Credit: Shutterstock photoW hen it comes to providing financial services to the commercial real estate industry, HFF has been on a winning streak. Through its subsidiaries, Holliday Fenoglio Fowler and HFF Securities,HFF ( HF ) provides commercial real estate and capital markets services to both the users and providers of capital in the commercial real estate sector.
The company offers clients a fully integrated national capital markets platform including debt placement, investment sales, equity placement, investment banking and advisory services, loan sales and commercial loan servicing. It operates out of 22 offices around the U.S. and has 732 associates, including 286 transaction professionals.
Its clients are owners of various property types, including offices, retail, industrial, senior living and multihousing properties.
Among its recent transactions is the acquisition financing for the purchase of 12 apartment communities totaling 4,635 units in Texas, Georgia and Colorado.
Working on behalf of the borrower, Strata Equity Group, HFF placed 12 separate fixed-rate loans totaling $494.88 million with Federal Home Loan Mortgage Corp.'s Capital Markets Execution Program.
Property Is Hot
HFF has been cashing in on the growing demand for its services as the commercial real estate market keeps up its strong momentum in terms of sales and investments.
It has logged at least double-digit earnings growth in all but one of the past eight quarters. Analysts polled by Thomson Reuters expect it to keep up the double-digit-growth streak for the 2015 full year.
Why the strong gains? Analysts see a number of growth drivers.
"The number of transactions in commercial real estate continues to grow at a healthy clip," William Blair analyst Brandon Dobell told IBD. "More and more buildings are being sold every year and the building values are also rising. Commercial real estate as an asset class continues to attract institutional capital. Pension funds, life insurance companies, endowments, private equity (and others) over the past 10 years have gradually increased their allocations of money they manage to commercial real estate."
Dobell says the long-term trend of money managers increasing their allocations to commercial real estate has been "amplified" in the past four or five years by the economic recovery.
He says that as the economy has recovered property fundamentals including rents and occupancy rates have gradually improved in the commercial real estate sector, while low interest rates and a healthy credit market have made it easier for borrowers to finance or refinance property transactions.
Adds George Ratiu, director of quantitative and commercial research for the National Association of Realtors: "Investors have been hungry for commercial properties for several reasons. One is the fact that with economic fundamentals improving, prospects for commercial building is improving.
"Capital availability has seen a solid rebound from the lows of the financial crisis and there are a lot more players in the capital markets," he said. "With a full spectrum of capital originators back in the market, there's significantly more capital available. That's driven investment sales higher."
Productivity Improving
Dobell says that HFF has been "taking market share" in a growing commercial real estate market by continuing to grow its head count and increasing the "productivity" of their transaction professionals.
HFF, he adds, has been growing the number of associates by about 10% a year over the past several years through a combination of recruiting and internal promotions.
And the productivity of the individual brokers has been improving for a long time, he says, which helps generate more transactions and more revenue every year and illustrates that HFF's focus on providing a relatively narrow range of services is generating repeat customers and referrals.
Hiring 'Producers'
JMP Securities analyst Mitch Germain says a "significant amount" of the company's growth is tied to hiring. He estimates it has hired over 100 "producers" over the last four years.
HFF's competitors include the CBRE Capital Markets arm ofCBRE Group ( CBG ) -- the world's largest commercial real estate services and investment firm -- and commercial real estate services firmJLL ( JLL ).
"What's unique about HFF is they don't lease assets and are not a landlord," said Germain.
HFF's services include debt placement, in which it offers clients access to a complete range of debt instruments, including construction and construction/mini-permanent loans, as well as adjustable- and fixed-rate mortgages.
It also provides investment sales services to commercial real estate owners who are looking to sell one or more properties or property interests.
Through its licensed broker-dealer subsidiary HFF Securities, it offers private equity, investment banking and advisory services.
"Part of the reason they're successful is they've stayed very true to what they want to do," adds Dobell. "They don't sway from doing one thing very well, which is transaction advisory."
HFF boasts a high retention rate for its senior transaction professionals, who have an average tenure of 12.8 years. The average production tenure for the top 25 senior transaction professionals, compiled by initial leads during the last five years, was 14.8 years, according to the company's 2014 year-end filing with the Securities and Exchange Commission.
"Substantially" all of HFF's revenue is in the form of capital markets services fees that are collected from clients, usually negotiated on a transaction-by-transaction basis, the filing says. It also earns fees from commercial loan-servicing activities.
HFF turned out an impressive first quarter. Earnings surged 150% from a year earlier to 25 cents a share, sailing past consensus views. Revenue jumped 24% to $94.3 million.
Debt placement production volume soared 49% from a year earlier to $7.84 billion. Investment sales production volume increased 19.1% to $5.61 billion. Loan sales popped 599% to $255.6 million.
Analysts polled by Thomson Reuters see full-year 2015 earnings climbing 24% to $1.99 a share. They expect a 10% gain in 2016.
"I expect the improving economy will continue to drive growth in the commercial real estate markets," said Ratiu.
HFF stock has risen 14% since the start of the year.
What's the draw for investors?
"People recognize this is a relatively straightforward way to invest in the ongoing growth in commercial real estate," said Dobell. "From a company-specific perspective, investors believe these guys run the company well. They're good at what they do and they put the customer first, which keeps customers loyal, and when they have too much cash on the balance sheet they give it back in the form of a dividend to shareholders."
Dobell says employees own about 25% of the company's shares.
HFF is a part of IBD's Finance-Mortgage & Real Estate Services industry group. It leads the group with an IBD Composite Rating of 96 out of a possible 99. The group also includesEssent Group ( ESNT ), which has a Composite Rating of 95, andCoreLogic ( CLGX ) -- the group's largest name by market cap -- with a Composite Rating of 92.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
