tax examination by tax authorities before 2011.
The Company will recognize interest and
penalties related to unrecognized tax benefits in interest and other income, net in the consolidated statements of income. There were no interest or penalties recorded in the three and nine month periods ending September 30, 2016 and 2015.
Tax Receivable Agreement
In connection with the
Reorganization Transactions, HFF LP and HFF Securities made an election under Section 754 for 2007 and kept that election in effect for each taxable year in which an exchange of Operating Partnership units for shares of the Companys
Class A common stock occurred. The initial sale as a result of the Offering and subsequent exchanges of Operating Partnership units for shares of Class A common stock produced increases in the tax basis of the assets owned by HFF LP and
HFF Securities to their fair market value. This increase in tax basis allows the Company to reduce the amount of tax payments to the extent that the Company has taxable income. As a result of the increase in tax basis, the Company is entitled to
future tax benefits of $120.8 million and has recorded this amount as a deferred tax asset on its consolidated balance sheet. The Company has updated its estimate of these future tax benefits based on the changes to the estimated annual effective
tax rate for 2016. The Company is obligated, however, pursuant to its tax receivable agreement with HFF Holdings, to pay to HFF Holdings 85% of the amount of cash savings in U.S. federal, state and local income tax that the Company actually realizes
as a result of these increases in tax basis and as a result of certain other tax benefits arising from the Company entering into the tax receivable agreement and making payments under that agreement. For purposes of the tax receivable agreement,
actual cash savings in income tax is computed by comparing the Companys actual income tax liability to the amount of such taxes that it would have been required to pay had there been no increase to the tax basis of the assets of HFF LP and HFF
Securities as a result of the initial sale and later exchanges had the Company not entered into the tax receivable agreement.
The Company accounted for
the income tax effects and corresponding tax receivable agreement effects as a result of the initial purchase and the sale of units of the Operating Partnerships in connection with the Reorganization Transactions and subsequent exchanges of
Operating Partnership units for the Companys 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. Subsequent changes in enacted tax rates or any valuation allowance are recorded as a component of income tax expense.
The Company believes it is more likely than not that it will realize the benefit represented by the deferred tax asset, and, therefore, the Company recorded
85% of this estimated amount of the increase in deferred tax assets as a liability to HFF Holdings under the tax receivable agreement and the remaining 15% of the increase in deferred tax assets directly in additional paid-in capital in
stockholders equity at the time of each exchange of Operating Partnership partnership units for shares of the Companys Class A common stock. As of August 31, 2012, all of the Operating Partnership partnership units have been
exchanged.
While the actual amount and timing of payments under the tax receivable agreement depend upon a number of factors, including the amount and
timing of taxable income generated in the future, changes in future tax rates, the value of individual assets, the portion of the Companys payments under the tax receivable agreement constituting imputed interest and increases in the tax basis
of the Companys assets resulting in payments to HFF Holdings, the Company has estimated that the future payments that will be made to HFF Holdings will be $111.4 million, and has recorded this obligation to HFF Holdings as a liability on the
consolidated balance sheet. To the extent the Company does not realize all of the tax benefits in future years, this liability to HFF Holdings may be reduced.
In conjunction with the filing of the Companys 2015 federal and state tax returns, the benefit for 2015 relating to the Section 754 basis step-up
was finalized, resulting in $12.7 million of tax benefits being realized by the Company. As discussed above, the Company is obligated to remit to HFF Holdings 85% of any such cash savings in federal and state tax. As such, during the third quarter
of 2016, the Company paid $10.8 million to HFF Holdings under the tax receivable agreement. As of September 30, 2016, the Company has made payments to HFF Holdings pursuant to the terms of the tax receivable agreement in an aggregate amount of
approximately $74.2 million and the Company anticipates making a payment of $11.3 million to HFF Holdings in 2017.
18
13. Stockholders Equity
The Company is authorized to issue 175,000,000 shares of Class A common stock, par value $0.01 per share. Each share of Class A common stock entitles
its holder to one vote on all matters to be voted on by stockholders generally. Holders of Class A common stock vote together as a single class on all matters presented to the stockholders for their vote or approval. The Company had issued
38,463,448 and 38,351,367 shares of Class A common stock as of September 30, 2016 and December 31, 2015, respectively.
On January 22,
2016, the board of directors declared a special cash dividend of $1.80 per share of Class A common stock to stockholders of record on February 8, 2016. The aggregate dividend payment was paid on February 19, 2016 and totaled
approximately $68.4 million based on the number of shares of Class A common stock then outstanding. Holders of unvested, and vested but not issued, restricted stock units were granted, in the aggregate, 82,536 additional restricted stock units
as of the record date of February 8, 2016. These units follow the same vesting terms as the underlying restricted stock units.
14. Earnings Per
Share
The Companys net income and weighted average shares outstanding for the three and nine month periods ended September 30, 2016 and
2015 consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income
|
|
$
|
20,020
|
|
|
$
|
19,256
|
|
|
$
|
49,742
|
|
|
$
|
49,839
|
|
Weighted Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
38,273,684
|
|
|
|
38,001,399
|
|
|
|
38,234,868
|
|
|
|
37,963,954
|
|
Diluted
|
|
|
38,958,377
|
|
|
|
38,554,028
|
|
|
|
38,764,829
|
|
|
|
38,394,930
|
|
The calculations of basic and diluted net income per share amounts for the three and nine month periods ended
September 30, 2016 and 2015 are described and presented below.
Basic Net Income per Share
Numerator
net income for the three and nine month periods ended September 30, 2016 and 2015, respectively.
