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 our second 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 webcast 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 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. Thank you so much for joining us today. Thank you, Kelsey, and good morning, everyone. Walker and Dunlop's second quarter performance

reflects our continued investments in people, brand, and technology to fundamentally change our competitive positioning in the commercial real estate lending and services market. We increased total transaction volume by 90% to $13.5 billion, generating total revenues of $281 million, up 11% from the second quarter of 2020, diluted earnings per share of $1.73, and adjusted EBITDA of $67 million, up 37% over Q2 2020. Those numbers directly reflect the transformation of Walker & Dunlop from a mortgage-centric specialty finance firm into a broader technology-enabled financial services company. We took Walker & Dunlop public in 2010 as one of the best agency multifamily lenders in the country. Ten years later, Thanks to our investments in people, brand, and technology, we are a dramatically more diversified financial services company that is more relevant to our customers every day. Q2 total transaction volume of $13.5 billion, up 90% from Q2 2020, reflects WND's customers' desire to work with us and our team's ability to meet their needs with the appropriate capital and services. When the market dislocated in 2020, and countercyclical capital from Fannie, Freddie and HUD was needed, WMD was there to meet our clients' needs. And as the market recovered and both capital and sales transactions returned, WMD met our clients' needs in spectacular fashion. Q2 2020 and Q2 2021 could not be more distinct quarters from the depths of a pandemic to an economy roaring back. And in both quarters, Walker Dunlop met our clients' needs and generated fantastic financial results. At the end of 2020, we announced a five-year strategic plan called the Drive to 25 with the overreaching goal of doubling revenues from $1 billion to $2 billion by increasing annual debt financing volume to $65 billion, multifamily property sales volume to $25 billion, and are servicing portfolio to over $160 billion, assets under management in our fund management business to $10 billion, and starting three new businesses in small business lending, small balance lending, appraisals, and investment banking. All of these growth initiatives and investments are designed to make W&D a broader, more diversified, technology-enabled financial services company, and our Q2 results reflect our rapid progress towards achieving these goals. In order to grow our debt financing volume to $65 billion over the next five years, we are recruiting the very best bankers and brokers in the industry and investing in technology. Two proof points on the value of our investments are 22% of our Q2 total transaction volume came from new clients to Walker & Dunlop, and 55% of the loans we refinanced were taken away from competitors' portfolios. New clients are a combination of deal teams, brand, and technology Working seamlessly together, since we started reporting on new clients to Walker & Dunlop last year, we have brought in 660 new clients and $15 billion in total transaction volume. Refinancing loans held by our competition is a result of insightful technology being put in the hands of our talented bankers and brokers. Since we started reporting last year on refinances that are new to Walker & Dunlop, we have refinanced $16 billion of loans away from the competition. The total commercial real estate finance market is projected to be $486 billion in 2021. We originated over $10 billion of loans in Q2, which included record debt brokerage volume of $6.3 billion, along with $4 billion of lending with Fannie Freddie, HUD, and on our balance sheet. As you can see on this slide, our debt brokerage volume of $6.3 billion in Q2 21 is up dramatically from 1.9 billion in Q2 2019 and up 320% from $1.5 billion in Q2 of last year. $10 billion of debt financing in Q2 places us at an annual run rate of over $40 billion. well on our way to $65 billion by 2025, which would give us over 10% market share of total commercial real estate lending in the United States. Another area of our business we are expanding dramatically is small balance lending on multifamily properties, a market dominated by our big bank competitors, JP Morgan and Wells Fargo. We grew our small balance loan volumes by 45% for the first half of 2021 over 2020, and the recently announced acquisition of TapCap, a technology platform that can size and generate a loan quote on small multifamily properties in minutes will accelerate this growth. As we continue automating our loan underwriting processes, launch TapCap, expand our brand as the largest multifamily lender in the United States and combine our best-in-class people and technology, we will disintermediate the banks and gain market share. Our multifamily investment sales business has the momentum of a freight train. We have added brokers in seven major MSAs over the past year, leveraged the brand and technology from our lending businesses, and watched our volumes explode. The market fundamentals for apartment sales are exceedingly strong. With Zellman, the research and advisory firm we