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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-33280
 HFF, INC.
  Delaware
    
    51-0610340(State of incorporation)
    
    (I.R.S. Employer Identification No.)One Oxford Centre301 Grant Street, Suite 600Pittsburgh, Pennsylvania 15219
    
    (412) 281-8714(Address of principal executive offices, 
including zip code)
    
    (Registrants telephone number, including area code)
  Title of each class
    
    Name of Exchange on whichto be registered
    
    class is to be registeredClass A Common Stock, par value $.01 per share
    
    New York Stock Exchange
   o þ
 o þ
 þ o
 o
  Large accelerated filer o Accelerated filer o Non-accelerated filer þ
 o þ
  DOCUMENTS INCORPORATED BY REFERENCE
  Part III
    
    The Registrants definitive proxy statement, for use in
connection with the Annual Meeting of Stockholders, to be
filed within 120 days after the Registrants fiscal year
ended December 31, 2006.




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##### 



TABLE OF CONTENTS
 PART I.Item 1.    BusinessItem 1A. Risk FactorsItem 1B.  Unresolved Staff CommentsItem 2.     PropertiesItem 3.     Legal ProceedingsItem 4.     Submission of Matters to a Vote of Security HoldersPART II.Item 5.     Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity SecuritiesItem 6.     Selected Financial DataItem 7.     Managements Discussion and Analysis of Financial Condition and Results
of OperationsItem 7A.  Quantitative and Qualitative Disclosures About Market RiskItem 8.     Consolidated Financial Statements and Supplementary DataItem 9.     Changes in and Disagreements with Accountants on Accounting and
Financial DisclosureItem 9A.  Controls and ProceduresItem 9B.   Other InformationPART IIIItem 10.   Directors, Executive Officers and Corporate GovernanceItem 11.   Executive CompensationItem 12.   Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder MattersItem 13.   Certain Relationships and Related Transactions, and Director IndependenceItem 14.   Principal Accountant Fees and ServicesPART IVItem 15.   Exhibits and Financial Statement SchedulesSIGNATURESEXHIBIT INDEXHolliday Fenoglio Fowler, L.P. Partnership AgreementHFF Securities L.P. Partnership AgreementEmployment Agreement between the Registrant and John H. Pelusi, Jr.Employment Agreement between the Registrant and Gregory R. ConleyEmployment Agreement between the Registrant and Nancy GoodsonAmended and Restated Credit AgreementSubsidiaries of the RegistrantConsent of Ernst & Young LLPCertification of John H. Pelusi, Jr.Certification of Gregory R. ConleyCertification of CEO and CFO Pursuant to Section 906




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FORWARD-LOOKING STATEMENTS
  SPECIAL NOTE REGARDING THE REGISTRANT
   
 PART I
 
 Item 1. Business
 Overview
  1




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
    
    Debt placement;
 
    
    Investment sales;
 
    
    Structured finance;
 
    
    Private equity, investment banking and advisory services;
 
    
    Note sale and note sales advisory services; and
 
    
    Commercial loan servicing.
    Reportable Segments
  Our Competitive Strengths
  People, Expertise and Culture
   2




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Integrated Capital Markets Services Platform
 
  Independent Objective Advice
  Extensive Cross-Selling Opportunities
  Broad and Deep Network of Relationships
  3




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Proprietary Transaction Database
  Our Strategic Growth Plan
  Expand Our Geographic Footprint
   Increase Market Share Across Each of our Capital Market Services
  4




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
    
    Debt Placement.Our transaction value in debt placements were
approximately $22.1 billion and $22.0 billion in 2006 and 2005,
respectively. According to the Mortgage Bankers Associations
Commercial Real Estate/Multifamily Finance: Annual Origination Volume
Summation report, debt issuances in 2005 and 2004 were $345 billion
and $230 billion, respectively.
    
    Investment Sales.In 2006, we completed investment sales in excess of
$10.1 billion, an increase of approximately 32.9% over $7.6 billion
completed in 2005. According to Real Capital Analytics, commercial
real estate sales volume for office, industrial, multifamily and
retail properties in the U.S. in 2006 and 2005 were $312.7 billion and
$276.6 billion, respectively.
    
    Structured Finance, Private Equity and Advisory Services.In 2006 and
2005, we completed approximately $3.8 billion and $2.1 billion of
structured finance, private equity and advisory services transactions
(which includes amounts that we internally allocate to the structured
finance reporting category, even though the transaction may have been
funded through a single mortgage note) for our clients. In April 2004,
we formed our broker-dealer subsidiary, HFF Securities, to undertake
both discretionary and non-discretionary private equity raises, select
property specific joint ventures, and select investment banking
activities for our clients.
    
    Note sale and note sales advisory.Since formalizing our note sales
and note sales advisory services platform in 2004, we have consummated
over $698 million in note sale and note sales advisory transactions.
We see growth in this market as well due to the desire of lenders to
seek to diversify concentration risk (geographic, borrower or product
type), manage potential problems in their loan portfolios or sell
loans rejected from Commercial Mortgage Backed Securities (CMBS)
securitization pools.
    
    Loan servicing.The principal balance of HFFs loan servicing
portfolio increased nearly 21% from $14.9 billion at December 31,
2005, to over $18.0 billion at December 31, 2006. Currently, we have
33 formal correspondent lender relationships with life insurers and 17
CMBS sub servicing agreements. The majority of the CMBS contracts
having been put in place over the past 18 months due to our increased
focus on growing our servicing platform to better serve our clients.
As a result of our continued debt placements with correspondent
lenders as well as our new sub servicing relationships with CMBS
lenders, our loan servicing portfolio has grown from $14.9 billion in
2005 to $18.0 billion at December 31, 2006 with a large percentage of
this growth coming from CMBS sub servicing contracts we have been
executing since early 2005.
 Continue to Capitalize on Cross-Selling Opportunities
  5




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Our Services
 Debt Placement Services
   Investment Sales Services
  Structured Finance Services
  Private Equity, Investment Banking and Advisory Services
  
    
    Joint Ventures.Equity capital for our commercial real estate clients
to establish joint ventures relating to either identified properties
or properties to be acquired by a fund sponsor. These joint ventures
typically involve the acquisition, development, recapitalization or
restructuring of multi-asset commercial real estate portfolios, and
include a variety of property types and geographic areas.
 6




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
    
    Private Placements.Private placements of common, perpetual preferred
and convertible preferred securities. Issuances involve primary or
secondary shares that may be publicly registered, listed and traded.
    
    Advisory Services.Entity-level advisory services for various types
of transactions including mergers and acquisition, sales and
divestitures, management buyouts, and recapitalizations and
restructurings.
    
    Marketing and Fund-Raising.Institutional marketing and fund-raising
for public and private commercial real estate companies, with a focus
on opportunity and value-added commercial real estate funds. In this
capacity, we undertake private equity raises, both discretionary and
non-discretionary, and offer advisory services.
 Note Sale and Note Sales Advisory Services
  Commercial Loan Servicing
   Competition
   Regulation
  7




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History
    Available Information
  
    
    our Code of Conduct and Ethics;
    
    the charter of its Nominating and Governing Committee;
 8




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
    
    the charter of its Compensation Committee;
    
    the charter of its Audit Committee; and
    
    our Corporate Governance Guidelines.
 
 Item 1A. Risk Factors
  Risks Related to Our Business
 General economic conditions and commercial real estate market conditions, both globally and
domestically, can have a negative impact on our business.
   
 
 
 
  9




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If we are unable to retain and attract qualified and experienced transaction professionals and
associates, our growth may be limited and our business and operating results could suffer.
     Our business could be hurt if we are unable to retain our business philosophy and partnership
culture as a result of becoming a public company, and efforts to retain our philosophy and culture
could adversely affect our ability to maintain and grow our business.
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We have numerous significant competitors and potential future competitors, some of which may
have greater resources than we do, and we may not be able to continue to compete effectively.
  We could be adversely affected if the Terrorism Risk Insurance Act of 2002 is not renewed
beyond 2007, or is adversely amended, or if insurance for other natural or manmade disasters is
interrupted or constrained.
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We have experienced significant growth over the past several years, which may be difficult to
sustain and which may place significant demands on our administrative, operational and financial
resources.
   If we acquire companies in the future, we may experience high transaction and integration
costs, the integration process may be disruptive to our business and the acquired businesses may
not perform as we expect.
   A failure to appropriately deal with actual or perceived conflicts of interest could adversely
affect our businesses.
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A
majority of our revenue is derived from capital markets services transaction fees, which are
not long-term contracted sources of revenue and are subject to intense competition, and declines in
those engagements could have a material adverse effect on our financial condition and results of
operations.
  Additional indebtedness may make us more vulnerable to economic downturns and limit our
ability to withstand competitive pressures.
   