Denominator
the weighted average shares of Class A common stock for the three and nine month periods ended September 30, 2016 and 2015,
including 189,385 and 165,732 restricted stock units that have vested and whose issuance is no longer contingent as of September 30, 2016 and September 30, 2015, respectively.
Diluted Net Income per Share
Numerator
net income for the three and nine month periods ended September 30, 2016 and 2015 as in the basic net income per share calculation described above.
Denominator
the weighted average shares of Class A common stock for the three and nine month periods ended September 30, 2016 and
2015, including 189,385 and 165,732 restricted stock units that have vested and whose issuance is no longer contingent as of September 30, 2016 and September 30, 2015, respectively, plus the dilutive effect of the unvested restricted stock
units and stock options.
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Three months ended
September 30,
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Nine months ended
September 30,
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2016
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2015
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2016
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2015
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Basic Earnings Per Share of Class A Common Stock
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Numerator:
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Net income
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$
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20,020
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$
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19,256
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$
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49,742
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$
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49,839
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Denominator:
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Weighted average number of shares of Class A common stock outstanding
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38,273,684
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38,001,399
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38,234,868
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37,963,954
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Basic net income per share of Class A common stock
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$
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0.52
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$
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0.51
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$
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1.30
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$
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1.31
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Diluted Earnings Per Share of Class A Common Stock
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Numerator:
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Net income
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$
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20,020
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$
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19,256
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$
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49,742
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$
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49,839
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Denominator:
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Basic weighted average number of shares of Class A common stock
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38,273,684
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38,001,399
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38,234,868
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37,963,954
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Adddilutive effect of:
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Unvested restricted stock units
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672,888
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530,758
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518,127
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408,786
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Stock options
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11,805
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21,871
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11,834
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22,190
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Weighted average common shares outstandingdiluted
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38,958,377
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38,554,028
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38,764,829
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38,394,930
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Diluted earnings per share of Class A common stock
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$
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0.51
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$
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0.50
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$
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1.28
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$
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1.30
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15. Related Party Transactions
As a result of the Companys initial public offering, the Company entered into a tax receivable agreement with HFF Holdings that provides for the payment
by the Company to HFF Holdings of 85% of the amount of the cash savings in U.S. federal, state and local income tax that the Company actually realizes as a result of the increase in tax basis of the assets owned by HFF LP and HFF Securities and as a
result of certain other tax benefits arising from entering into the tax receivable agreement and making payments under that agreement. As members of HFF Holdings, each of Mark Gibson, the Companys chief executive officer, Jody Thornton, the
Companys president and member of the Companys board of directors and a transaction professional of the Operating Partnerships, John Fowler, a current director emeritus of the Companys board of directors and a transaction
professional of the Operating Partnerships, and Matthew D. Lawton, Gerard T. Sansosti, Michael J. Tepedino and Manuel A. de Zarraga, each an Executive Managing Director and a transaction professional of the Operating Partnerships, is entitled to
participate in such payments, in each case on a pro rata basis based upon such persons 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 2016, Messrs. Gibson, Thornton, Fowler, Lawton, Sansosti, Tepedino and de Zarraga received payments of $0.8 million, $0.8 million, $0.7 million, $0.2 million, $0.4 million, $0.2 million and $0.2 million,
respectively, in connection with the Companys payment of $10.8 million to HFF Holdings under the tax receivable agreement. During the third quarter of 2015, Messrs. Gibson, Thornton, Fowler, Lawton, Sansosti, Tepedino and de Zarraga received
payments of $0.9 million, $0.8 million, $0.7 million, $0.2 million, $0.4 million, $0.2 million and $0.2 million, respectively, in connection with the Companys payment of $10.8 million to HFF Holdings under the tax receivable agreement. The
Company retains the remaining 15% of cash savings in income tax that it realizes. For purposes of the tax receivable agreement, cash savings in income tax is computed by comparing the Companys actual income tax liability to the amount of such
taxes that it would have been required to pay had there been no increase to the tax basis of the assets of HFF LP and HFF Securities allocable to the Company as a result of the initial sale and later exchanges and had the Company not entered into
the tax receivable agreement. The term of the tax receivable agreement commenced upon consummation of the initial public offering and will continue until all such tax benefits have been utilized or have expired. See Note 12 for further information
regarding the tax receivable agreement and Note 16 for the amount recorded in relation to this agreement.
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16. Commitments and Contingencies
The Company is obligated, pursuant to its tax receivable agreement with HFF Holdings, to pay to HFF Holdings 85% of the amount of cash savings in U.S. federal,
state and local income tax that the Company actually realizes as a result of the increases in tax basis under Section 754 and as a result of certain other tax benefits arising from the Company entering into the tax receivable agreement and
making payments under that agreement. The Company has recorded $111.4 million and $121.2 million for this obligation to HFF Holdings as a liability on the consolidated balance sheet as of September 30, 2016 and December 31, 2015,
respectively.
In recent years, the Company has entered into arrangements with newly-hired transaction professionals whereby these transaction
professionals would be paid additional compensation if certain performance targets are met over a defined period. These payments will be made to the transaction professionals only if they enter into an employment agreement at the end of the
performance period. Payments under these arrangements, if earned, would be paid in fiscal years 2016 through 2019. Currently, the Company cannot reasonably estimate the amounts that would be payable under all of these arrangements. The Company
begins to accrue for these payments when it is deemed probable that payments will be made; therefore, on a quarterly basis, the Company evaluates the probability of each of the transaction professionals achieving the performance targets and the
probability of each of the transaction professionals signing an employment agreement. There was no accrual required for these arrangements as of September 30, 2016. At December 31, 2015, $5.8 million was accrued for these arrangements on
the consolidated balance sheet and was paid in the first quarter of 2016.
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