just acquired, reporting in its recent apartment transaction survey, that June buyer demand increased for the 14th consecutive month to the highest index score since September of 2015. Our sales activity of $3.3 billion in Q2 21 is up 648% over Q2 2020 and up 203% from Q2 2019. One of our largest competitors in this space, CVRE, recently announced that their global property sales platform, which covers all commercial real estate asset classes, saw 152% volume growth from Q2 2020 and 27% growth from Q2 2019. It is great to see our multifamily property sales platform, which is focused on the largest commercial real estate asset class in the United States, growing significantly faster than the competition. We have an exceedingly strong pipeline for the remainder of the year, with $6.6 billion of listings that we are either currently marketing or have already closed for Q3 and Q4. And as we add more top brokers to our team, like the group we just added here in Denver, integrate Zellman's market research into our marketing materials and apply our database insights to uncover sales opportunities, we will achieve our 2025 goal of $25 billion in annual multifamily investment sales. at the core of our lending and investment sales businesses is valuation what a property is worth to determine the size of the loan or the sales price our automated appraisal business a prize is another example of where our focus on technology will scale a new business and pull market share from our largest competitors the global commercial real estate appraisal business is a 9.8 billion dollar revenue market with profit margins around 14 percent today CBRE has roughly 7% market share, generating over $650 million of annual revenues. We entered the appraisal business last year after automating the majority of the appraisal process with our technology partner, GeoFi. We did 50 appraisals in Q1 of 2020 and grew that number five times in Q1 of 2021 to 250. In Q2, we grew our quarterly volume by another 48%. After a significant amount of investment in technology, and hiring of appraisers over the past 12 months, we expect to see continued growth in this business due to our product being faster, cheaper and better than the competition. And our technology-based approach will allow us to generate significantly higher margins than the competition. As we continue growing our services business like debt and property brokerage and invest in our technology-enabled businesses like small balance lending and appraisals, we will continue building Walker & Dunlop into a broader, and more diversified technology-enabled financial services company. This transformation will not only propel our growth forward, but generate more cash earnings. As slide seven shows, our Q2 revenues a year ago of $253 million were comprised of 64% cash revenues and 36% non-cash mortgage servicing rights. Due to growing our services businesses, such as debt brokerage and property sales, Our Q2 2021 revenues of $281 million were 78% cash and only 22% non-cash mortgage servicing rights. As you can see on the right side of this slide, the shift in revenues drove our adjusted EBITDA to $67 million, up 37% over Q2 2020. By expanding our cash and carry services businesses, such as debt brokerage, property sales, asset management, We will increase cash revenues and expand the multiple that investors use to value Walker Dunlop. As you can see on slide eight, our debt brokerage business has grown at a compound annual growth rate of 22% over the past five years. The closest pure play comp to this business is our old competitor HFF prior to being acquired by JLL in 2019 for 17 times trailing earnings. Similarly, we can compare our multifamily property sales business to Marcus and Millichap. As you can see on slide nine, over the past five years, Walker and Dunlop has grown our multifamily property sales business at a compound annual growth rate of 32% versus Marcus Millichap's 2%. Marcus Millichap is currently trading at over 32 times trailing earnings. We expect Walker and Dunlop's valuation to trend away from specially financed companies and towards technology and real estate services firms as we move forward. While our services businesses such as debt and property brokerage continue to expand dramatically, we are still a major lender and will continue generating significant mortgage servicing rights. Fannie Mae and Freddie Mac both carried over a significant amount of business from 2020 to begin 2021 and then they hit the brakes. We thought they would reenter the market in Q2 but are just now seeing them priced and Win Business at historic levels. With almost 60% of their annual lending capacity still in hand, we should generate significant mortgage servicing rights from our Fannie Mae and Freddie Mac lending in the back half of the year. And our HUD business has simply been on a tear, originating over $600 million of origination volume in both Q1 and Q2 and proving that with the right team and right leadership, HUD volumes can become more consistent and valuable over time. To become the largest multifamily lender in the United States at the end of 2020, W&D had to jump over JPMorgan, Wells Fargo, and CBRE in the lending league tables. Those three large global firms, along with JLL, have significant market share in the commercial real estate lending and services