 
 
 
 
 
 
  Significant fluctuations in our revenues and net income may make it difficult for us to
achieve steady earnings growth on a quarterly or an annual basis, which may make the comparison
between periods difficult and may cause the price of our Class A common stock to decline.
  13




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Our results of operation vary significantly among quarters during each calendar year, which
makes comparisons of our quarterly results difficult.
  Employee misconduct, which is difficult to detect and deter, could harm us by impairing our
ability to attract and retain clients and subjecting us to significant legal liability and
reputational harm.
  Compliance failures and changes in regulation could result in an increase in our compliance
costs or subject us to sanctions or litigation.
   14




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Risks Related to Our Organizational Structure
 Our only material asset is our units in the Operating Partnerships, and we are accordingly
dependent upon distributions from the Operating Partnerships to pay our expenses, taxes and
dividends (if and when declared by our board of directors).
  We will be required to pay HFF Holdings for most of the benefits relating to any additional
tax depreciation or amortization deductions we may claim as a result of the tax basis step-up we
receive, subsequent sales of our common stock and related transactions with HFF Holdings.
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If HFF, Inc. was deemed an investment company under the Investment Company Act of 1940 as a
result of its ownership of the Operating Partnerships, applicable restrictions could make it
impractical for us to continue our business as contemplated and could have a material adverse
effect on our business.
   Risks Related to Our Class A Common Stock
 Control by HFF Holdings of the voting power in HFF, Inc. may give rise to conflicts of
interests and may prevent new investors from influencing significant corporate decisions.
     16




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Transformation into a public company may increase our costs and disrupt the regular operations
of our business.
    Our internal controls over financial reporting may not be effective and our independent
registered public accounting firm may not be able to certify as to their effectiveness, which could
have a significant and adverse effect on our business and reputation.
  17




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If securities analysts do not publish research or reports about our business or if they
downgrade our company or our sector, the price of our Class A common stock could decline.
  Our share price may decline due to the large number of shares eligible for future sale and for
exchange.
     The market price of our Class A common stock may be volatile, which could cause the value of
your investment to decline or subject us to litigation.
  18




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Anti-takeover provisions in our charter documents and Delaware law could delay or prevent a
change in control.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  19




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 Market Information
  Holders
  Dividends
   Initial Public Offering Use of Proceeds
    Performance Graph
  Recent Sales of Unregistered Securities
  20




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Issuer Purchases of Equity Securities.
  
 Item 6. Selected Financial Data
  21




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Successor
    


    
    Predecessor (a)For the Year Ended
    
    
    
    
    
    
    
    
    
    
    
    Year EndedDecember 31,
    
    
    6/16/03 -
    
    
    
    1/1/03 -
    
    
    December 31,2006
    
    
    2005
    
    
    2004
    
    
    12/31/03
    
    
    
    6/15/03
    
    
    2002(unaudited)
    
    
    (unaudited)(in thousands)
    
    
    
    (in thousands)Statement of Income Data:Total revenue
    
    $
    229,697
    
    
    $
    205,848
    
    
    $
    143,691
    
    
    $
    72,474
    
    
    
    $
    36,725
    
    
    $
    84,661Operating expenses
    
    
    174,903
    
    
    
    157,619
    
    
    
    113,961
    
    
    
    58,579
    
    
    
    
    32,461
    
    
    
    78,658Operating income
    
    
    54,794
    
    
    
    48,229
    
    
    
    29,730
    
    
    
    13,895
    
    
    
    
    4,264
    
    
    
    6,003Interest and other income
    
    
    632
    
    
    
    274
    
    
    
    67
    
    
    
    63
    
    
    
    
    
    
    
    
    Interest expense
    
    
    (    3,541
    )
    
    
    (          80
    )
    
    
    (          86
    )
    
    
    (38
    )
    
    
    
    
    
    
    
    Income before income taxes
    
    
    51,885
    
    
    
    48,423
    
    
    
    29,711
    
    
    
    13,920
    
    
    
    
    4,264
    
    
    
    6,003Income taxes (b)
    
    
    332
    
    
    
    288
    
    
    
    296
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    51,553
    
    
    $
    48,135
    
    
    $
    29,415
    
    
    $
    13,920
    
    
    
    $
    4,264
    
    
    $
    6,003Balance Sheet Data:Total assets
    
    $
    154,302
    
    
    $
    38,630
    
    
    $
    23,940
    
    
    $
    34,361
    
    
    
    
    
    
    
    $
    44,430Long term debt, excluding current
portion
    
    $
    91
    
    
    $
    150
    
    
    $
    193
    
    
    $
    243
    
    
    
    
    
    
    
    $
    Total liabilities
    
    $
    198,620
    
    
    $
    29,521
    
    
    $
    11,568
    
    
    $
    10,205
    
    
    
    
    
    
    
    $
    11,749
 
 (a)
    
    The financial information for the period from January 1, 2002 through June 15, 2003, is derived from unaudited financial
information and general ledger reports provided by HFF LPs parent company at that time. Prior to June 15, 2003, HFF LP was
an indirect wholly-owned subsidiary of Lend Lease, an Australian company with a June 30 fiscal year. The acquisition of HFF
LP on June 16, 2003 by HFF Holdings created a new basis of accounting and, accordingly, the financial information for the
periods through December 31, 2003 are not comparable to recent periods and comparisons of those periods to recent periods may
not be accurate indicators of our relative financial performance.(b)
    
    We have historically operated as two limited liability companies (HFF Holdings and Holdings Sub), a corporation (Holliday GP)
and two limited partnerships (HFF LP and HFF Securities), which two partnerships we refer to as the Operating Partnerships.
As a result, our income has been subject to limited U.S. federal income taxes and our income and expenses have been passed
through and reported on the individual tax returns of the members of HFF Holdings. Income taxes shown on the Companys
combined statements of income reflect federal income taxes of the corporation and business and corporate income taxes in
various jurisdictions. Following the offering, the Company will be subject to additional entity-level taxes that will be
reflected in our consolidated financial statements. See Managements Discussion and Analysis of Financial Condition and
Results of Operation  Key Financial Measures and Indicators  Costs and Expenses  Income Tax Expense. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
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Overview
 Our Business
    
    
    Economic and commercial real estate market downturns.Our business is dependent on
international and domestic economic conditions and the demand for commercial real estate and
related services in the markets in which we operate and even a regional economic downturn
could adversely affect our business. A general decline in acquisition and disposition
activity can lead to a reduction in fees and commission for arranging such transactions, as
well as in fees and commissions for arranging financing for acquirers and property owners
that are seeking to recapitalize their existing properties. Likewise, a general decline in
commercial real estate investment activity can lead to a reduction in fees and commissions
for arranging acquisitions, dispositions and financings for acquisitions as well as for
recapitalizations for existing property owners as well as a significant reduction in our
loan servicing activities, due to increased delinquencies and lack of additional loans that
we would have otherwise added to our loan servicing portfolio, all of which would have an
adverse effect on our business.
    
    Decreased investment allocation to commercial real estate class.Allocations to
commercial real estate as an asset class for investment portfolio diversification may
decrease for a number of reasons beyond our control, including but not limited to poor
performance of the asset class relative to other asset classes or superior performance of
other asset classes when compared with continued good performance of the commercial real
estate asset class. In addition, while commercial real estate is now viewed as an accepted
and valid class for portfolio diversification, if this perception changes, there could be a
significant reduction in the amount of debt and equity capital available in the commercial
real estate sector.
    
    Fluctuations in interest rates.Significant fluctuations in interest rates as well as
steady and protracted movements of interest rates in one direction (increases or decreases)
could adversely affect the operation and income of commercial real estate properties as well
as the demand from investors for commercial real estate investments. Both of these events
could adversely affect investor demand and the supply of capital for debt and equity
investments in commercial real estate. In particular, increased interest rates may cause
prices to decrease due to the increased costs of obtaining financing and could lead to
decreases in purchase and sale activities thereby reducing the amounts of investment sales
and loan originations and related servicing fees. If our investment sales origination and
servicing businesses are negatively impacted, it is likely that our other lines of business
would also suffer due to the relationship among our various capital
markets services.
  23




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Key Financial Measures and Indicators
 Revenues
  Total Revenues:
 Capital markets services revenues.
 
