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 fourth quarter and full year 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 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, and 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. Across almost every measure, 2020 was a year of record performance for Walker and Dunlop during a tremendously challenging year for our country and the world. The COVID pandemic and its far reaching impact on jobs, the global economy, and the health of colleagues and loved ones was felt by all Americans. And the issues of racial justice and a tumultuous political season left enduring impacts on our society. Yet despite the many challenges that 2020 presented, The W&D team continued to step up for our clients, our communities, and for one another every day. We remain focused on building the premier commercial real estate finance company in the United States while completing our ambitious five-year growth plan, Vision 2020, and established even more ambitious targets for the next five years that I will outline during this call. After an exceedingly strong Q1, followed by the transition to remote work in Q2, The W&D team adapted to selling, underwriting, and closing financings in property sales in Q3 and Q4 to generate record total transaction volume of $41.1 billion for the year, up 29% from 2019. We closed out 2020 with record Q4 revenues of $350 million, up 61% year over year, pushing our annual total revenues to $1.1 billion. As long-term investors in Walker and Dunlop know, we have established bold, highly ambitious five-year growth plans for our company. And in 2015, established the goal of more than doubling our revenues to $1 billion by 2020. As you can see on this slide, we grew total revenues an impressive 18% compound annual growth rate over the five-year period. and grew debt financing volumes by a 17% compound annual growth rate to end 2020 at $35 billion. And our servicing portfolio more than doubled over the five-year period to $107 billion, a 16% compound annual growth rate. Finally, we grew our property sales business at a compound annual growth rate of 32%. And even with the pandemic induced shutdown of property sales for most of Q2, and Q3, we increased our volume to $6.1 billion in 2020, a truly spectacular 14% growth rate over 2019. All of this growth and record transaction volume generated 2020 diluted earnings per share of $7.69, up 41% over 2019. As you can see on this slide, we have grown EPS at an impressive compound annual growth rate of 24% over the past five years while maintaining our weighted average diluted share count at around 31 million shares with less than 1% increase in diluted shares over the period due to prudent management of our share count. And this consistent and dramatic growth in EPS combined with our annual increase to our dividend that Steve will mention momentarily has driven total shareholder return 46% over one year, 107% over three years, and 241% over five years, handily beating the market and our peer group. I've been told time and time again that investors don't care about what you did yesterday, only what you are going to do tomorrow. And while I both understand and appreciate that, I think it is extremely important for investors in Walker & Dunlop to hear and see the incredible compounding growth numbers of Walker & Dunlop over the past five years. Because while history rarely repeats itself, as Mark Twain once said, it does often rhyme. And as a high growth company with a massive market opportunity and incredibly talented team of professionals, our growth over the coming years will continue to rhyme with the past. Driving our performance in 2020 was the combination of our exceptional people, expanding brand, and actionable technology. which all came together to transform our business and produce exceptional results. Despite the challenges presented by the remote work environment, our people continue to deliver and remain wildly productive. We just hired employee number 1,000 at Walker & Dunlop. And while we have had it headcount over the past several years in conjunction with our dramatic growth in transaction volumes and servicing portfolio, we have maintained our industry leading metric of over $1 million in revenue per employee. And while we now compete head to head with the largest commercial real estate finance and services firms, we have maintained the small company touch and feel that Walker & Dunlop was built upon by my grandfather and my father. The combination of big company capabilities with small company touch and feel is a competitive advantage in the marketplace, which we aim to maintain going forward, whether we have 1000 employees or 5,000 employees. As we have scaled our platform by bringing in the very best people in the industry, we have enhanced the way we interact with our clients via digital marketing and media, including the Walker webcast. Not only does the webcast reach thousands of clients each week, it has also expanded our digital marketing and social media presence dramatically, increasing our client reach, creating new digital relationships and augmenting the personal relationships of our bankers and brokers. In total, the Walker webcast has been watched by over 240,000 viewers and combined with the What Drives You advertising campaign, thought leadership pieces and PR outreach has propelled the Walker and Dunlop brand across every channel. Our website traffic grew by 80% in 2020. Our email list grew by over 500%. and our PR media hits grew by over 400% last year, including an upswing in top tier and broadcast media. Compared to last year, we are reaching an audience that is eight times larger overall, bolstering our brand as the premier commercial real estate finance company in the United States. Finally, our investments in actionable technology came to life in 2020. We began investing in databases several years ago, then acquired Enodo early in 2019 to apply machine learning to those databases. And then we turn that data over to our bankers and brokers. And the results with regard to new clients and new transactions to Walker and Dunlop has been truly amazing. While many of our competitor firms were refinancing their own loan portfolios as interest rates dropped at the onset of the pandemic, 66% of our 2020 refinancing volume Thank you for joining us. and the traditional sales channel and processes did not exist. That is the power of our people, brand and technology and it sets us up exceedingly well for continued growth for many years to come. I'm going to turn the call over to Steve to discuss our Q4 and annual financial performance in more detail and then I'll come back to discuss our drive to 25 and what investors should expect to see over the coming years. Steve.