arena. All four firms employ tens of thousands or hundreds of thousands of employees, and while they have big brands and market presence, they couldn't stop W&D from jumping over them in the league tables due to our people, brand, technology and focus. We will use our relatively small size, we only have 1,100 people, brand and combination of people and technology to innovate faster and win. As you can see from this slide, W&D revenue per employee dwarfs our larger competitors, underscoring the strength of our business model and opportunity for us to continue investing, entering new businesses that are currently dominated by our larger competitors will expand our product offering and allow us to meet more of our clients' needs. For example, banks such as JP Morgan and Wells Fargo are major players in the affordable housing market, both by lending on affordable properties and buying tax credits. W&B is already a large player in the affordable lending business, but as we add technology to scale in this space, we will take business from the large incumbent lenders. The growth in our multifamily property sales business is dramatic. Yet as we look to expand into other commercial real estate asset classes such as office, retail, hospitality, and industrial, we will take business from the large global service providers like JLL and CBRE. Similar to our property sales businesses, our appraisal business is focused solely on the multifamily industry today. But as we shift towards non-multifamily property sales, and grow our non-multifamily debt financing volumes, we will apply the same technology-driven people and process to appraisals on all commercial real estate asset classes. Finally, Wells Fargo, JP Morgan and Morgan Stanley all have scaled research and investment banking capabilities that cover every sector, including commercial real estate. Our recent acquisition of Zellman provides us with one of the best research platforms in the industry, along with an investment banking team currently focused on the single-family housing market that will be expanded to include commercial real estate. WMD has a massive opportunity to leverage our existing market presence, relatively small size, and focus on technology to broaden our product offering and beat the large incumbent service providers. And we plan to do just that. I will now turn the call over to Steve to discuss our second quarter and year-to-date financial results in more details. and then I'll be back with some further thoughts. Steve?

Thank you, Willie, and good morning, everyone. Q2 demonstrated the breadth and diversity of our platform's capabilities as increases in overall transaction volumes generated strong cash revenues and meaningful progress towards our long-term growth plan to drive to 25. We continue to invest in people to support future growth, expand our markets, and advance our technology initiatives to differentiate our execution and insights from the competition. I'm going to focus my initial remarks on the first half of the year as that time period truly exhibits the transformation of the company that Will has just described in going through the Q2 results. During the first half of the year, we generated total revenues of $506 million, up 4% from a very strong first half of 2020. year-to-date diluted EPS of $3.52 is up 2% over the first half of 2020. Year-to-date total transaction volume of $22.6 billion has been driven by record debt brokerage and property sales volumes which helped increase cash origination and property sales revenues by a combined 28% year-over-year to $215 million. At the same time, the growth in our servicing portfolio which ended the second quarter at $112 billion with a weighted average servicing fee of 24.5 basis points generated $135 million of cash servicing fees in the first half, up 20% over the same period last year. The strong growth in our cash revenues propelled our adjusted EBITDA to $127 million for the first half of 2021, up 13% over the same period last year, as shown on the right-hand side of this slide. What we control at Walker and Dunlop is the team we put on the field every day and their capabilities to meet our clients' needs. In 2020, our clients needed capital during uncertain times, and W&D met those client needs primarily with the countercyclical capital of Fannie and Freddie. Sorry, folks, my screen's freezing up here. and our 2020 financial performance, particularly our non-cash mortgage servicing rights, grew in spectacular fashion, generating record amounts of revenue. This year, transaction volumes increased by over 90% quarter on quarter, generating record amounts of cash origination fees and property sales revenues. The transaction volume and mix of revenue so far in 2021 is a reflection of Walker and Dunlop's enhanced positioning in the market as the go-to provider of financing and capital, regardless of the execution, and demonstrates the successful diversification of our business over the last few years. And while our results prove we aren't just an agency lender anymore, we did end 2020 as the second largest GSE lender in the country, with a combined Fannie Mae and Freddie Mac market share of 12%. Year-to-date, as shown on slide 12, Our GSE market share has held strong at 11%. And based on Fannie Mae's recently released mid-year lender rankings, we've maintained