Walker & Dunlop, Inc

Good morning. We will be starting the call in two minutes.

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 second 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 analyst questions following the presentation. If you have dialed into the call and would like to ask a question at that time, please press star nine on your touchtone phone. If you're 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 serve as a reference point for some of what Willie and Steve will touch on during the call. 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. Since the pandemic began, when I begin a webcast on Wednesday, I usually say if it's Wednesday, it's the Walker webcast. But today we aren't doing the Walker webcast, so we can present to investors our absolutely fantastic second quarter results. But before I dive into comments about the second quarter at Walker Dunlop, I want to reiterate our condolences to those who have lost loved ones due to the COVID-19 virus and express our concern and support for the millions of Americans who have been adversely affected by the economic downturn. While Walker Dunlop's Q2 financial results are exceptional, many individuals and businesses have been hit extremely hard, and it is our great hope and wish that we get control of the virus so that jobs and businesses can be restored. As we have seen since the advent of the pandemic, certain businesses have benefited from the forced changes to the way we live and work, and others have been badly damaged. Fortunately for Walker and Dunlop, we have benefited and generated record revenues of $253 million during the quarter on the back of exceedingly strong loan origination and property sales volume of $7.1 billion. Our quarterly loan origination volume of $6.7 billion coupled with our Q1 lending volume of $9.6 billion, catapulted Walker & Dunlop's market share of total commercial real estate lending in the United States for the first half of 2020 to 13.2%, nearly tripling our market share from last year. This dramatic growth in market share is due to the success we've had in attracting and retaining the very best bankers and brokers in the industry, Investing in integrated technology solutions and proprietary databases to better understand and meet our clients' borrowing needs and the development of an entirely new digital marketing strategy thanks to the wildly popular Walker webcast. All of these investments in people, technology, and branding came together in Q2 2020 to generate 26% year-over-year growth in revenues and 47% year-over-year growth in diluted earnings per share to $1.95 in the midst of the global pandemic when our entire team was working remotely. And if record revenue growth and explosive earnings were not enough, we added a record net $5.2 billion of servicing from loan originations to our portfolio during the quarter, pushing our servicing portfolio over $100 billion at the end of July and officially achieving the first pillar of our highly ambitious five-year strategic growth plan entitled Vision 2020. Revenue growth of 26% during a quarter when our debt brokerage and property brokerage businesses were significantly curtailed highlights the volume of lending we did with the GSEs and higher. We originated $4.5 billion of financing with Fannie Mae and Freddie Mac in the second quarter, increasing our market share with the GSEs from 10% last year up to 14% through the first half of 2020. Our partnership with Fannie Mae, which dates back to 1988, has had an incredible year with Walker and Dunlop representing 20% of Fannie Mae's total multifamily lending volume for the first half of the year. We have been Fannie Mae's largest lending partner for four of the last seven years, and our performance this year leaves little doubt that we are not only Fannie Mae's largest partner, but their very best. $5.2 billion of new loans into our servicing portfolio during a quarter when we originated $6.7 billion in total financing means we were not simply refinancing loans that already existed in our servicing portfolio, but rather taking business from our competition and bringing new clients into Walker and Dunlop. These new mortgage servicing rights and client relationships will add huge long-term value to Walker and Dunlop. As slide six shows, we had strong growth in our Fannie and Freddie origination volumes in Q2. And as the middle column shows, we had explosive growth with HUD this quarter, growing from $190 million of loan originations in Q2 of 2019 to 640 million new loan originations this quarter. By far our largest HUD quarter ever. There are several items of note in our HUD origination numbers. First, Sherry Thompson joined Walker & Dunlop 18 months ago to lead our HUD business and has done an absolutely magnificent job taking our team from being a market leader to being the leader in HUD financing. Second, as anyone who has ever done a HUD financing will tell you, HUD business takes a long time to originate and process, and nothing ever happens in a quarter. So our fantastic Q2 was due to our team's incredible work over the past year, not due to rates dropping and HUD becoming wildly more competitive in Q2. But that has happened, and rates and HUD's counter-cyclical role should benefit our HUD volumes in future quarters. Finally, as you can see just to the right of the HUD volumes, we brokered $1.5 billion of debt to third parties during Q2. That number is down 23% from Q2 2019, but still very strong given the dislocation that took place in the markets. It is noteworthy that the New York-based debt brokerage team we added in Q1 was responsible for 26% of our total brokered volume in Q2. quite an accomplishment for a team's first quarter at Walker Dunlop, particularly considering they are based in the epicenter of the early COVID crisis. Similar to our debt brokerage business, our multifamily property sales business slowed dramatically in Q2 due to the pandemic. We closed $447 million of sales volume in Q2, a slower quarter for our team, but we were seeing the market pick back up and currently have 33 properties worth $1.4 billion under contract for closing in Q3 and Q4. So with very robust GSE and HUD pipelines, our debt brokerage business rebuilding nicely as capital begins to return to the broader market and our multifamily property sales business rebounding nicely, we feel extremely well positioned to continue outperforming the market for the remainder of 2020. Vision 2020 was established in 2016 with very ambitious five-year goals. $30 billion of annual debt financing, $8 billion of annual investment sales, $8 billion in assets under management, and $100 billion of loans in our