Walker & Dunlop, Inc

Good morning, everyone. I'm Kelsey Duffey, Vice President of Investor Relations at Walker & Dunlop, and I would like to welcome you to Walker & Dunlop's third 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 dived into the call and would like to ask a question at that time, please press star 9 on your touch-tone 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 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. We hope you and your families are safe and healthy. I want to start our call by sending condolences to one of our colleagues, Will Baker, who lost his father suddenly yesterday morning. Will is an extremely important member of the Walker & Dunlop team, having joined WND right out of college and risen to become one of our most successful bankers and team members. There's another member of our team, Howard Smith, who also joined Walker & Dunlop right out of college, also rose to become one of our most successful bankers, and has been my partner in building this business as our president. Howard will celebrate 40 years at Walker & Dunlop on November 24th. It is people like Will and Howard that make Walker & Dunlop what it is, and I want to reiterate our condolences to Will and the entire Baker family for their loss. As a company that finances millions of safe, affordable apartment homes and understands the direct correlation between vibrant, integrated communities and economic growth, we remain very focused on the COVID pandemic and issues of racial justice that have impacted our country so dramatically over the past eight months. We have continued to provide credit to the multifamily industry as landlords have changed how they operate their buildings due to the pandemic and also dealt with rental forbearance. We have raised and donated money to nonprofits that focus on healthcare and housing. And we have made hires and changes to our corporate leadership and governance that will continue to make Walker & Dunlop a leader Thank you so much for joining us. Our financial performance in Q3 was exceptional as we grew market share and continued expanding our client base. As you can see on slide three, we generated total revenues of $247 million, up 16% from the third quarter of last year, and diluted earnings per share of $1.66, up 19% year over year. Those growth rates are dramatic given the strength of our performance last year and all that has transpired this year to impact our business model. A pullback in credit to office, retail and hospitality assets, a prolonged pause in the property sales market, remote work and a dramatic drop in interest rates, which has diminished the returns we earn on escrow deposits and balance sheet loans. Yet even with those headwinds, our team has found ways to continue growing and gaining market share. As shown on slide four, On a year-to-date basis of an exceedingly successful 2019, we have grown total revenues by 22% and diluted earnings per share by 24%. Many Walker & Dunlop investors have benefited over the years from our company's outperformance versus our direct competitors and industry. For example, slide 5 shows W&D's performance versus the median of the S&P 600 Financials Index over the past several years. As you can see, WND has grown significantly faster than the index in total revenues and earnings over both the past three and five years. Yet as the right side of this slide shows, the median price to earnings ratio for the S&P 600 Financials Index is 16.5, while it is 8.5 for Walker & Dunlop. As WND continues to outperform, it is our strong belief that our multiple will trend closer and closer to the S&P Financials Index. As we have scaled our business, we have diversified our capital sources and the volumes of lending we do on all commercial real estate asset classes. You can see on the slide that our Q1 lending was done 57% with the agencies and 43% with other capital sources. Yet as the pandemic hit in Q2, Private capital fled the market, and the agencies assumed their role of providing consistent capital flows to the multifamily industry. As a result, in Q2, our agency volumes expanded to 77% of total financing, while capital from banks, CMVS, and insurance companies contracted to only 23%. That trend continued into Q3. 