Thank you, Willie. And good morning, everyone. We ended 2020 with fantastic fourth quarter financial results, including record total transaction volume of $14.2 billion, up 45% year over year, and record earnings of $2.59 per share, up an astounding 93% over Q4 of 2019. Our full year transaction volume of $41.1 billion is 29% higher than 2019, while record full year earnings per share of $7.69 increased 41% over the prior year. The fact that these incredible results came in the midst of a pandemic are a true testament to the resiliency of our business model and the hard work and dedication of our team. Our strong performance in the quarter and year shine through in our key metrics. Operating margin in Q4 was 34%, well above our target range of 27 to 30%, leading to full year operating margin of 30% for 2020. Return on equity was 29% for the quarter and 23% for the full year, well above our annual goal of 18 to 20%. Personnel expense for the quarter was 45% of revenue in line with Q4 of last year and was 43% for the full year, just slightly higher than 2019's 42% due to growth in commission and bonus expense resulting from our phenomenal performance in 2020. Total transaction volume for the quarter included $2.8 billion of property sales volume, a 44% increase over last year, and a quarterly record. This pickup is notable given the challenging market dynamics that this part of our business faced in 2020 when the impacts of the pandemic caused buyers and sellers to exit the market for several months. A record volume in the quarter is indicative of a return to a robust multifamily acquisitions market that has moved past the market disruption that began in mid-March. The attractiveness of multifamily assets will continue to drive investment into the space, and we expect to see a very healthy market and strong growth in multifamily property sales volume in 2021. Our fourth quarter debt financing volume was led by agency financing, including a record quarter of $844 million of lending with HUD. Debt brokerage volume totaled $3.8 billion, down 3% from Q419, but up significantly from the second and third quarters of 2020. This is another notable pickup in an area of our business that was very challenged for the better part of the year. We expect that our debt brokerage business will continue to gain momentum as we move into 2021 and are excited for what our team can accomplish. Based on the strength of our debt financing volume in 2020, we grew our servicing portfolio by nearly $14 billion or 15% to 107 billion as of December 31st, 2020. As the portfolio has continued to grow, The contractual cash servicing fees have grown along with it to $236 million in 2020, up 10% from 2019. That growth rate accelerated as year went on, with Q4 servicing fees increasing by 15% over last year to $63 million for the quarter. This acceleration was due in part to the strong volumes in the second half of the year, but is primarily the result of a sizable increase in the average servicing fee for the portfolio to 24 basis points from 23.2 basis points at the beginning of the year. This increase is significant when you consider the overall size of our portfolio and is worth more than $8.5 million of additional annual cash revenue on a portfolio of $107 billion. The combination of strong growth in both the portfolio and the weighted average servicing fee sets the stage for accelerated cash servicing fee growth in 2021. In addition, the mortgage servicing rights related to the portfolio now have a fair value of over $1 billion, reflective of the significant future cash flow streams we will receive from the portfolio beyond just the next year. I also want to mention one other item related to our servicing operation. During the fourth quarter, we made the decision to remain with our existing servicing technology vendor. Consequently, we ended our planned conversion to a new servicing system, resulting in a $5.8 million charge to expense that we took during the quarter related to the write off of previously capitalized software costs and a termination payment on the contract. We do not expect to incur any additional costs associated with that contract going forward. During the fourth quarter, we recorded additional provision for credit losses of $5.5 million. Just more than half of that expense was driven by the strong growth in the at risk portfolio during the quarter, while the other half relates to an increase in the specific reserves associated with the two student housing loans that defaulted in 2019 and our one interim loan that also