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 first quarter 2021 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 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 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 Security 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'll now turn the call over to Willie.

Thank you, Kelsey, and good morning, everyone. We started off 2021 with strong first quarter financial performance with the combination of our people, brand, and technology continuing to differentiate us in the marketplace, enhance our competitive positioning, and drive terrific financial performance. First quarter revenues of $224 million generated diluted earnings per share of $1.79, up 20% over Q1 2020 on total transaction volume of $9 billion. This is a very strong start to the year that appears to be accelerating by the day. We laid out our five-year strategic growth plan in December of last year with one of the objectives being to move from the number five multifamily lender in the United States to number one. To do this, we plan to build a small loan lending business that rivaled JPMorgan Chase's and a multifamily property sales business that rivaled CBRE's, two firms ahead of us in the 2019 league tables. Yet due to the use of technology, growth of our brand and truly fantastic execution by our team, We vaulted to the number one position as the largest provider of capital to the multifamily industry in 2020. My father gave me a t-shirt when I was in college that read, unless you are the lead dog, the scenery never changes. Well, the scenery can now change, and we will use our market leadership position to win more clients, continue investing in technology, and benefit from the fantastic branding that this accomplishment establishes. Our vision to be the premier commercial real estate finance company in the United States was established in 2010 when Walker and Dunlop lent $2.7 billion on commercial properties or 7% of the $37 billion that Wells Fargo lent that year as the largest lender in the country. And over the last decade, due to hiring great people, investing in technology, and building our brand, Thank you so much for joining us. Thank you for joining us. with the very real opportunity to grow to 3,000 to 5,000 people by investing in technology and entering new markets. Our largest competitors have tens of thousands and in some instances hundreds of thousands of employees and will constantly be challenged over the coming years with how technology is going to disintermediate their existing employee base and businesses. Our technology investments will continue to focus on actionable technology that enhances the capabilities of our people as we grow Walker and Dunlop and expand into new markets. The fact that we ended 2020 with 1000 employees and over $1 billion in revenues allowed us to maintain our metric of over $1 million of revenue per employee. As this slide shows, revenue per employee of over $1 million places Walker and Dunlop in line with Visa and just behind the global tech giants, Facebook, Google, and Apple. We believe that over the coming years, as we continue to implement more technology and expand our brand, that our revenue per employee can move closer and closer to the tech giants. The numbers behind our brand strategy are stunning. Walker Webcast and related digital marketing strategies have averaged nearly 50,000 views each week in 2021. And just yesterday, we hit 1 million total views of the Walker Webcast since we started it in March of last year. The quality of the guests that we bring on the webcast and their insights provide every banker and broker at Walker and Dunlop with client touchpoints and market insights every week. This has not only expanded the WND brand dramatically, but generated new business. Just last week, we closed on a $37 million financing for a new client who listened to the Walker webcast, sent an email to our general mailbox, was introduced to a banking team, and got a terrific loan on their office building and paid us a $250,000 fee in the process. This transaction brought to us through the combination of digital marketing, branding, technology, and flawless execution by our team is part of the 27% of our total transaction volume in Q1 coming from new clients to Walker & Dunlop. That is up from 23% for all of 2020. The other technology proof point we introduced in 2020, new loans to our servicing portfolio, increased to 79% in Q1 of 2020, up from 66% for all of 2020. So rather than simply refinancing the loans in Walker & Dunlop's sizable $110 billion servicing portfolio, almost 80% of the loans we refinanced in Q1 were new loans to Walker & Dunlop. generating financing fees and adding mortgage servicing rights to our loan portfolio. The amount of capital targeting commercial real estate investments continues to fuel the acquisitions market. According to Prequin, commercial real estate focused funds began 2021 with a record $324 billion of dry powder. A robust investment and acquisition market combined with a wave of loan maturities Thank you for joining us. And since our technology can tell us exactly who holds those loans, there is a massive opportunity for us to capture significant refinancing volume in 2021 and beyond. Let me turn the call over to Steve now to run through our Q1 financial performance, and then I'll come back to talk about the terrific accomplishments we weighed in Q1 towards our long-term strategic growth objectives. Steve?