    
    Origination fees.Our origination fees are earned through the placement of debt, equity
and structured financing. Debt placements represent the majority of our business, with
approximately $22.1 billion of debt transaction volume in 2006. Fees earned by HFF
Securities for discretionary and non-discretionary equity capital raises and other
investment banking services are also included with capital markets services revenue in our
consolidated statements of income. We recognize origination revenues at the closing of the
applicable financing and funding of capital, when such fees are generally collected.
    
    Investment sales fees.We earn investment sales fees by acting as a broker for
commercial real estate owners seeking to sell a property(ies) or an interest in a
property(ies). We recognize investment sales revenues at the close and funding of the sale,
when such fees are generally collected.
    
    Loan servicing fees.We generate loan servicing fees through the provision of
collection, remittance, recordkeeping, reporting and other related loan servicing functions,
activities and services. We also earn fees through escrow balances maintained as a result of
required reserve accounts and tax and insurance escrows for the loans we service. We
recognize loan servicing revenues at the time services are rendered, provided the loans are
current and the debt service payments are actually made by the borrowers. We recognize the
other fees related to escrows and other activities at the time the fees are paid.
    
    Note sale, note sales advisory and other production fees.We generate note sale, note
sales advisory and other production fees through assisting our clients in their efforts to
sell all or portions of commercial real estate debt notes. We recognize note sale, note
sales advisory and other production revenues at the close and funding of the capital to
consummate sale, when such fees are generally collected.
 Interest on mortgage notes receivable.
 Other.
  24




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Costs and Expenses
  Operating Expenses:
 Cost of Services.
 Personnel.
 Occupancy.
 Travel and entertainment.
 Supplies, research and printing.
 Other.
  25




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Interest and Other Income:
  Interest Expense:
  Income Tax Expense:
    Minority Interest:
  Results of Operations
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Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 For the YearEndedDecember 31,2006
    
    
    2005
    
    
    Total
    
    
    Total% of
    
    
    
    
    
    
    % of
    
    
    Dollar
    
    
    PercentageDollars
    
    
    Revenue
    
    
    Dollars
    
    
    Revenue
    
    
    Change
    
    
    Change(dollars in thousands, unless percentages)RevenuesCapital markets services revenue
    
    $
    225,242
    
    
    
    
    
    
    $
    203,457
    
    
    
    
    
    
    $
    21,785Interest on mortgage notes receivable
    
    
    1,354
    
    
    
    
    
    
    
    412
    
    
    
    
    
    
    
    942Other
    
    
    3,101
    
    
    
    
    
    
    
    1,979
    
    
    
    
    
    
    
    1,122Total revenues
    
    
    229,697
    
    
    
    100
    %
    
    
    205,848
    
    
    
    100
    %
    
    
    23,849
    
    
    
    11.6
    %Operating expensesCost of services
    
    
    130,708
    
    
    
    56.9
    %
    
    
    119,106
    
    
    
    57.9
    %
    
    
    11,602
    
    
    
    9.7
    %Personnel
    
    
    13,471
    
    
    
    5.9
    %
    
    
    14,019
    
    
    
    6.8
    %
    
    
    (548
    )
    
    
    (3.9
    )%Occupancy
    
    
    6,319
    
    
    
    2.8
    %
    
    
    5,357
    
    
    
    2.6
    %
    
    
    962
    
    
    
    18.0
    %Travel and entertainment
    
    
    5,789
    
    
    
    2.5
    %
    
    
    5,067
    
    
    
    2.5
    %
    
    
    722
    
    
    
    14.2
    %Supplies, research and printing
    
    
    6,463
    
    
    
    2.8
    %
    
    
    5,089
    
    
    
    2.5
    %
    
    
    1,374
    
    
    
    27.0
    %Other
    
    
    12,153
    
    
    
    5.3
    %
    
    
    8,981
    
    
    
    4.4
    %
    
    
    3,172
    
    
    
    35.3
    %Total operating expenses
    
    
    174,903
    
    
    
    76.2
    %
    
    
    157,619
    
    
    
    76.7
    %
    
    
    17,284
    
    
    
    11.0
    %Operating income
    
    
    54,794
    
    
    
    23.8
    %
    
    
    48,229
    
    
    
    23.3
    %
    
    
    6,565
    
    
    
    13.6
    %Interest and other income
    
    
    632
    
    
    NM
    
    
    
    274
    
    
    NM
    
    
    
    358
    
    
    NMInterest expense
    
    
    (3,541
    )
    
    NM
    
    
    
    (80
    )
    
    NM
    
    
    
    (3,461
    )
    
    NMIncome before taxes
    
    
    51,885
    
    
    
    22.6
    %
    
    
    48,423
    
    
    
    23.5
    %
    
    
    3,462
    
    
    
    7.1
    %Income tax expense
    
    
    332
    
    
    NM
    
    
    
    288
    
    
    NM
    
    
    
    44
    
    

    NMNet income
    
    $
    51,553
    
    
    
    22.5
    %
    
    $
    48,135
    
    
    
    23.4
    %
    
    $
    3,418
    
    
    
    7.1
    %
 
 NM = Not Meaningful Revenues.
 
    
    The revenues we generated from capital markets services for the year ended December 31,
2006 increased $21.8 million, or 10.7%, to $225.2 million from $203.5 million for the same
period in 2005. The increase is primarily attributable to increased production.
    
    The revenues derived from interest on mortgage notes were $1.4 million for the year ended
December 31, 2006 compared to $0.4 million for the same period in 2005, an increase of $1.0
million. Revenues increased primarily as a result of increased production of Freddie Mac
loans.
    
    The other revenues we earned were $3.1 million for the year ended December 31, 2006
compared to $2.0 million for the same period in 2005, an increase of $1.1 million, or 56.7%.
Other revenues increased primarily as a result of expense reimbursements on a larger number
of transactions with expense reimbursement compared to the number of transactions with
expense reimbursement in 2005.
 Total Operating Expenses.
 
    
    The costs of services for the year ended December 31, 2006 increased $11.6 million, or
9.7%, to $130.7 million from $119.1 million for the same period in 2005. The increase is
most significantly a result of commissions on increased capital
markets services provided for
clients.
    
    Personnel expenses that are not directly attributable to providing services to our
clients for the year ended December 31, 2006 decreased $0.5 million, or 3.9%, to $13.5
million from $14.0 million for the same period in 2005. The decrease is primarily related to
a lower profit participation payout in 2006.
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
    
    Occupancy, travel and entertainment, and supplies, research and printing expenses for the
year ended December 31, 2006 increased $3.1 million, or 19.7%, to $18.6 million compared to
the same period in 2005. These increases are primarily due to increased business activity,
and additional space occupied, higher rents and new office space.
    
    Other expenses, including costs for insurance, professional fees, depreciation and
amortization, interest on our warehouse line of credit and other operating expenses, were
$12.2 million in the year ended December 31, 2006, an increase of $3.2 million, or 35.3%,
versus $9.0 million in the year ended December 31, 2005. This increase is primarily related
to costs associated with increased Freddie Mac volume
resulting in interest expense on our warehouse line and increased professional fees in relation
to the contemplated reorganization transaction.
 Net Income.
 
    
    Interest and other income, partially offsetting the costs we incurred in these periods,
increased $0.3 million, to $0.6 million versus $0.3 million earned in the year ended
December 31, 2005. This increase is principally attributable to increased cash balances as a
result of increased production.
    
    The interest expense we incurred in the year ended December 31, 2006 totaled $3.5
million, an increase of $3.4 million from $0.1 million of similar expenses incurred in the
year ended December 31, 2005. This increase resulted from the term loan of $60.0 million
funded in March 2006.
    