servicing portfolio, which, if achieved, would drive $1 billion in annual revenues. As the left-hand side of this next slide shows, we established a debt financing goal of $30 billion after originating $16.2 billion of debt financing in 2015. And on a trailing 12-month basis, as you can see in the last column of this chart, we have achieved our Vision 2020 debt financing goal by originating $31.4 billion of loans, which is a five-year compound annual growth rate on loan originations of 14%. Similarly, the right side of this slide shows the growth in property sales from establishing the goal of selling $8 billion in multifamily properties after selling $1.5 billion in 2015 to selling $5.8 billion over the last 12 months. While the pandemic has clearly slowed down our property sales business, we have grown this business at a compound annual growth rate of 31% over the past five years and have built an absolutely incredible team. I mentioned previously the growth in our servicing portfolio to $100 billion. And as this slide shows, over the past five years, we have grown the portfolio from $50.2 billion in 2015 to $100 billion today at a compound annual growth rate of 15%. The dramatic growth in loan originations, property sales, and servicing have grown revenues, as you can see on the right side of this slide, from $468 million in 2015 to $916 million over the past 12 months, or at a compound annual growth rate of 14%. So all of this brings us close, but not quite to, our Vision 2020 goal of $1 billion in annual revenues. which we will continue chasing for the remainder of this year. We announced twice during the second quarter that the number of forbearance requests in our at-risk portfolio have been extremely low. As seen on this slide, forbearance requests on office, retail, and hospitality loans in our portfolio are dramatically higher than multifamily, but we have zero credit risk on any office, Retail, industrial or hospitality loan we have originated and service today, zero. Our only credit risk is on multifamily and that portfolio continues to perform exceedingly well. As Steve will discuss, we took a large loan loss reserve in Q1 to incorporate the expected impacts of COVID and added another $5 million to that reserve in Q2. The additional reserves added in this quarter were due entirely to growth in our servicing portfolio and not due to any specific reserves or degradation in the credit quality in our at-risk portfolio. While it is still early days in the COVID-induced economic crisis, given the extremely small number of forbearance requests we have received in Q2, we feel extremely good about the long-standing reputation for outstanding credit discipline at Walker Dunlop, showing itself once again. There are two other topics I'd like to focus on before turning the call over to Steve. First, when the pandemic hit, we decided we needed to communicate with our employees and customers on a direct and consistent basis. I started filming daily videos to all Walker Dunlop employees that helped everyone on the team know what was going on inside and outside of the company. The videos also help maintain the exceptional corporate culture that defines Walker and Dunlop during a time when everyone was working from home. We also launched the Walker Webcast. While all of W&D's competitors were producing webinars to discuss market conditions and cap rates, we designed the Walker Webcast to discuss not only commercial real estate and the COVID pandemic, but also topics like healthcare, leadership, remote working, macroeconomics, and emotional intelligence. and by bringing in world leaders on these topics, the Walker webcast differentiated itself and has continued to do so ever since. While most webcasts I participate on with other Institute leaders have a few hundred participants, the Walker webcast has consistently had over 5,000 pre-registered to watch the webcast and the webcast replay on Walker Dunlop's YouTube channel have consistently received more than 5,000 views. To date, we have had just under 150,000 people view a live or recorded Walker webcast. And while 150,000 views is an incredibly impressive number, what is even more exciting is how the webcast has become a cornerstone for an entirely new digital marketing strategy for Walker and Dunlop. For example, our client email database was 19,000 people prior to the COVID pandemic. Today is over 120,000 email addresses. Our media outreach has exploded, having Walker and Dunlop mentioned in 129 press articles in target publications during Q2, an all-time record by over 55%. It is no coincidence that W&D has gained enormous market share in Q2, and given the success of the Walker webcast, we will continue to expand our brand and digital marketing strategies going forward. The second topic is racial justice and diversity. The Wednesday after George Floyd was brutally murdered in the streets of Minneapolis, Walker and Dunlop board member John Rice joined me on the Walker webcast and said, quote, the time for token acts of diversity is over. It is time for real action, unquote. On that webcast, I detail Walker and Dunlop's already established ambitious goals to increase gender and racial diversity in both management positions and top earning positions by 2025. Walker Dunlop has consistently been a leader in the commercial real estate and mortgage industries with regard to racial diversity, and we will continue to do so. We have been a major sponsor of Project Destined, Management Leadership for Tomorrow, Year Up, and Future Housing Leaders, and we will continue to invest our capital and time to make these important programs have greater impact. We have reinforced our commitment to building a robust diversity and inclusion program, driven in large part by our minority employee resource group and our women's initiative. And we have put diversity and inclusion at the center of our environmental, social, and governance goals, and are in the process of tying the accomplishment of these goals to long-term executive compensation. As I wrote to all Walker & Dunlop clients two weeks ago, the commercial real estate industry is premised on the concept of community. Communities to work, communities to shop, and communities to live. We must, as an industry, do all we can to promote community and equality across our country during these challenging times, and most importantly, over the coming years, to ensure systemic change actually happens. I'll turn the call over to Steve now to talk through our second quarter financial results and credit portfolio in more detail. And then I'll come back to provide some insight into what we see ahead in the coming quarters. Steve?