Thank you, Willie, and good morning, everyone. Thank you so much for joining us. Earnings in the quarter included the positive benefit of reducing our allowance for credit risk by $11.3 million, which added 25 cents to EPS. Q1 personnel expense as a percentage of total revenues was 43%, which is elevated compared to a typical first quarter due to our recent investments in people as we continue to scale our business and support our future growth. During the quarter, we grew our team of bankers and brokers to 214 from 205 at the start of the year, further increasing both our geographic reach with hires in Ohio, California, Texas, and Maryland, and our investment sales product capabilities with the acquisition of student housing-focused 4Point. Even with the increase in compensation expense, operating margin was 33%, inclusive of the reserve release, and 28% without, within our typical range of 28 to 30%, as non-personnel expenses continue to grow at a slower rate. We manage operating margin very closely and are confident that it will remain within our expected range over the course of the year. Return on equity was 19% in the quarter, consistent with last year and within our expected range of 18 to 20%. Total transaction volume of $9 billion was down 20% from the first quarter of 2020, as anticipated, given that we originated the largest portfolio in our company's history, a $2.1 billion Fannie Mae transaction last Q1. Notably, we saw strong debt brokerage volumes of $4.3 billion in the quarter, up 8% from last year's very strong volumes, indicative of an active market for commercial real estate financing that is attracting significant amounts of capital as we continue to progress towards a post-COVID environment. 72% of our debt brokerage volumes were multifamily, compared to 94% in the year-ago quarter, reflecting a pickup in lending on other asset classes. The mix of our $7.6 billion of debt financing volume in Q1 2021 was skewed more heavily towards debt brokerage originations as compared to the first quarter of last year, primarily due to the large portfolio that I just mentioned. Our HUD volumes at $622 million were up 75% from Q1 2020, continuing the strong performance off of 2020's record year. In addition, our interim lending program was very active in the quarter with $178 million of multifamily bridge loans originated through our JV with Blackstone and on our own balance sheet. The GSEs had a relatively slow start to the year as they carried over a lot of deliveries from 2020 into 2021. Our market share with Fannie and Freddie remained above 11% and we expect that our overall volumes will pick up over the next three quarters as the GSEs manage their deal flow to ensure that they use all of their remaining $105 billion of lending capacity for the year. We also expect broker debt volumes for the remainder of the year to rebound strongly from last year's COVID impacted markets as life insurance companies, banks, and debt funds are all very competitive capital providers in the market today. Investment sales volume of $1.4 billion was down 19% from last year's first quarter. However, the pipeline of deals entering Q2 is extremely robust, and we expect significant growth in investment sales volumes over the remainder of the year as our recruiting efforts continue to build out both the geographic and product capabilities of the team. The increase in investment sales activity will also contribute to additional debt financing opportunities over the next three quarters. Q1 adjusted EBITDA, $61 million, is down slightly from Q1 of last year, but is the highest quarter of EBITDA since the start of the pandemic, as we are seeing the benefit of the strong mortgage servicing rights that we booked during 2020 translate into cash servicing fees, which were up 19% in the quarter. As you can see on this slide, the servicing portfolio ended the quarter at $110 billion with a weighted average servicing fee of 24.3 basis points, up one full basis point from the first quarter of last year, which is huge given the overall size of the book and the fact that we have added over $15 billion of net new loans to the portfolio in the last 12 months. With 85% of the portfolio's future servicing fees being prepayment protected, The portfolio will continue to fuel meaningful, stable cash servicing fees approaching $275 million on an annual basis. Additionally, this should be the last quarter of significant year-over-year declines in escrow interest as short-term rates, which drive the pricing of our escrow deposits, collapsed at the end of first quarter of 2020 due to the pandemic. During the quarter, we lowered the loss forecast used to determine the allowance for risk-sharing obligations. As I mentioned earlier, this resulted in an $11.3 million recapture of provision for credit losses in Q1 of 2021 compared to an expense of $23.6 million in the first quarter of 2020 when the pandemic was declared. One year later, we have very few loans in forbearance and our portfolio has had no defaults related to the pandemic. reflecting the resiliency of multifamily and the quality of our underwriting and servicing teams who have done an expert job of managing our credit risk both before and during the pandemic. Further evidence of the strong performance of our portfolio is that the debt service coverage ratio of the $50 billion of loans we have risk on remained above two times at the end of 2020, consistent with the end of 2019. While unemployment rates are still relatively elevated at 6%, this is a significant improvement from the high of 14.7% that we saw in April of 2020, reflecting the return of jobs across the economy. The most recent stimulus bill, combined with an anticipated full reopening of the economy by the fall and forecasted strong economic growth over the next year, gives us confidence that the fantastic credit metrics we are seeing in the portfolio today will persist into the future. We feel that the current level of the allowance at $64.6 million is sufficient to cover any future losses that could arise in the portfolio over its expected remaining life. We ended the quarter with over $277 million of cash on our balance sheet and another $62 million funding loans held for sale bringing our total cash available to $339 million. We are currently exploring a number of strategic acquisition opportunities that are in line with our drive to 25 objectives, investing in revenue generating technology initiatives, and continuing to bring on banking and brokerage talent, all of which is supported by our strong cash position today. Yesterday, we announced the acquisition of 75% of Zellman & Associates, the leading housing focused research firm in the country. The transaction is expected to close sometime in the third quarter pending regulatory approval. We expect the Zellman platform to contribute between 15 and 20 cents in earnings per share in its first year. While our focus remains reinvesting our capital back into the business through acquisitions like Zellman, our strong financial position and the steady cash generation of our business enables us also to return a portion of our capital to shareholders. Yesterday, our board of directors approved a quarterly dividend of 50 cents per share, payable to shareholders of record as of May 20th. A quarter ago, we laid out ambitious goals for double-digit growth and earnings per share and adjusted EBITDA for 2021. A strong start to the year in terms of our financial performance, credit quality, and cash position, and our expectations for the market opportunity ahead give us confidence that we will achieve both of those goals. Thank you for your time today. and I'll now turn the call back over to Willie.