    Expenses from income tax were approximately $0.3 million for the years ended December 31,
2006 and 2005.
 28




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##### Table of Contents



Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
 For the YearEndedDecember 31,2005
    
    
    2004
    
    
    Total
    
    
    Total% of
    
    
    
    
    
    
    % of
    
    
    Dollar
    
    
    PercentageDollars
    
    
    Revenue
    
    
    Dollars
    
    
    Revenue
    
    
    Change
    
    
    Change(In thousands, unless percentages)RevenuesCapital markets services revenue
    
    $
    203,457
    
    
    
    
    
    
    $
    142,192
    
    
    
    
    
    
    $
    61,265Interest on mortgage notes receivable
    
    
    412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    412Other
    
    
    1,979
    
    
    
    
    
    
    
    1,499
    
    
    
    
    
    
    
    480Total revenues
    
    
    205,848
    
    
    
    100
    %
    
    
    143,691
    
    
    
    100
    %
    
    
    62,157
    
    
    
    43.3
    %Operating expensesCost of services
    
    
    119,106
    
    
    
    57.9
    %
    
    
    85,778
    
    
    
    59.7
    %
    
    
    33,328
    
    
    
    38.9
    %Personnel
    
    
    14,019
    
    
    
    6.8
    %
    
    
    8,882
    
    
    
    6.2
    %
    
    
    5,137
    
    
    
    57.8
    %Occupancy
    
    
    5,357
    
    
    
    2.6
    %
    
    
    5,047
    
    
    
    3.5
    %
    
    
    310
    
    
    
    6.1
    %Travel and entertainment
    
    
    5,067
    
    
    
    2.5
    %
    
    
    3,617
    
    
    
    2.5
    %
    
    
    1,450
    
    
    
    40.1
    %Supplies, research and printing
    
    
    5,089
    
    
    
    2.5
    %
    
    
    2,933
    
    
    
    2.0
    %
    
    
    2,156
    
    
    
    73.5
    %Other
    
    
    8,981
    
    
    
    4.4
    %
    
    
    7,704
    
    
    
    5.4
    %
    
    
    1,277
    
    
    
    16.6
    %Total operating expenses
    
    
    157,619
    
    
    
    76.7
    %
    
    
    113,961
    
    
    
    79.3
    %
    
    
    43,658
    
    
    
    38.3
    %Operating income
    
    
    48,229
    
    
    
    23.3
    %
    
    
    29,730
    
    
    
    20.7
    %
    
    
    18,499
    
    
    
    62.2
    %Interest and other income
    
    
    274
    
    
    NM
    
    
    
    67
    
    
    NM
    
    
    
    207
    
    
    NMInterest expense
    
    
    (80
    )
    
    NM
    
    
    
    (86
    )
    
    NM
    
    
    
    6
    
    
    NMIncome before taxes
    
    
    48,423
    
    
    
    23.5
    %
    
    
    29,711
    
    
    
    20.7
    %
    
    
    18,712
    
    
    
    63.0
    %Income tax expense
    
    
    288
    
    
    NM
    
    
    
    296
    
    
    NM
    
    
    
    (8
    )
    
    NMNet income
    
    $
    48,135
    
    
    
    23.4
    %
    
    $
    29,415
    
    
    
    20.5
    %
    
    $
    18,720
    
    
    
    63.6
    %
 
 NM = Not Meaningful Total Revenues.
 
    
    The revenues earned from our capital markets services for the year ended December 31,
2005 increased $61.3 million, or 43.1%, to $203.5 million from $142.2 million for the year
ended December 31, 2004. The increase resulted from a number of factors, most significantly
an increase in number of transactions as well as higher fees per transaction professional
and an increase in the number of transaction professionals, a larger servicing portfolio and
an increased focus on certain revenue sources that were not previously a main focus for the
company including service fees from CMBS loans and expanding activity of HFF Securities.
    
    The revenues derived from interest on mortgage notes receivable were $0.4 million for the
year ended December 31, 2005. No such revenue was recorded in 2004. We earn interest on
mortgage notes receivable in connection with our loan servicing business and our
participation in Freddie Macs Program Plus Seller Servicer program. HFF LP qualified for
this program in December 2004; accordingly, we did not begin earning revenue derived from
this program until 2005.
    
    Our other revenues increased $0.5 million to $2.0 million for the year ended December 31,
2005 compared with $1.5 million in 2004. Other revenues increased primarily as a result of
expense reimbursements on a larger number of transactions.
 Total Operating Expenses.
 29




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##### Table of Contents




    
    Our cost of services for the year ended December 31, 2005 was $119.1 million, which
represented a $33.3 million, or 38.9%, increase over $85.8 million in similar expenses
incurred in 2004. We attribute this increase primarily to increased commissions we paid in
2005, which increase was directly attributable to our increased
capital markets services
revenue.
    
    Personnel expenses for 2005 increased $5.1 million, or 57.8%, to $14.0 million from $8.9
million for the year ended December 31, 2004. The increase was primarily a result of an
increase in the profit participation bonus that is calculated based on the net income of
each office.
    
    Our occupancy expenses were $5.4 million for 2005, which represented an increase of $0.3
million, or 6.1%, from $5.1 million in 2004. The primary reason for this increase was an
increase in office space and operating leases to support our growth and expansion in several
locations. Our travel and entertainment expenses increased $1.5 million, or 40.1%, to $5.1
million in 2005 from $3.6 million in 2004, while our supply, research and printing expenses
increased $2.2, or 73.5% to $5.1 million for the year ended 2005 compared with $2.9 million
in 2004.
    
    Other expenses were $9.0 million in the year ended December 31, 2005, an increase of $1.3
million, or 16.6%, versus $7.7 million in 2004. This increase was most significantly
attributable to an increase of our occupancy, depreciation and amortization expenses.
 Net Income.
 
    
    Interest and other income increased $0.2 million to $0.3 million in the year ended 2005
compared with $0.1 million in 2004. This increase primarily arose as a consequence of higher
cash balances resulting from increased net income.
    
    Our interest expense incurred in each of 2005 and 2004 equaled $0.1 million.
    
    Income tax expense incurred in each of 2005 and 2004 equaled $0.3 million.
 
 30




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##### Table of Contents



Cash Flows
  2006
  2005
  2004
  Liquidity and Capital Resources
    31




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32




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##### Table of Contents



Critical Accounting Policies; Use of Estimates
  Goodwill. Goodwill and Other Intangible Assets,
 Intangible Assets. Goodwill and Other Intangible Assets,
 Leases
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##### Table of Contents



Certain Information Concerning Off-Balance Sheet Arrangements
  Contractual and Other Cash Obligations
  Payments due by periodLess than
    
    
    1-3
    
    
    3-5
    
    
    More thanTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsLong-term debt
    
    $
    56,250
    
    
    $
    56,250
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital lease obligations
    
    
    234
    
    
    
    143
    
    
    
    86
    
    
    
    5
    
    
    
    Operating lease obligations
    
    
    28,662
    
    
    
    4,754
    
    
    
    8,746
    
    
    
    6,749
    
    
    
    8,413Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities
reflected on the balance
sheet
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    85,146
    
    
    $
    61,147
    
    
    $
    8,832
    
    
    $
    6,754
    
    
    $
    8,413
 Seasonality
  Effect of Inflation
  Recent Accounting Pronouncements
  34




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Recent Developments
  35




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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
  36




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 PageHFF, Inc.:Report of Independent Registered Public Accounting Firm
    
    
    38Statement of Financial Condition
    
    
    39Notes to Statement of Financial Condition
    
    
    40HFF, Inc., Combined:Report of Independent Registered Public Accounting Firm
    
    
    45Combined Balance Sheets as of December 31, 2006 and 2005
    
    
    46Combined Statements of Income for the years ended December 31, 2006, 2005 and 2004
    
    
    47Combined Statements of Stockholders Equity/Partners Capital (Deficiency) for the years
ended December 31, 2006, 2005 and 2004
    
    
    48Combined Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    49Notes to Combined Financial Statements
    
    
    51HFF Holdings, LLC and Subsidiaries:Report of Independent Registered Public Accounting Firm
    
    
    69Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    70Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004
    
    
    71Consolidated Statements of Members Equity for the years ended December 31, 2006, 2005 and 2004
    
    
    72Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    73Notes to Consolidated Financial Statements
    
    
    75
 37




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##### Table of Contents



HFF, Inc.
 
