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HF - Profit From 1.7T Re-fi Boom In CRE (Commercial Real Estate)

|Includes: HFF, Inc. (HF)

Upside potential : 50% in less than a year.

HFF (NYSE:HF) is a full-service commercial real estate financial intermediary. HFF does not risk its own capital but simply matches buyers and sellers (investment banking model).

Investment thesis

HFF is a CRE financial intermediary that is trading at ~9x earnings (ex-cash) & ~5x EBITDA. HFF has been making early cycle investments to take advantage of CRE re-fi boom from the 1.7Trillion in debt maturing between 2012-17. There is significant upside of over ~50% over next year as the companies earnings grow and market catches up with the opportunity in terms of multiple expansion.

Investment Characteristics

· CRE deals done during heydays of 2005-07 are coming due. 1.7T in CRE debt is maturing between 2012-17.

· HF has been making investments in early cycle (since 2010) for this opportunity.

· HFF has no leverage, no corporate debt and $4 per share cash.

· Very conservative management

· 29% insider ownership and management/shareholder interests are well aligned.

How does the business work?

· Debt and investment sales are the bread and butter of the business.

· 90% of revenues are from capital markets services fees

· Fees are usually negotiated on a transaction-by-transaction basis

· HF brings a deal to all the capital providers. Whoever offers the best quote (and terms) wins the business

· Diversified revenue base. No client represents more than 2% of revenues

Key business drivers

· CRE capital market activity (Transaction based revenues) is the key macro driver.

· Geographical presence is important. Need feet on the ground.

· "Eat what you kill" business. Broker (producers) are the key to the business.

· Relationships with sellers and capital providers are also very critical.

Cyclical Opportunity

· Deals done during heydays of 2005-07 are coming due. 1.7T debt due between 2012-17.

· 225B of outstanding CRE debt is distressed. Distressed loan needs resolution in the form of restructuring, extension or liquidations etc. HF has role to play in those transactions.

· Real estate asset class allocations on institutional side are on the rise.

Early cycle investments

HFF has been making early cycle investments and is well positioned to take advantage of the opportunity. Here is how?

· HFF has been increasing footprint - Added four new offices in CY 2011 and 2012.

o 2011 New offices - Austin and Tampa

o 2012 New offices - Denver and Orlando

· HFF has been aggressively adding production professionals since 2010

o HFF added 55 production professionals. Increased from 159 to 214 (33% increase)

What is the production ramp up for new producers?

According to CEO, peak production ramp-up is 3-5 yrs for a new analyst and 2-4 yrs for a lateral hire. The new hires from 2010 are probably going to hit the peak in 2013 and 2014.

HF has also been gaining market share. Market share growth in origination volume of HF Growth Vs Industry Growth

¨ 2011: HF 87% Vs Industry 55%

¨ 2010 : HF 88% Vs Industry 44%


HFF Competes with CBRE, JLL and Cushman & Wakefields of the world. The key difference with HFF is that it does not compete with clients and capital providers, unlike its competitors.


HFF trades at 9x (ex-cash) earnings & ~5x EBITDA.

CBG and JLL trade at ~12-15x earnings & ~8-9x EBITDA.

HF is a pure transactional company should trade at some discount to its comps which have revenue mix of contractual and transactional fees.

What is street missing? Why it may be trading cheap.

¨ HFF results can be lumpy. Street has not fully adopted to the lumpiness in HFF's business perhaps because HFF comps are not that lumpy. Street focuses too much on quarter to quarter volumes.

¨ But as the cyclical opportunity in CRE re-fi realizes and market gets more clarity, expect the earnings to improve and multiple to expand as well.

¨ HFF has limited coverage. CBG, JLL are large cap, better owned and better covered.

¨ HFF is an easier to own when volumes are growing instead of when volumes are sideways.

Price Target

HFF will do ~70M in EBITDA this year. Even a modest growth of 15% from volume pickup will put them at 80M EBITDA next year.

As market gets more clarity on the volume growth and rewards HFF stockholders with multiple expansion, see $20-22 price target on HFF common stock. 50% upside over less than a year.

Disclosure: I am long HF.

Additional disclosure: Email me to receive a more detailed thesis (powerpoint deck).