Walker & Dunlop, Inc

Good morning, everyone. We'll be starting in one minute. Good morning. I'm Kelsey Duffey, Vice President of Investor Relations at Walker & Dunlop. and I would like to welcome you to Walker & Dunlop's first quarter 2020 earnings conference call and webcast. Hosting the call today is Willie Walker, Walker & Dunlop chairman and CEO. He is joined by Steve Theobald, chief financial officer. Today's call is being recorded and a replay will be available via webcast on the investor relations section of our website. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. If you have dialed into the call and would like to ask a question at that time, please press star 9 on your touchtone phone. If you are accessing the webcast on your computer, please click the raise hand icon on the bottom menu bar of the webcast screen. This morning, we posted our earnings release and presentation to the investor relations section of our website, www.walkerdunlop.com. These slides will serve as a reference point for some of what Willie and Steve will touch on during the call this morning. Please also note that we will reference the non-GAAP financial metric adjusted EBITDA during the course of this call. Please refer to the earnings release posted on our website for a reconciliation of this non-GAAP financial metric. Investors are urged to carefully read the forward-looking statements language in our earnings release. Statements made on this call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe our current expectations, and actual results may differ materially. Walker and Dunlop is under no obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise. We expressly disclaim any obligation to do so. More detailed information about risk factors can be found in our annual and quarterly reports filed with the SEC. I will now turn the call over to Willie.

Thank you, Kelsey, and good morning, everyone. First and foremost, we hope you and your families and colleagues are staying safe and healthy. The COVID-19 pandemic has dramatically changed the world we live in today and the underlying fundamentals of the U.S. economy. This earning call will be broken up into three segments. WND pre-COVID, where the investments we have made over the past several years all came together to produce outstanding Q1 financial results. WMD in the crisis, where our team transitioned rapidly to continue providing the capital and solutions our clients have needed, and WMD going forward, where our business model, access to capital, and conservative underwriting culture should position us well to endure the downturn and emerge on the other side even stronger and more relevant to our clients. The investments we have made over the past several years in hiring new bankers and brokers Building new technology solutions and expanding our national footprint generated record Q1 total transaction volume of $11.4 billion, up 91% over the first quarter of last year. As this slide shows, every business line had double digit growth in the quarter. The $5.2 billion of GSE loan originations includes the largest transaction in Walker Dunlop's history, a $2 billion credit facility on 67 properties in the Mid-Atlantic for Southern Management Corporation. Walker Dunlop won this transaction over our three largest competitors, one of whom had this debt on their books for over decades. Winning this financing was an incredible honor and is reflective of the team, brand, and capabilities we have built at Walker Dunlop. and while winning this transaction was a massive accomplishment, underwriting all the properties, structuring the credit facilities, pricing the loans and closing the loans all in the midst of the COVID-19 crisis was one of the most challenging and significant accomplishments in our company's long history. I'm deeply appreciative of the trust and confidence Southern Management placed in Walker and Dunlop and beyond proud and thankful to the team at W&D that executed this enormous deal under exceedingly difficult circumstances. We've told investors before that W&D is in a small group of agency lenders that can effectively execute on transactions of this size and this marquee transaction will pay benefits for many years to come. Looking at other production volumes, our HUD team originated $355 million of loans in the first quarter, an increase of 99% from last year's T1 and a very strong start to the year. HUD continues to play an extremely important role in the multifamily debt financing markets and we have a healthy pipeline of HUD business carrying into the second quarter. Brokered debt financing volume grew by 178% to $4 billion in Q1, the largest debt brokerage quarter we have ever had. We have made significant investments in this area of the business over the past several years and are extremely excited about the future potential of this team. We originated $108 million of principal lending and investing volume, with $22 million of that originated through JCR Capital, and the remainder originated for our joint venture with Blackstone Mortgage Trust. Finally, our multifamily property sales volume was $1.7 billion, up 148% from Q1 of 2019, reflecting the level of growth We generated revenue growth of 25% to $234 million and 7% growth in diluted earnings per share to $1.49. That 7% growth in EPS is after taking a significant $23.6 million provision for potential future credit losses due to the COVID-19 pandemic. Steve will discuss that charge and our overall credit risk position in more details during his remarks. And finally, our adjusted EBITDA was down slightly on the quarter, but still very strong, reflecting the strength of our business model. As the COVID-19 crisis set in, The team at Walker and Dunlop seamlessly transitioned to a dispersed work model and didn't skip a beat, as reflected in our Q1 origination volumes and financial performance. The Fed stepped into the agency's CMBS market in late March and provided much-needed liquidity that reduced spreads on agency bonds and allowed Fannie, Freddie, and Hud to remain very active in the lending market. Our Q1 volumes reflect the terrific financing environment created