 Statement of Financial Condition
As of December 31, 2006
 Assets  Cash
    
    $
    1Stockholders Equity:Class A Common Stock, par value $.01 per share, 1,000 shares authorized 1 share issued and outstanding
    
    $
    Additional Paid in Capital
    
    
    1Total Stockholders Equity
    
    $
    1
 See accompanying notes.
 39




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##### Table of Contents



NOTES TO STATEMENT OF FINANCIAL CONDITION
 1. Organization
     2. Summary of Significant Accounting Policies
 Basis of Presentation
  40




---



##### Table of Contents



3. Stockholders Equity
  4. Subsequent Events
      41




---



##### Table of Contents



Percentage of HFFNumber of
    
    Holdings PartnershipAdditional Shares
    
    Units in theof Class A Common
    
    OperatingStock Expected to
    
    PartnershipsBecome Available
    
    Becoming EligibleAnniversary of the Offering
    
    for Exchange
    
    for ExchangeSecond
    
    
    5,088,750
    
    
    
    25
    %Third
    
    
    5,088,750
    
    
    
    25
    %Fourth
    
    
    5,088,750
    
    
    
    25
    %Fifth
    
    
    5,088,750
    
    
    
    25
    %Total
    
    
    20,355,000
    
    
    
    100
    %
   42




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43




---



##### Table of Contents



4. Subsequent Event (continued)
  44




---



##### Table of Contents



45




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##### Table of Contents



(Dollars In Thousands)
 December 312006
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,345
    
    
    $
    8,836Restricted cash (Note 5)
    
    
    2,440
    
    
    
    389Accounts receivable
    
    
    2,508
    
    
    
    921Receivable
from affiliate (Note 12)
    
    
    3,003
    
    
    
    468Mortgage notes receivable (Note 6)
    
    
    125,700
    
    
    
    14,700Prepaid expenses and other current assets
    
    
    4,533
    
    
    
    1,671Total current assets
    
    
    141,529
    
    
    
    26,985Property and equipment, net (Note 3)
    
    
    5,040
    
    
    
    4,276Goodwill
    
    
    3,712
    
    
    
    3,712Intangible assets, net (Note 4)
    
    
    3,293
    
    
    
    2,889Other noncurrent assets
    
    
    728
    
    
    
    768$
    154,302
    
    
    $
    38,630Liabilities and stockholders equity/partners capital:Current liabilities:Current portion of long-term debt (Note 5)
    
    $
    56,393
    
    
    $
    122Warehouse line of credit (Note 6)
    
    
    125,700
    
    
    
    14,700Accrued compensation and related taxes
    
    
    10,836
    
    
    
    10,800Accounts payable
    
    
    856
    
    
    
    330Other current liabilities
    
    
    2,162
    
    
    
    905Total current liabilities
    
    
    195,947
    
    
    
    26,857Deferred rent credit
    
    
    2,404
    
    
    
    2,366Other long-term liabilities
    
    
    178
    
    
    
    148Long-term debt, less current portion (Note 5)
    
    
    91
    
    
    
    150Total liabilities
    
    
    198,620
    
    
    
    29,521Stockholders equity/partners capital:Class A common stock, par value $0.01 per share, 1,000
shares authorized, 1 share outstanding
    
    
    
    
    
    
    Partners capital (deficiency)
    
    
    (44,318
    )
    
    
    9,109Total stockholders equity/partners capital (deficiency)
    
    
    (44,318
    )
    
    
    9,109$
    154,302
    
    
    $
    38,630
 See accompanying notes.
 46




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##### Table of Contents



(Dollars In Thousands)
 Years Ending December 31,2006
    
    2005
    
    2004RevenuesCapital markets services revenue
    
    $
    225,242
    
    
    $
    203,457
    
    
    $
    142,192Interest on mortgage notes receivable
    
    
    1,354
    
    
    
    412
    
    
    
    Other
    
    
    3,101
    
    
    
    1,979
    
    
    
    1,499229,697
    
    
    
    205,848
    
    
    
    143,691ExpensesCost of services
    
    
    130,708
    
    
    
    119,106
    
    
    
    85,778Personnel
    
    
    13,471
    
    
    
    14,019
    
    
    
    8,882Occupancy
    
    
    6,319
    
    
    
    5,357
    
    
    
    5,047Travel and entertainment
    
    
    5,789
    
    
    
    5,067
    
    
    
    3,617Supplies, research, and printing
    
    
    6,463
    
    
    
    5,089
    
    
    
    2,933Insurance
    
    
    1,457
    
    
    
    1,459
    
    
    
    1,046Professional fees
    
    
    2,023
    
    
    
    1,101
    
    
    
    807Depreciation and amortization
    
    
    2,806
    
    
    
    2,595
    
    
    
    2,466Interest on warehouse line of credit
    
    
    1,375
    
    
    
    409
    
    
    
    Other operating
    
    
    4,492
    
    
    
    3,417
    
    
    
    3,385174,903
    
    
    
    157,619
    
    
    
    113,961Operating income
    
    
    54,794
    
    
    
    48,229
    
    
    
    29,730Interest and other income
    
    
    632
    
    
    
    274
    
    
    
    67Interest expense
    
    
    (3,541
    )
    
    
    (80
    )
    
    
    (86
    )Income before taxes
    
    
    51,885
    
    
    
    48,423
    
    
    
    29,711Income tax expense
    
    
    332
    
    
    
    288
    
    
    
    296Net income
    
    $
    51,553
    
    
    $
    48,135
    
    
    $
    29,415
 See accompanying notes.
 47




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##### Table of Contents



(Dollars In Thousands, except share data)
 Common Stock
    
    PartnersShares
    
    Amount
    
    Capital
    
    TotalStockholders equity/partners capital,
December 31, 2003
    
    
    
    
    
    $
    
    
    
    $
    24,156
    
    
    $
    24,156Net income
    
    
    
    
    
    
    
    
    
    
    29,415
    
    
    
    29,415Distributions
    
    
    
    
    
    
    
    
    
    
    (41,199
    )
    
    
    (41,199
    )Stockholders equity/partners capital,
December 31, 2004
    
    
    
    
    
    
    
    
    
    
    12,372
    
    
    
    12,372Net income
    
    
    
    
    
    
    
    
    
    
    48,135
    
    
    
    48,135Distributions
    
    
    
    
    
    
    
    
    
    
    (51,398
    )
    
    
    (51,398
    )Stockholders equity/partners capital,
December 31, 2005
    
    
    
    
    
    
    
    
    
    
    9,109
    
    
    
    9,109Issuance of class A common stock
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    51,553
    
    
    
    51,553Distributions
    
    
    
    
    
    
    
    
    
    
    (104,980
    )
    
    
    (104,980
    )Stockholders equity/partners capital
(deficiency), December 31, 2006
    
    
    1
    
    
    $
    
    
    
    $
    (44,318
    )
    
    $
    (44,318
    )
 See accompanying notes.
 48




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##### Table of Contents



(Dollars In Thousands)
 Year Ended December 312006
    
    2005
    
    2004Operating activitiesNet income
    
    $
    51,553
    
    
    $
    48,135
    
    
    $
    29,415Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization:Property and equipment
    
    
    1,728
    
    
    
    1,611
    
    
    
    1,352Intangibles
    
    
    1,078
    
    
    
    984
    
    
    
    1,114(Gain) loss on sale or
disposition of assets
    
    
    (507
    )
    
    
    (140
    )
    
    
    28Purchase of NASD license
    
    
    
    
    
    
    
    
    
    
    (100
    )Increase (decrease) in cash from
changes in:Restricted cash
    
    
    (2,051
    )
    
    
    392
    
    
    
    (244
    )Accounts receivable
    
    
    (1,587
    )
    
    
    (721
    )
    
    
    944Receivable from affiliate
    
    
    (2,535
    )
    
    
    567
    
    
    
    160Mortgage notes receivable
    
    
    (111,000
    )
    
    
    (14,700
    )
    
    
    Prepaid expenses and other
current assets
    
    
    (2,862
    )
    
    
    (569
    )
    
    
    (684
    )Other noncurrent assets
    
    
    40
    
    
    
    (449
    )
    
    
    (230
    )Accrued compensation and
related taxes
    
    
    36
    
    
    
    2,935
    
    
    
    985Accounts payable
    
    
    526
    
    
    
    25
    
    
    
    7Other accrued liabilities
    
    
    1,257
    
    
    
    466
    
    
    
    (25
    )Other long-term liabilities
    
    
    290
    
    
    
    (162
    )
    
    
    654Net cash (used) provided by operating activities
    
    
    (64,034
    )
    
    
    38,374
    
    
    
    33,376Investing activitiesPurchases of property and equipment
    
    
    (2,624
    )
    
    
    (1,447
    )
    
    
    (1,646
    )Net cash used in investing activities
    
    
    (2,624
    )
    
    
    (1,447
    )
    
    
    (1,646
    )Financing activitiesNet borrowings on warehouse line of credit
    
    
    111,000
    
    
    
    14,700
    
    
    
    Borrowings on long-term debt
    
    
    60,000
    
    
    
    
    