our position as Fannie's number one partner, with our 2021 deliveries outpacing the second-ranked lender by 32%. However, because of the year-over-year decline in Fannie and Freddie's overall production, our non-cash mortgage servicing rights revenues are off by 24% year-to-date. putting us behind pace to achieve double-digit earnings growth for the year. In our last call, we signaled an increase in Fannie and Freddie activity after the slow start to the year. And as you can see on this slide, our applications with Fannie and Freddie, which are a strong leading indicator of future rate lots, have increased significantly over the past three months, particularly in July, reflecting the GSE's steadily increasing appetite for deal flow as we move into the third quarter. This recent application activity gives us greater confidence that both agencies are back in the market and focused on lending the over $80 billion they have remaining to deploy this year. With the tremendous growth in transaction volume continuing and the increasing competitiveness of Fannie and Freddie as we enter Q3, we are on track for flat to 5% earnings growth on the year. However, if the current strength of our pipeline and market fundamentals hold, we still have the ability to once again achieve double-digit earnings per share growth something that has been a hallmark of ours since we went public in 2010. On all other metrics, we are reaffirming our initial 2021 targets, including double-digit growth and adjusted EBITDA, which is on track for a record year due to the strength of our overall transaction volumes. Personnel expenses increased by 32% in the quarter, driven by increases in both commissions expense, which were up 59% due to the significant increase in cash origination and property sales fees, and fixed personnel related expenses up 19% due to the substantial hiring we've done over the last year. We continue to invest heavily in future growth with a focus on increasing our production teams, expanding our brand and technology capabilities and supporting our new business initiatives on our path to achieving our drive to 25 objectives. To illustrate this point, year over year growth in salary expense saw the highest increases in small balance lending, investment sales, Walker and Dunlop Investment Partners, Marketing, and IT, reflective of the fact that we are making investments in new initiatives and technology, as well as continuing to add bankers and brokers and their support staff to the platform. All of these investments and the lower mortgage servicing rights revenues drove personnel as a percentage of total revenues to 47% for the first half of 2021, higher than our historical average, which is in the low to mid 40% range. We are in an investment stage this year, and our addition of headcount to support our emerging businesses is driving this expense ratio up, as is the fact that a higher percentage of our revenues are coming from cash origination fees on which we pay commissions. With higher agency volumes forecasted in the second half of the year, we expect personnel costs as a percentage of revenue to trend downward from current levels over the next two quarters. Second quarter operating margin was 26%, bringing year-to-date operating margin to 29% within our target range of 29% to 32% for the year, reflecting the fact that our scaled business model can support significant growth investments while remaining very profitable. Q2 return on equity was 18%, bringing ROE to 19% for the first six months of the year, also within our annual target range of 19% to 22%. For the second consecutive quarter, we lowered the loss forecast used to determine the allowance for risk-sharing obligations, resulting in a $4.3 million or 10 cent per share benefit to provision for credit losses in Q2. The strong credit fundamentals we described in our last earnings call, including very few loans and forbearance, no pandemic related defaults in the portfolio, and the extremely healthy debt service coverage ratio of our at-risk portfolio still hold true today. We believe that the macroeconomic trends underpinning the multifamily industry today, continued growth in GDP, rising property values, low interest rates, and declining unemployment levels set it up for continued strong performance for the foreseeable future. Given these dynamics, we feel very comfortable with the $60 million allowance for credit losses that remains in place to cover future losses in our portfolio. We ended the quarter with nearly $330 million of cash on the balance sheet. During the second quarter, we closed on the acquisition of TapTap and we continue to pursue a number of acquisition opportunities that directly align with our Drive to 25 strategy. Yesterday, our board of directors approved a quarterly dividend of 50 cents per share, payable to shareholders of record as of August 19th, 2021. The servicing portfolio continues to grow along with the related cash revenue streams. Our strong cash flow and existing cash position give us significant financial flexibility as we continue to pursue growth opportunities and invest heavily in our people, brand, and technology, a combination of which will continue to differentiate us in the market and drive growth in revenues and earnings. Thank you for your time today. I'll now turn the call back over to Willie.