by falling interest rates and tight spreads. And those conditions continued throughout April. Steve will provide data on our April origination volumes and outlook for the rest of Q2 in a moment. While the agencies remain very active in the multifamily market, capital for retail, hospitality, and office assets began to dry up as the first quarter ended. We continue to work with all active capital providers, which are mostly banks and large insurance companies, to provide financing on non-multifamily assets. But deal flow has dropped dramatically. And while transaction volumes on non-multifamily assets are certain to remain low for at least Q2 and likely Q3, 61% of our debt brokerage team's 2019 transaction volume was on multifamily assets. So we expect that team to contribute The acquisition market is essentially shut down for now as investors consider the short and long-term impacts of this pandemic on market fundamentals. But given the underlying strength of the multifamily industry and the liquidity being provided by Fannie, Freddie, and HUD, we expect multifamily property sales activity to come back as soon as this crisis begins to abate. Our bankers and brokers have been extremely active with their clients since the crisis set in, hosting Zoom meetings and working on transactions. We also launched the Walker webcast in mid-March, bringing market insights and thought leadership on the COVID-19 pandemic to our clients and partners. These webcasts have taken on a life of their own and are being watched live and on YouTube by over 10,000 people per week. Similar to the Walker Dunlop Summer Conference that we hold in Sun Valley, Idaho every year which unfortunately we had to just cancel for 2020. We are providing our clients with unique insights into the markets and their businesses. But powerfully, rather than hosting 250 clients for three days in the Idaho mountains, we are reaching thousands of clients every week and extending the Walker Dunlop brand each time. I will now turn the call over to Steve to talk through our first quarter results and financial outlook in more detail. And I will then come back to focus on WND going forward. Steve.

Thank you, Willie, and good morning, everyone. It's great to be with you today. We started 2020 with a strong quarter of top and bottom line results. Record total transaction volume of $11 billion drove total revenues of $234 million, up 25% over Q1 2019, and diluted earnings per share of $1.49 was up 7% from the same quarter last year, even with a provision bill of $23.6 million. Our first quarter results demonstrate the incredible financial performance our business is capable of delivering and validates the investments we have made to build the platform. I will provide a few more brief comments about the first quarter and additional color on our provision build, liquidity position, and expectations for future performance. Turning to slide six, Q1 operating margin was 26%, Thank you for joining us. totaled $47.6 million or 53% of our total personnel expense in the quarter. As Willie mentioned, during the quarter we rate locked a portfolio of over $2 billion with Fannie Mae. Large transactions like this one carry significantly lower gain on sale margins as origination and servicing fees as a percentage of the transaction are less than our typical flow business. Even with this mega transaction, Our overall quarterly gain on sale margin came in at 151 basis points within our forecast range of 150 to 170 basis points. This reflects stronger margins on the balance of our Fannie Mae lending and the increase in HUD origination volumes during the quarter. As you can see on slide seven, our servicing portfolio ended the quarter at 95 billion and continues to fuel strong cash revenues with servicing fees totaling 55 million in Q1. These high margin revenue streams are the backbone of our business model and were a large contributor to the $64 million of adjusted EBITDA we reported in Q1. We were very pleased with this strong start to the year. As I discussed at our last earnings call, we booked our adjustment for the adoption of CECL at the beginning of the quarter with an addition to the allowance for risk sharing obligations of $31.6 million with the offset of that adjustment to equity and deferred tax assets. The increase to our allowance for the implementation of CECL was based upon our forecast of expected future losses at that time, which predated the impacts of the COVID-19 crisis. During the quarter, we recorded a provision expense of $22.5 million for the allowance for risk sharing and $1.1 million for the allowance for loan losses related to our interim loan portfolio. The provisions taken in the quarter were driven entirely by the impacts of the COVID-19 pandemic on our forecast of expected future losses. The provision estimate for the allowance for risk sharing assumes the rate of losses increase over the next 12 months to slightly higher than the peak of losses resulting from the great financial crisis. As you can see on slide eight, we experienced peak losses of six basis points in 2012, four years after the onset of the crisis and two years after delinquencies peaked. Those losses occurred after an extended period of rising unemployment and a slow build of delinquencies. The crisis we are facing today is a much different scenario with a dramatic spike in unemployment in the short run, but significantly more government support being provided to consumers and small businesses than what occurred during the great financial crisis. Our forecast assumes the unprecedented government support being pumped into the economy will help mitigate some of the impacts of the increase in unemployment. In addition, our portfolio enters this crisis with a much higher average debt service coverage ratio with cash flow coverage of nearly two times required debt service today versus one and a half times in 2008 due to the extended period of positive multifamily performance since 2010. We will continue to assess the assumptions we are making with respect to our forecast of future losses and we'll adjust our reserve accordingly. At a minimum, based upon the CECL