    
    
    Payments on long-term debt
    
    
    (3,878
    )
    
    
    (86
    )
    
    
    (274
    )Deferred financing costs
    
    
    (975
    )
    
    
    (14
    )
    
    
    Partners distributions
    
    
    (104,980
    )
    
    
    (51,398
    )
    
    
    (41,199
    )Net cash provided by (used) in financing
activities
    
    
    61,167
    
    
    
    (36,798
    )
    
    
    (41,473
    )Net (decrease) increase in cash
    
    
    (5,491
    )
    
    
    129
    
    
    
    (9,743
    )Cash and cash equivalents, beginning of period
    
    
    8,836
    
    
    
    8,707
    
    
    
    18,450Cash and cash equivalents, end of period
    
    $
    3,345
    
    
    $
    8,836
    
    
    $
    8,707
 49




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##### Table of Contents



(Dollars In Thousands)
 Years Ended December 312006
    
    2005
    
    2004Supplemental disclosure of cash flow
informationCash paid for income taxes
    
    $
    362
    
    
    $
    288
    
    
    $
    296Cash paid for interest
    
    $
    4,442
    
    
    $
    444
    
    
    $
    86Supplemental disclosure of non-cash financing
activitiesProperty acquired under capital leases
    
    $
    90
    
    
    $
    89
    
    
    $
    28
 See accompanying notes.
 50




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##### Table of Contents



1. Organization
    Business Combinations
   51




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##### Table of Contents



1. Organization (continued)
 Distributions
  2. Summary of Significant Accounting Policies
 Combination
  Concentrations of Credit Risk
  Cash and Cash Equivalents
  52




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##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 Revenue Recognition
  Income Statement Characterization
of Reimbursements Received for Out-of-Pocket Expenses Incurred,
 Mortgage Notes Receivable
 ®
 53




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##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
   Advertising
  Property and Equipment
   Leases
  54




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##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 Accounting for Leases
 Computer Software Costs
 Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
 Goodwill
 Goodwill and Other Intangible Assets
 Prepaid Compensation Under Employment Agreements
  55




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##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 Producer Draws
  Intangible Assets
    56




---



##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
   Use of Estimates
  Income Taxes
  Cost of Services
  57




---



##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 Segment Reporting
  Recent Accounting Pronouncements
 SFAS 123(R) Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Statement of Cash
Flows
 SFAS 154 Accounting Changes and Error Corrections Accounting Changes Reporting
Accounting Charges in Interim Financial Statements
 58




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##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 SFAS 156 Accounting for Servicing of Financial
Assets  an amendment of FASB Statement No. 140
 SFAS 157 Fair Value Measurements
 FIN 48.
 59




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##### Table of Contents



3. Property and Equipment
  December 312006
    
    2005Furniture and equipment
    
    $
    3,202
    
    
    $
    2,199Computer equipment
    
    
    1,530
    
    
    
    1,199Capitalized software costs
    
    
    831
    
    
    
    739Leasehold improvements
    
    
    5,005
    
    
    
    3,718Subtotal
    
    
    10,568
    
    
    
    7,855Less accumulated depreciation and amortization
    
    
    (5,528
    )
    
    
    (3,579
    )$
    5,040
    
    
    $
    4,276
  4. Intangible Assets
  December 31, 2006
    
    December 31, 2005Gross
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    Accumulated
    
    Net Book
    
    Carrying
    
    Accumulated
    
    Net BookAmount
    
    Amortization
    
    Value
    
    Amount
    
    Amortization
    
    ValueAmortizable intangible assets:Mortgage servicing rights
    
    $
    6,085
    
    
    $
    (3,695
    )
    
    $
    2,390
    
    
    $
    5,578
    
    
    $
    (2,803
    )
    
    $
    2,775Deferred financing costs
    
    
    988
    
    
    
    (185
    )
    
    
    803
    
    
    
    14
    
    
    
    
    
    
    
    14Unamortizable intangible assets:NASD license
    
    
    100
    
    
    
    
    
    
    
    100
    
    
    
    100
    
    
    
    
    
    
    
    100Total intangible assets
    
    $
    7,173
    
    
    $
    (3,880
    )
    
    $
    3,293
    
    
    $
    5,692
    
    
    $
    (2,803
    )
    
    $
    2,889
 60




---



##### Table of Contents



4. Intangible Assets (continued)
   2007
    
    $
    1,0082008
    
    
    8482009
    
    
    6762010
    
    
    3062011
    
    
    74
  5. Long-Term Debt and Capital Lease Obligations
  December 312006
    
    2005Bank term note payable
    
    $
    56,250
    
    
    $
    Capital lease obligations
    
    
    234
    
    
    
    272Total long-term debt and capital leases
    
    
    56,484
    
    
    
    272Less current maturities
    
    
    56,393
    
    
    
    122Long-term debt and capital leases
    
    $
    91
    
    
    $
    150
 61




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##### Table of Contents



5. Long-Term Debt and Capital Lease Obligations (continued)
 (a) The Credit Agreement
   .
 (b) Letters of Credit and Capital Lease Obligation
  62




---



##### Table of Contents



5. Long-Term Debt and Capital Lease Obligations (continued)
  2007
    
    $
    1432008
    
    
    472009
    
    
    392010
    
    
    5$
    234
 6. Warehouse Line of Credit
  7. Lease Commitments
  63




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##### Table of Contents



7. Lease Commitments (continued)
  2007
    
    $
    4,7542008
    
    
    4,8022009
    
    
    3,9442010
    
    
    3,6152011
    
    
    3,134Thereafter
    
    
    8,413$
    28,662
    8. Retirement Plan
  64




---



##### Table of Contents



9. Servicing
   10. Legal Proceedings
 Accounting for Contingencies,
 11.
Concentrations
  12. Related Party Transactions
  13. Subsequent Events
  65




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##### Table of Contents



Percentage of HFFNumber of
    
    HoldingsAdditional Shares
    
    Partnershipof Class A
    
    Units in theCommon
    
    OperatingStock Expected to
    
    PartnershipsBecome Available
    
    Becoming EligibleAnniversary of the Offering
    
    for Exchange
    
    for ExchangeSecond
    
    
    5,088,750
    
    
    
    25
    %Third
    
    
    5,088,750
    
    
    
    25
    %Fourth
    
    
    5,088,750
    
    
    
    25
    %Fifth
    
    
    5,088,750
    
    
    
    25
    %Total
    
    
    20,355,000
    
    
    
    100
    %
 66




---



##### Table of Contents



67




---



##### Table of Contents



68




---



##### Table of Contents



69




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##### Table of Contents



(Dollars in Thousands)
 2006
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    57,198
    
    
    $
    59,595Restricted cash (Note 5)
    
    
    3,485
    
    
    
    389Accounts receivable
    
    
    2,508
    
    
    
    921Mortgage notes receivable (Note 6)
    
    
    125,700
    
    
    
    14,700Prepaid expenses and other current assets
    
    
    7,843
    
    
    
    2,691Total current assets
    
    
    196,734
    
    
    
    78,296Property and equipment, net (Note 3)
    
    
    5,040
    
    
    
    4,276Goodwill
    
    
    3,712
    
    
    
    3,712Intangible assets, net (Note 4)
    
    
    3,293
    
    
    
    2,889Other noncurrent assets
    
    
    728
    
    
    
    768$
    209,507
    
    
    $
    89,941Liabilities and members equityCurrent liabilities:Current portion of long-term debt (Note 5)
    
    $
    56,393
    
    
    $
    122Warehouse line of credit (Note 6)
    
    
    125,700
    
    
    
    14,700Accrued compensation and related taxes
    
    
    10,836
    
    
    
    10,800Accounts payable
    
    
    868
    
    
    
    330Other current liabilities
    
    
    2,260
    
    
    
    1,027Total current liabilities
    
    
    196,057
    
    
    
    26,979Deferred rent credit
    
    
    2,404
    
    
    
    2,366Other long-term liabilities
    
    
    438
    
    
    
    408Long-term debt, less current portion (Note
5)
    
    
    91
    
    
    
    150Total liabilities
    
    
    198,990
    
    
    
    29,903Members equity (Note 1)
    
    
    10,517
    
    
    
    60,038$
    209,507
    
    
    $
    89,941
 See accompanying notes.
 70




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##### Table of Contents



(Dollars In Thousands)
 Year Ended December 312006
    
    2005
    
    2004RevenuesCapital markets services revenue
    
    $
    225,242
    
    
    $
    203,457
    
    
    $
    142,192Interest on mortgage notes receivable
    
    
    1,354
    
    
    