defaulted in 2019. We delivered record earnings in a year in which we have taken provision expense of $37 million, 30 million more than in all of 2019. We have always prided ourselves in our exceptional and relatively conservative credit culture in the overall performance of our portfolio in 2020 with limited forbearance requests and no new defaults in our at-risk or interim portfolios has been fantastic. However, COVID remains a significant uncertainty with respect to its impact on future employment levels and overall economic performance. As a result, we don't believe any downward adjustment to our overall reserve balance is appropriate at this time. 2020 adjusted EBITDA of $215.8 million was down 13% from 2019, primarily due to a significant year over decrease in escrow earnings resulting from historically low interest rates during the year. 2020's low interest rate environment reduced our annual escrow earnings to $18 million compared to $57 million in 2019. As a reminder, we currently hold escrow deposits on loans that we service with an average balance of $2.8 billion, and we earn interest income tied to short-term rates on those deposits. Every 25 basis point increase in the deposit rate, Translates into approximately $7 million of additional pre-tax earnings per year. We ended the year with $321 million of cash on the balance sheet. As shareholders in Walker and Dunlop know, we will continue to prioritize reinvesting our capital into the business to drive future growth opportunities. As you will hear shortly when Willie lays out our Drive to 25 objectives, maintaining our growth trajectory and achieving these ambitious goals will require investments in bankers and brokers, New business areas and technology. We feel that we are in a very strong financial position that will allow us to continue deploying capital into our growth initiatives while also returning capital to shareholders. To that end, our board of directors voted yesterday to increase our quarterly dividend payment to 50 cents per share, a 39% increase. This is our third annual increase since we initiated the dividend in February of 2018 at 25 cents per share. Thank you for joining us. our board authorized a share repurchase plan in the amount of $75 million to be executed over the next 12 months, giving us the ability to continue opportunistically buying back our stock. We feel very well positioned to keep growing our business in 2021 by continuing to hire great people, leveraging our unique brand and making additional investments in technology. And we've established ambitious financial targets for the year. We are again targeting double digit growth in both earnings per share, and adjusted EBITDA in 2021. Though we did not grow adjusted EBITDA at this rate in 2020, the increase in our servicing portfolio and average servicing fee during 2020 and our expectations for stronger debt brokerage and property sales volumes in 21 should positively impact EBITDA. And while we believe the Fed is likely to keep short-term interest rates low for the foreseeable future, if there is any increase in short-term rates, our adjusted EBITDA will benefit from the increased interest we would earn from our escrow deposits. We're raising our operating margin target range to 29 to 32% for 2021 and our return on equity range to 19 to 22% for the year. During 2020, we saw operating margin and ROE expansion in our business as we realized economies of scale and continued to closely manage our people and expenses, even while some parts of our business were not operating at full efficiency. As a result, we raised the range for both metrics due to our expectations for continued growth in transaction volumes and particularly a return to normalcy in both debt brokerage and investment sales in 2021. With respect to the first quarter of 2021, remember that last year included $2.1 billion of the Southern Management transaction. Absent that, our pipeline compares favorably to Q1 of 2020 and the expected size of the market this year has us poised for another year of growth and financial success in 2021. I'm extremely pleased with our financial performance this year. and our team's ability to come together during a difficult year to generate incredible results. And I wanna thank all of my colleagues at WD for all you did to make this year possible. We are moving into 2021 with a renewed sense of energy and purpose as we drive towards our next five-year financial targets. I'm now going to turn the call back over to Willie to discuss these goals and our long-term outlook. Willie.