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Capital Ideas from Holliday Fenoglio Fowler

Revolutionary strategies and a single-minded focus have helped make it one of the nation’s most successful capital market companies.
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photography by Billy Surface

Collectively. It’s a word used frequently by Mark Gibson when discussing the growth of Holliday Fenoglio Fowler, one of the largest and most successful capital markets companies in the country.

Gibson has been with the firm since 1984, when it was just getting started as a Houston mortgage banking concern. In 1993 he gave up an ownership stake in that office to make a bet on Dallas, teaming up with Jody Thornton to expand HFF’s presence here.

Today Gibson and Thornton, along with John Fowler in Boston and John Pelusi in Pittsburgh, oversee national operations for Holliday Fenoglio Fowler. Since 1998, the publicly traded company (NYSE: HF) has closed a whopping 12,500 commercial real estate transactions valued at $275 billion.

But HFF’s success is not due to the efforts of one person, or two people, or even four. The firm has grown, as Gibson puts it, collectively.
And so he grimaces when, during an interview, he’s asked personal questions about his life. Not because he wants to keep the information private, but because he doesn’t see the relevance. The truth is, he’d rather not be talking to a reporter at all. Unlike many chest-pounders in the real estate business, HFF prefers to operate under the radar, letting its results do the talking.

Gibson reluctantly allows that he was born in Fort Payne, Ala., and was 2 years old when his mother, who was single, moved to Houston for a job. He played football in high school and “sat on the bench” at the University of Texas at Austin—the first one in his family to attend college. The original plan was to become a doctor, but struggles with organic chemistry led him to switch his major to finance. “I loved everything about it … the capital markets, how they worked, and business in general was just very interesting to me,” Gibson says. “I saw how you could achieve teamwork within a company—and maybe that relates to my sports background—and achieve remarkable things in business, if you were focused appropriately.”

In January 1984, having earned a bachelor’s degree in finance, Gibson was working at a bank and taking night classes at South Texas College of Law when he was asked by John Fenoglio and Hal Holliday to join their fledgling mortgage banking firm. The entrepreneurial aspects of the opportunity appealed to him, and Gibson jumped on board. Nine years later, he moved to North Texas to partner with Thornton.

“Collectively, we grew Dallas fairly rapidly, through a different way of conducting business in the real estate intermediary market,” he says.

A Mortgage Banking Sea Change
Thornton had opened the Dallas office of Holliday Fenoglio two years earlier. A Fort Worth native, he earned a bachelor’s degree in accounting at UT-Austin, choosing the same career as his accountant father and sister. He became a CPA and got a job in the audit division at Peat, Marwick & Mitchell. But it didn’t take long for him to realize that, although he loved studying accounting, he hated doing accounting.

“I wanted to be the guy doing the deal, not checking the deal,” Thornton says.

He stuck it out at PMM for two years, then went to work for Joyner Mortgage Co. in August 1984. Before long, the Dallas real estate market took a nosedive. Many of his contemporaries fled to the coasts, but Thornton, whose father had recently passed away, wanted to stay close to his mother in Fort Worth. Struggling through the downturn proved to be an invaluable experience. “I learned a lot of things that you don’t want to do,” Thornton says. “And when a market gets frothy, I can spot those things very easily.”

He first met Gibson in 1991. Their planned one-hour meeting stretched out to nearly five hours. “It was like we were friends forever,” Thorton says. “We just clicked.” The two discovered they shared the same philosophies about many things, from their deep Christian faith to how the mortgage banking business should operate. At the time, the industry was on the verge of a transformation—one that Holliday Fenoglio would help pioneer.

For years, mortgage bankers had represented big insurance companies. When developers or investors needed capital, the mortgage bankers would take the deals to their lender clients. If none of the insurance companies wanted to do the loan, the borrowers were out of luck.

“One thing we agreed upon from the very beginning was that on every transaction there are two clients, a borrower and a lender, or a buyer and a seller. But in our view, we have one customer, and that’s the consumer of the capital. That’s where Mark and I really lined up,” Thornton says.

“That was a huge sea change in the industry. A lot of people still viewed the mortgage banking business as one that represented three or four or five lenders. We viewed it as one where we would have the exclusive opportunity to represent the transaction to the marketplace.”

Core Strategies
The real estate-heavy Dallas market was particularly receptive to the unique approach Holliday Fenoglio brought to the intermediary business. Amresco took notice and acquired the firm in 1994. As a result the company quickly grew from four to 26 offices. (It now has 19.) Through the years under various ownerships (see chart), HFF has maintained core strategies that have driven its growth. Accepting only exclusive assignments is one of them. Others include:

[inline_image id=”1″ align=”r” crop=””]Specialization. HFF focuses solely on capital markets services. It has seven business lines—debt placement, investment sales, advisory services, private equity and corporate finance, structured finance, loan sales, and loan servicing. Within those groups, producers often focus on specific product types, be it office or retail or multifamily, etc. They’re supported by a deep team of analysts—another HFF innovation.

“I used to think you needed to know a little bit of everything to be good at it,” Thornton says. “But I’m also the guy who said Starbucks wouldn’t make it because you get free coffee at work. I’ve learned that specialization is pretty powerful.”  

Purity. HFF steers clear of other real estate services. “We make sure that we have no conflicts of interest with our clients, no hidden agendas and no hidden fees,” Thornton says. “We also make sure we don’t compete with our clients—no leasing, no management, no development, no lending, etc.”

Selective Hiring. HFF, which employs more than 450 nationwide (including 85 who were added in the past 18 months), has largely grown “one brick at a time.” It puts job candidates through a rigorous hiring process, starting with a two-part screener. First, candidates must be in the top 1 percent to 2 percent of practitioners in the trade. Second, they must be someone “we and our wives would enjoy having dinner with,” Gibson says. The only constraint to growth at HFF, he adds, is “finding people who are entrepreneurial, who have a very high character and moral compass, who don’t carry a sense of entitlement, and who have a passion for what they do. These people are very difficult to find.”

The Team. The Team. The Team. HFF doesn’t follow a typical hierarchy. Group heads act not as managers, Gibson says, but as coordinators of “a lot of very talented, highly motivated” producers. Maintaining a team culture is difficult in an industry that attracts a lot of Type A people. Sometimes that spills over into big egos, says Thornton, and “that’s when it causes a problem in terms of the way we run our business.” HFF has no time for the internal competition that sometimes exists in real estate services firms. “Our strategy is to make the pie bigger,” Thornton says. “If we put the clients first and make the pie bigger, you don’t have to worry about the size of your slice.”

Targeted Markets. HFF’s platform works better in major metropolitan areas, so that’s where its focus is. (Dallas, with about 80 employees, is HFF’s largest office.) “In larger markets, there’s more deal flow,” Thornton says. “And when you get more reps—I don’t care if you’re Dirk practicing your jump shot—you’re going to be better than the guy who doesn’t get as much practice.”

The results of these strategies show up on HFF’s bottom line. As of July 27, the company’s stock (nearly half of which is owned by HFF partners) was trading at $15.05 per share—substantially up from the trailing 12-month average of $9.70 per share. It generated first quarter 2011 net income of about $4 million on $41.9 million in sales, beating analysts’ estimates.

Says Gibson: “The team orientation, the culture of the company, and quality of the people have helped us achieve some remarkable things in a short period of time.”