MAY 2007 VOL. 2

Corporate Focus: HFF Inc.

After IPO, HFF focuses on existing platform, while exploring overseas expansion

A new name and a $272 million IPO in February haven't changed Holliday Fenoglio Fowler's long-term goals. The company, now known as HFF Inc. and headquartered in Pittsburgh, remains focused on putting its clients first while providing capital markets and investment sales expertise.

With the IPO, HFF’s top leaders and producers retained approximately 55 percent of the operating partnership. Today, the company has 18 U.S. offices and operates two subsidiaries, Holliday Fenoglio Fowler LP and HFF Securities LP. It offers debt placement, loan servicing, investment sales and structured finance services, along with investment banking and advisory services including note sales and private equity.

It's a platform that HFF has established over the past 30 years and one that it continues to expand. "We're very focused on filling out the platform services in the offices that we currently don't have services in," says CEO John Pelusi.

Pelusi adds that the company also is focused on adding specialization to the investment sales area, recently hiring Patrick Pogey as a managing director in Miami to focus on hotel and resort property investment sales and capital markets transactions throughout the U.S., Caribbean, and Mexico.

"There are certain product types that the investors really like to see you have a special expertise, that being multi-family, retail, hospitality and industrial," Pelusi explains.
 
Culture Club

Last year, HFF achieved record production volumes, completing roughly 1,300 transactions totaling $36.4 billion. The company did business in roughly 45 states, closing deals in more than 500 cities from its 18 existing offices, according to Pelusi. 

The company is constantly looking for ways to grow, but refuses to do so without the right people. In 2006, HFF added 87 employees nationwide, including 10 transaction professionals.

"Our focus remains first and foremost on people with the highest reputation and best integrity," Pelusi says. "When we find them, we're prepared to commit the capital and resources to open up either offices in the U.S. or internationally… as well as committing the capital and resources to fill in platform services in our respective current locations."

For example, HFF looked for seven years to find the right person to head up the firm's San Francisco office because it was so determined to maintain the corporate culture, says Mark Gibson, founding partner & executive managing director in HFF’s Dallas office.

Industry veteran Bruce Ganong joined HFF from Cohen Financial to serve as managing director of the San Francisco office, which opened in 2006.  Additionally, Peter Smyslowski relocated from HFF's L.A. office to take on the role of managing director of the San Francisco office.

In addition to its domestic growth, HFF also is considering an international expansion. "We’re in discussions internally about how we might go overseas,” Pelusi says. "If we have enough clients that are asking us to go and if we can find employees with the best reputation and the highest integrity, we would not be opposed to going over there.”

HFF has put together a task force to evaluate an overseas expansion. John Fowler, executive managing director of HFF's New York office and a member of the company’s operating committee, is leading the task force, which also includes John Krukal, a member of the HFF board and former president & CEO of Blackstone Real Estate Advisors.

If HFF does take the leap overseas, the company would adopt a city-by-city approach to growth rather than a broader country-by-country strategy, Pelusi says, adding that the company would weigh a city’s population, job growth and its real estate inventories in the office, retail, multifamily, industrial and hotel sectors.

Growth opportunities

HFF tends to shy away from growth by mergers and acquisitions because of the challenges related to corporate culture. "Culture is, by far, the most important item we have as a firm,” Gibson says. “We focus on people. We focus on trying to make them as successful as they can be. We articulate that they are more important than the company at large.”
 
Part of the HFF culture is an emphasis on collaboration—its offices do not run as self-contained geographic fiefdoms. The Dallas office, for instance, may be pursuing a lucrative deal but may not possess the expertise to handle all the aspects of it, so the New York office may be tapped to help, he says.

“We put the best team on the field without regard to ego, without regard to geography or anything else,” Gibson says.

HFF's culture played into its decision to go public. The IPO allowed HFF to: retain and control the company culture in perpetuity; monetize a portion of the ownership positions of 41 partners while allowing more than 400 HFF employees to buy stock; and provide a currency for recruiting future professionals.

A joint venture or a sale to another company was pondered, but Gibson says either of those choices would have diluted HFF’s corporate culture. The February IPO generated net proceeds of $271.6 million. HFF sold a 45 percent stake to the public, or nearly 16.5 million shares of Class A common stock.

Looking forward, HFF’s biggest growth opportunities involve investment sales, note sales and securities. Last year, for example, investment sales volume climbed 33 percent to $10.1 billion from $7.6 billion in 2005. Meanwhile volume in note sales soared 341 percent to $414 million, and structured finance activity jumped 52 percent to more than $3 billion. Similarly, HFF Securities activity increased 460 percent to $926.5 million from $165.4 million in 2005.

HFF's debt placement business was flat in 2006, with placements totaling $22.1 billion versus $22 billion in 2005. Still, the 2006 figure was a record, according to Pelusi, who says that HFF’s clients last year were more focused on investment sales, structured finance and private equity services than on debt placement.

Overall, HFF closed 2006 with $229.7 million in revenue, up 11.6 percent from $205.8 million the previous year, while net income increased to $51.6 million from $48.1 million.

As HFF adjusts to life as a public company, it adheres to a belief in creating long-term value, not churning out short-term gains, Gibson says. “We’re not building this company for this year or next year,” he asserts. “We’re marathoners, not sprinters.”