75% of the $7.3 billion of debt financing we did in Q3 was with the agencies on multifamily properties, while only 1.8 billion or 25% was with banks, life insurance companies, and other sources. There are two key points inside this data. First, our business model and team allowed us to deploy a huge amount of agency capital during the pandemic that has driven our tremendous financial performance. And second, while deploying $1.8 billion of capital from banks, CMBS, and life companies during Q3 is a significant accomplishment. We lent over $3 billion with these capital sources last year during Q3, showing the significant upside to our transaction volumes as the market normalizes. Our multifamily property sales business rebounded nicely in Q3. We started the year with a very strong first quarter sales volume of $1.7 billion and then watched the market collapse in Q2. Closing only $447 million of sales. But due to our team, brand, and technology investments, we saw our multifamily property sales volume rebound to $1.1 billion in Q3 as investors reentered the market with conviction. We have a significant pipeline moving into Q4 and expect to close $2 to $3 billion in property sales volume in the quarter, bringing our annual total to over $5 billion. Our lending and brokerage volumes and overall financial performance in 2020 are due to having the very best people, brand, and technology in the commercial real estate industry. We have continued to add the very best bankers and brokers to our team despite the impact of the pandemic, bringing on new brokerage teams in Austin, Miami, Nashville, and San Diego, and and new bankers in New York, Dallas and Columbus so far in 2020. We have a distinct competitive advantage against our larger competitors today where our domestic focus on multifamily is generating strong financial performance, cash flow and the ability to continue investing in our platform to drive growth and market share gains. Winning and closing the largest multifamily financing likely to be done in 2020 The $2.4 billion Southern Management deal that we closed in Q2 was a marquee deal where Walker and Dunlop went head-to-head against our three largest competitors and won. Every subsequent time we have gone head-to-head with one of those three competitors, we have been able to reference that deal and underscore how and why WND won. At the same time, we launched the Walker webcast just as the pandemic was taking hold across the United States. to provide our clients and the market with insights and analysis, not just on the commercial real estate industry but on all topic areas that are relevant to the unprecedented world we live in today. The webcast has expanded Walker & Dunlop's brand in ways we could have never imagined. Our total viewership of the Walker webcast has exceeded 200,000 unique views. Our email distribution list has expanded from 19,000 distinct email addresses at the beginning of the pandemic to over 120,000 today. And we have received half a million views of webcast clips across all social media channels. While our competitors have tried hard to imitate the Walker webcast, the quality of our guests and weekly viewership will be hard to replicate. Finally, as our team and brand have expanded, our investment in and use of technology has continued to differentiate Walker and Dunlop and allowed us to gain market share. As you can see on slide seven, we have taken our market share with the GSEs from 10% last year to 13% this year. Our growth in 2020 has been due to a combination of exceptional service from our talented bankers, brokers, and underwriters, the breadth of our brand, and the insights our technology provides to both us and our clients. In the third quarter, 69% of the loans we've refinanced were new to Walker & Dunlop. Let me repeat that number. 69% of the loans we refinanced in Q3 2020 were not from our servicing portfolio and were either new loans from an existing Walker & Dunlop client or new loans from a new client. And as it relates to new clients, 25% of our total financing volume in the third quarter was with new clients to Walker & Dunlop. We will continue to grow our client base and market share by leveraging off our incredible team, brand, and technology. While the current market conditions make the success of our technology strategy most apparent in our debt financing business, we have also been focused on integrating the data science and data analytics that power our multifamily appraisal business, Apprise, throughout our platform. At its core, our business is a valuation business, relying on value to make loans sell assets, and manage our servicing portfolio. And we have been investing heavily in developing and scaling our faster and more accurate method for valuing multifamily properties. We are extremely excited about what the integration of this technology will do for our business over the next several years. Let me turn the call over to Steve to discuss our financial results in more detail, and then I'll come back to discuss what we see for the rest of 2020 and our next five-year strategic plan that we've been developing this year. Steve.