    412
    
    
    
    Other
    
    
    3,101
    
    
    
    1,979
    
    
    
    1,499229,697
    
    
    
    205,848
    
    
    
    143,691ExpensesCost of services
    
    
    130,708
    
    
    
    119,106
    
    
    
    85,778Personnel
    
    
    13,938
    
    
    
    14,369
    
    
    
    9,107Occupancy
    
    
    6,319
    
    
    
    5,357
    
    
    
    5,047Travel and entertainment
    
    
    5,789
    
    
    
    5,067
    
    
    
    3,617Supplies, research, and printing
    
    
    6,463
    
    
    
    5,089
    
    
    
    2,933Insurance
    
    
    3,126
    
    
    
    2,470
    
    
    
    1,500Professional fees
    
    
    3,030
    
    
    
    1,201
    
    
    
    871Depreciation and amortization
    
    
    2,806
    
    
    
    2,735
    
    
    
    2,506Interest on warehouse line of credit
    
    
    1,375
    
    
    
    409
    
    
    
    Other operating
    
    
    4,474
    
    
    
    3,483
    
    
    
    3,441178,028
    
    
    
    159,286
    
    
    
    114,800Operating income
    
    
    51,669
    
    
    
    46,562
    
    
    
    28,891Interest and other income
    
    
    2,339
    
    
    
    1,267
    
    
    
    317Interest expense
    
    
    (3,541
    )
    
    
    (271
    )
    
    
    (406
    )Income before taxes
    
    
    50,467
    
    
    
    47,558
    
    
    
    28,802Income tax expense
    
    
    774
    
    
    
    715
    
    
    
    728Net income
    
    $
    49,693
    
    
    $
    46,843
    
    
    $
    28,074
 See accompanying notes.
 71




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##### Table of Contents



(Dollars In Thousands)
 Retained
    
    Receivable
    
    PayableCapital
    
    Earnings
    
    From Members
    
    To Members
    
    TotalMembers equity,
December 31, 2003
    
    $
    7,000
    
    
    $
    13,529
    
    
    $
    
    
    
    $
    
    
    
    $
    20,529Net income
    
    
    
    
    
    
    28,074
    
    
    
    
    
    
    
    
    
    
    
    28,074Distributions
    
    
    
    
    
    
    (11,491
    )
    
    
    
    
    
    
    
    
    
    
    (11,491
    )Members equity,
December 31, 2004
    
    
    7,000
    
    
    
    30,112
    
    
    
    
    
    
    
    
    
    
    
    37,112Withdrawal of member
    
    
    (71
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71
    )Net income
    
    
    
    
    
    
    46,843
    
    
    
    
    
    
    
    
    
    
    
    46,843Distributions
    
    
    
    
    
    
    (23,846
    )
    
    
    
    
    
    
    
    
    
    
    (23,846
    )Members equity,
December 31, 2005
    
    
    6,929
    
    
    
    53,109
    
    
    
    
    
    
    
    
    
    
    
    60,038Contributions
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71Net income
    
    
    
    
    
    
    49,693
    
    
    
    
    
    
    
    
    
    
    
    49,693Distributions
    
    
    
    
    
    
    (100,330
    )
    
    
    
    
    
    
    
    
    
    
    (100,330
    )Reset of equity (Note 1)
    
    
    
    
    
    
    
    
    
    
    (4,709
    )
    
    
    5,754
    
    
    
    1,045Members equity,
December 31, 2006
    
    $
    7,000
    
    
    $
    2,472
    
    
    $
    (4,709
    )
    
    $
    5,754
    
    
    $
    10,517
 See accompanying notes.
 72




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##### Table of Contents



(Dollars In Thousands)
 Year Ended December 312006
    
    2005
    
    2004Operating activitiesNet income
    
    $
    49,693
    
    
    $
    46,843
    
    
    $
    28,074Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization:Property and equipment
    
    
    1,728
    
    
    
    1,611
    
    
    
    1,352Intangibles
    
    
    1,078
    
    
    
    1,124
    
    
    
    1,154(Gain) loss on sale or disposition of assets
    
    
    (507
    )
    
    
    (140
    )
    
    
    28Purchase of NASD license
    
    
    
    
    
    
    
    
    
    
    (100
    )Increase (decrease) in cash from changes in:Restricted cash
    
    
    (3,096
    )
    
    
    392
    
    
    
    (244
    )Accounts receivable
    
    
    (1,587
    )
    
    
    (721
    )
    
    
    944Mortgage notes receivable
    
    
    (111,000
    )
    
    
    (14,700
    )
    
    
    Prepaid expenses and other current assets
    
    
    (5,152
    )
    
    
    (1,138
    )
    
    
    (1,011
    )Other noncurrent assets
    
    
    40
    
    
    
    (449
    )
    
    
    (230
    )Accrued compensation and related taxes
    
    
    36
    
    
    
    2,935
    
    
    
    985Accounts payable
    
    
    538
    
    
    
    25
    
    
    
    9Other accrued liabilities
    
    
    1,233
    
    
    
    553
    
    
    
    (5
    )Other long-term liabilities
    
    
    290
    
    
    
    98
    
    
    
    654Net cash (used) provided by operating
activities
    
    
    (66,706
    )
    
    
    36,433
    
    
    
    31,610Investing activitiesPurchases of property and equipment
    
    
    (2,624
    )
    
    
    (1,447
    )
    
    
    (1,646
    )Net cash used in investing activities
    
    
    (2,624
    )
    
    
    (1,447
    )
    
    
    (1,646
    )Financing activitiesNet borrowings on warehouse line of credit
    
    
    111,000
    
    
    
    14,700
    
    
    
    Net borrowings on short-term debt
    
    
    
    
    
    
    
    
    
    
    (217
    )Borrowings on long-term debt
    
    
    60,000
    
    
    
    
    
    
    
    Payments on long-term debt
    
    
    (3,878
    )
    
    
    (7,461
    )
    
    
    (2,433
    )Deferred financing costs
    
    
    (975
    )
    
    
    (14
    )
    
    
    Members contributions (withdrawals)
    
    
    1,116
    
    
    
    (71
    )
    
    
    Members distributions
    
    
    (100,330
    )
    
    
    (23,846
    )
    
    
    (11,491
    )Net cash provided by (used) in financing
activities
    
    
    66,933
    
    
    
    (16,692
    )
    
    
    (14,141
    )Net (decrease) increase in cash
    
    
    (2,397
    )
    
    
    18,294
    
    
    
    15,823Cash and cash equivalents, beginning of period
    
    
    59,595
    
    
    
    41,301
    
    
    
    25,478Cash and cash equivalents, end of period
    
    $
    57,198
    
    
    $
    59,595
    
    
    $
    41,301
 73




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##### Table of Contents



(Dollars In Thousands)
 Years Ended December 312006
    
    2005
    
    2004Supplemental disclosure of cash flow
informationCash paid for income taxes
    
    $
    771
    
    
    $
    715
    
    
    $
    728Cash paid for interest
    
    $
    4,442
    
    
    $
    650
    
    
    $
    405Supplemental disclosure of noncash
financing
activitiesProperty acquired under capital leases
    
    $
    90
    
    
    $
    89
    
    
    $
    28
 See accompanying notes.
 74




---



##### Table of Contents



1. Organization
 Business Combinations
   
 75




---



##### Table of Contents



1. Organization (continued)
 Capital Contributions
   Staff Accounting
Bulletin
  76




---



##### Table of Contents



1. Organization (continued)
 Distributions
  Redemption
  2. Summary of Significant Accounting Policies
 Consolidation
  Concentrations of Credit Risk
  77




---



##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 Cash and Cash Equivalents
  Revenue Recognition
  Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred,
 78




---



##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 Mortgage Notes Receivable
 ®
   Advertising
  79




---



##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 Property and Equipment
   Leases
 Accounting for Leases
 Computer Software Costs
 Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
 80




---



##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 Goodwill
 Goodwill and Other Intangible Assets
 Prepaid Compensation Under Employment Agreements
  Producer Draws
  81




---



##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 Intangible Assets
      Use of Estimates
  82




---



##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 Income Taxes
  Cost of Services
  Segment Reporting
  83




---



##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 Recent Accounting Pronouncements
 SFAS 123(R) Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Statement of Cash
Flows
 SFAS 154 Accounting Changes and Error Corrections Accounting Changes Reporting
Accounting Charges in Interim Financial Statements
 84