methodology, we would expect to make incremental increases to the reserve in future quarters as our portfolio continues to grow. Let me now address our liquidity position and the potential impacts of forbearance on our business. We ended the quarter with $205 million of cash in our balance sheet. By the end of April, that balance had grown by $20 million to $225 million. Under the terms of our Fannie Mae and HUD servicing, we are obligated to advance the principal, interest, and guarantee fees for the loans we service on their behalf when the borrower does not pay. We have no such obligations for our Freddie Mac or life insurance company portfolios. The agencies have announced forbearance programs that permit their borrowers to forego payments for up to a 90-day period between April and the end of the year if they are experiencing cash flow problems related to COVID-19. Under the terms of our DUS license, we may request reimbursement for our advances from Fannie after four months. For HUD, we are obligated to advance until the loan is assigned back to the FHA or the borrower begins making payments again. This obligation to advance payments is not new, but has been an immaterial issue due to the low level of historical delinquencies in our multifamily portfolio. For context, We had $1 million of advances receivable on our balance sheet at March 31, mostly related to our HUD portfolio. As shown on slide 9, we had relatively few forbearance requests or new delinquencies for the month of April, resulting in an increase of the advances receivable balance to $1.6 million at April 30, an increase of only $600,000. The April balance is comprised of five Fannie Mae loans totaling $91.9 million and 16 HUD loans totaling $152.4 million that were either delinquent or in forbearance. While it is likely that the number of forbearance requests will increase in May and again in June given the high levels of unemployment, the limited requests in April were certainly encouraging. With our sizable cash position, we have sufficient liquidity to meet our expected advancing obligations in anything but the most draconian of forbearance situations. In addition, we recently received a commitment from one of our banks to put in place a $100 million credit line to advance principal and interest payments for our Fannie Mae portfolio. And we expect to have this in place by the end of the month, subject to consent from Fannie and our term loan holders. Jeannie Mae also recently announced that they would provide a facility for advancing on HUD multifamily loans and forbearance, which we will be able to use if necessary. Finally, out of an abundance of caution, we have stopped making new interim loans on our balance sheet and are not currently in the market to repurchase our stock. These moves, coupled with our current strong liquidity and the advancing facilities we now have access to, make us feel very good about our current financial position and gave our board of directors the confidence to approve the $0.36 per share quarterly dividend payable to shareholders of record as of May 20th. Turning to the remainder of the year, I want to give you some insight into how we're thinking about financial results for the next three quarters. Despite the challenges caused by the pandemic, there are reasons for optimism. The strong start to the year has carried over into the second quarter, with robust pipelines for our Fannie Freddie and HUD businesses. We've already rate locked $1.9 billion of agency business in April, which would be a great month in a normal environment, and expect to rate lock another $2 to $2.5 billion in the quarter. As countercyclical sources of capital and with interest rates once again at historic lows, we expect Fannie, Freddie, and HUD to remain active in the market for the remainder of the year. On the debt brokerage and property sales front, we expect that overall volumes will be muted by the crisis as various capital sources stop lending, certain asset classes like retail and hospitality become more difficult to lend on, and property sales activity slows while buyers and sellers wait to see what comes next. While these are important parts of our overall business, they have lower margins than our agency originations and a smaller impact on our overall financial results. To be clear, we are still brokering loans and selling properties, but the volumes will be less than the highs we reached in Q1 and will likely not start to recover until sometime in the fourth quarter. With the strong margins achieved in Q1 and the expectation for lower debt brokerage volume in future quarters, We anticipate gain on sale margin will move higher. So we are increasing the range to 170 on the low end and 200 basis points on the high end for the remainder of the year. To date, we have not taken any actions to cut salaries or reduce our headcount. And with many parts of our company busier than they have ever been, we don't plan to. With 53% of our personnel costs being variable, we believe we can maintain our employee base in a lower volume environment while still delivering strong financial metrics. Our expectation is that we will be able to maintain operating margins in the mid 20% range for the year while personnel costs take up into low to mid 40% of revenue for the year, only slightly higher than our historical rate. Finally, on our Q4 2019 earnings call in February, we set out our goal of double digit growth in both earnings per share and adjusted EBITDA in 2020. While we feel optimistic about our ability to continue generating solid origination volume and cash flow for the remainder of the year, as we sit here today, we do not have the visibility to achieving these financial targets for the year. Given the number of factors that could potentially impact our business during the remainder of 2020, excuse me, Despite the current uncertainty surrounding the impacts of the pandemic, we are confident that our business will continue to succeed during this time due to our access to counter-cyclical capital, our cash-generating capabilities, and our strong liquidity position. I'll now turn the call back over to Willie.