Thank you, Willie, and good morning, everyone. Our third quarter financial performance once again demonstrates the strength and durability of the Walker and Dunlop business model as we continue to perform incredibly well during these challenging times. Our combination of steady cash generation, extremely strong credit fundamentals, and long-term focus on providing exceptional multifamily financing and sales capabilities continue to generate above-market growth in top and bottom-line performance. as evidenced by the 16% year-over-year increase in revenue during the quarter to $247 million and 19% growth in diluted earnings per share to $1.66. In addition, return on equity for the quarter was 20%, up from 18% last year, while operating margin held steady at 28%. Q3 adjusted EBITDA was $45.2 million, down from $54.5 million in Q3 of last year. There is significant upside to EBITDA in 2021 and beyond as the cash generating components of our business increase. First, our servicing portfolio has grown by 13% over the past year and now stands at $103 billion, as you can see on slide eight. In addition, the weighted average servicing fee on the portfolio has increased to 23.4 basis points at the end of Q3. We earned $60 million of high margin cash servicing fees in Q3 up 10% from last year. And those revenues will only continue to grow with the increase to both the portfolio and the weighted average servicing fee. Second, volumes from our debt brokerage and property sales teams have been constrained in 2020 due to the impact of the pandemic on the commercial real estate market. As a result, we have not seen the boost in adjusted EBITDA that these cash generating businesses can provide when they are operating at their full capacity as we saw in the first quarter of this year. and finally, while we expect interest rates to remain low in the near term, any future increase in short-term rates will have a positive impact on the interest income we earn from our now $2.8 billion of escrow deposits, a balance we expect to continue growing as our overall servicing portfolio grows. We ended the quarter with close to $300 million of cash on the balance sheet, further bolstering our already strong liquidity. During the quarter, we repurchased 254,000 shares at an average price of $53.12 per share, utilizing $13.5 million of our $50 million authorization. We felt that repurchasing stock at these levels presented a very attractive return for our shareholders based on our future outlook for the business, including our expectation for continued strong earnings growth, the current exceptional credit performance of our portfolio, and the significant reserves we've already taken to cover any future losses. We currently have $26 million available for share repurchases to use between now and early February of next year. And yesterday, our board of directors approved a dividend of $0.36 per share, payable to shareholders of record as of November 13th. I think it is important to point out that many companies have had to eliminate or significantly reduce their dividends during this crisis, while we have been able to maintain ours due to the underlying strength of our business model. We fully expect to increase the dividend rate next quarter, as we have done each year since we instituted it in 2018. We remain active in seeking out growth opportunities in the market, including recruiting and M&A opportunities as our financial performance and liquidity position give us the ability to take an offensive stance that will set us up for continued growth in the future. As I mentioned, we continue to see fantastic credit performance in the portfolio. At the end of the quarter, We had only one $6 million Fannie Mae loan still in forbearance. That is one loan in a portfolio of over 2,500 loans, which, by the way, we believe with our production volumes this year, is now the largest Fannie Mae portfolio in the country. Third quarter provision expense was $3.5 million and included a $2.4 million charge related to an increase to the reserve on the one loan in our interim loan portfolio that defaulted in the first quarter of last year. The remaining $1.1 million of the quarterly provision expense was driven by the growth in the at-risk portfolio during Q3 as we did not make any changes to our loan loss assumptions during the quarter. There were no other delinquent loans in our at-risk servicing or interim loan portfolios at the end of September. This performance is a testament to the durability of the agency model and the strength of multifamily lending. As detailed on slide 9, In our portfolio of 5,345 Fannie, Freddie, and HUD loans, we had only nine loans in forbearance at September 30th, or 0.2% of the entire agency portfolio. And as I noted earlier, we only have credit risk on one of those loans. We feel great about the performance of the portfolio so far, but it is still too early to declare victory. The unemployment rate continues to remain at a high level, and the economy is not even close to performing at pre-pandemic levels. We continue to believe that meaningful jobs gains are necessary to stabilize the economy before we can put credit in the rearview mirror. In the meantime, we continue to think the current reserve balance is sufficient to absorb any losses that may come through in the portfolio. We had an amazing first three quarters of the year and are carrying a lot of momentum into the fourth quarter. The pipeline looks great and includes a continued rebound in both debt brokerage and property sales volumes. After posting a gain on sale margin of 223 basis points in Q3, we expect the increase in debt brokerage volumes and continue strong agency originations to deliver a gain on sale margin in the range of 200 to 220 basis points in Q4. And with year-to-date earnings per share growth of 24%, we are well on track to delivering double-digit earnings growth for the seventh year of our 10 years as a public company. Our portfolio is performing extremely well. Our transaction platform is taking market share from the competition, and we amassed a significant cash position, all of which gives us flexibility to both return capital to shareholders through our quarterly dividend and share buybacks and evaluate market opportunities that will position us for continued growth over the next several years. As borne out by the stats that Willie went over related to our historical performance relative to the S&P 600 financials, our business model consistently demonstrates that it is built to sustain market downturns Thank you, Steve.