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##### Table of Contents



2. Summary of Significant Accounting Policies (continued)
 SFAS 156 Accounting for Servicing of Financial
Assets  an amendment of FASB Statement No. 140
 SFAS 157 Fair Value Measurements
 FIN 48.
 85




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##### Table of Contents



December 312006
    
    2005Furniture and equipment
    
    $
    3,202
    
    
    $
    2,199Computer equipment
    
    
    1,530
    
    
    
    1,199Capitalized software costs
    
    
    831
    
    
    
    739Leasehold improvements
    
    
    5,005
    
    
    
    3,718Subtotal
    
    
    10,568
    
    
    
    7,855Less accumulated depreciation and amortization
    
    
    (5,528
    )
    
    
    (3,579
    )$
    5,040
    
    
    $
    4,276
  4. Intangible Assets
  December 31, 2006
    
    December 31, 2005Gross
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    Accumulated
    
    Net Book
    
    Carrying
    
    Accumulated
    
    Net BookAmount
    
    Amortization
    
    Value
    
    Amount
    
    Amortization
    
    ValueAmortizable intangible assets:Mortgage servicing rights
    
    $
    6,085
    
    
    $
    (3,695
    )
    
    $
    2,390
    
    
    $
    5,578
    
    
    $
    (2,803
    )
    
    $
    2,775Deferred financing costs
    
    
    988
    
    
    
    (185
    )
    
    
    803
    
    
    
    14
    
    
    
    
    
    
    
    14Unamortizable intangible
assets:NASD license
    
    
    100
    
    
    
    
    
    
    
    100
    
    
    
    100
    
    
    
    
    
    
    
    100Total intangible assets
    
    $
    7,173
    
    
    $
    (3,880
    )
    
    $
    3,293
    
    
    $
    5,692
    
    
    $
    (2,803
    )
    
    $
    2,889
 86




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##### Table of Contents



4. Intangible Assets (continued)
   2007
    
    $
    1,0082008
    
    
    8482009
    
    
    6762010
    
    
    3062011
    
    
    74
  5. Long-Term Debt and Capital Lease Obligations
  December 312006
    
    2005Bank term note payable
    
    $
    56,250
    
    
    $
    Capital lease obligations
    
    
    234
    
    
    
    272Total long-term debt and capital leases
    
    
    56,484
    
    
    
    272Less current maturities
    
    
    56,393
    
    
    
    122Long-term debt and capital leases
    
    $
    91
    
    
    $
    150
 87




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##### Table of Contents



5. Long-Term Debt and Capital Lease Obligations (continued)
 (a) The Credit Agreement
     (b) The New Credit Agreement
  88




---



##### Table of Contents



5. Long-Term Debt and Capital Lease Obligations (continued)
   .
 (c) Letters of Credit and Capital Lease Obligation
  89




---



##### Table of Contents



5. Long-Term Debt and Capital Lease Obligations (continued)
  2007
    
    $
    1432008
    
    
    472009
    
    
    392010
    
    
    5$
    234
 6. Warehouse Line of Credit
  7. Lease Commitments
  90




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##### Table of Contents



7. Lease Commitments (continued)
  2007
    
    $
    4,7542008
    
    
    4,8022009
    
    
    3,9442010
    
    
    3,6152011
    
    
    3,134Thereafter
    
    
    8,413$
    28,662
    8. Retirement Plan
  91




---



##### Table of Contents



9. Servicing
   10. Legal Proceedings
 Accounting for Contingencies,
 11.
Concentrations
  12. Subsequent Events
   92




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##### Table of Contents



93




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##### Table of Contents



Percentage of HFFNumber of
    
    
    Holdings PartnershipAdditional Shares
    
    
    Units in theof Class A Common
    
    
    OperatingStock Expected to
    
    
    PartnershipsBecome Available
    
    
    Becoming EligibleAnniversary of the Offering
    
    for Exchange
    
    
    for ExchangeSecond
    
    
    5,088,750
    
    
    
    25
    %Third
    
    
    5,088,750
    
    
    
    25
    %Fourth
    
    
    5,088,750
    
    
    
    25
    %Fifth
    
    
    5,088,750
    
    
    
    25
    %Total
    
    
    20,355,000
    
    
    
    100
    %
   94




---



##### Table of Contents



95




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
  
 Item 9A. Controls and Procedures
 Disclosure Controls and Procedures.
      
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
   
 Item 11. Executive Compensation




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships, Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules




---



##### Table of Contents



SIGNATURES
  HFF, INC.By:
    /s/ John H. Pelusi, Jr.John H. Pelusi, Jr.Its: Chief Executive Officer




---



##### Table of Contents



Signature
    
    Capacity
    
    DateBy:
    

/s/
John H. Pelusi, Jr.
John H. Pelusi, Jr.
    
    Chief Executive Officer, Director and Executive
Managing Director
(Principal Executive Officer)
    
    March 15, 2007By:
    
    /s/ Gregory R. Conley
Gregory R. Conley
    
    Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    March 15, 2007By:
    
    /s/ John P. Fowler
    
    Director
    
    March 15, 2007John P. FowlerBy:
    
    /s/ Mark D. Gibson
    
    Director
    
    March 15, 2007Mark D. GibsonBy:
    
    /s/ John Z. Kukral
    
    Director
    
    March 15, 2007John Z. KukralBy:
    
    /s/ Deborah H. McAneny
    
    Director
    
    March 15, 2007Deborah H. McAnenyBy:
    
    /s/ George L. Miles, Jr.
    
    Director
    
    March 15, 2007George L. Miles, Jr.By:
    
    /s/ Lenore M. Sullivan
    
    Director
    
    March 15, 2007Lenore M. SullivanBy:
    
    /s/ Joe B. Thornton, Jr.
    
    Director
    
    March 15, 2007Joe B. Thornton, Jr.By:
    
    /s/ McHenry T. Tichenor, Jr.
    
    Director
    
    March 15, 2007McHenry T. Tichenor, Jr.




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##### Table of Contents



Exhibit Index
 2.1
    
    Sale and Merger Agreement, dated January 30, 2007 (incorporated by reference to Exhibit 10.5 to the
Registrants Registration Statement on Form S-l (File No. 333-138579) (Form S-l) filed with the
SEC on December 22, 2006)3.1
    
    Amended and Restated Certificate of incorporation of the Registrant (incorporated by reference to
Exhibit 3.1 to the Form S-l filed with the SEC on December 22, 2006)3.2
    
    Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Form S-1 filed with the SEC on December 22, 2006)10.1
    
    Holliday Fenoglio Fowler, L.P. Partnership Agreement, dated
February 5, 200710.2
    
    HFF Securities L.P. Partnership Agreement, dated February
5,  200710.3
    
    Tax Receivable Agreement, dated February 5, 2007 (incorporated by reference to Exhibit 10.3 to the
Form S-1 filed with the SEC on December 22, 2006)10.4
    
    Registration Rights Agreement, dated February 5, 2007 (incorporated by reference to Exhibit 10.4 to
the Form S-1 filed with the SEC on December 22, 2006)10.5
    
    HFF, Inc. 2006 Omnibus Incentive Compensation Plan,
dated January 30, 2007 (incorporated by
reference to Exhibit 10.9 to the Form S-l filed with the SEC on
January 8, 2007)10.6
    
    Holliday Fenoglio Fowler, L.P. Profit Participation Bonus Plan (incorporated by reference to Exhibit
10.10 to the Form S-1 filed with the SEC on January 8, 2007)10.7
    
    HFF Securities, L.P. Profit Participation Bonus Plan
(incorporated by reference to Exhibit 10.11 to the Form S-l filed
with the SEC on January 8, 2007)10.8
    
    Employment Agreement between the Registrant and John H. Pelusi, Jr., dated January 30, 200710.9
    
    Employment Agreement between the Registrant and Gregory R.
Conley, dated January 30, 200710.10
    
    Employment Agreement between the Registrant and Nancy
Goodson, dated January 30, 200710.11
    
    Amended and Restated Credit Agreement dated January 5, 2007*21.1
    
    Subsidiaries of the registrant.23.1
    
    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    The schedules and annexes to the exhibits attached to Exhibit 10.11 have been omitted. The
Registrant hereby agrees to furnish supplementally a copy of any omitted schedule or annex
to the exhibits attached thereto to the Securities and Exchange Commission upon its request.