Walker & Dunlop, Inc

Good morning, everyone. I'm Kelsey Duffy, Vice President of Investor Relations at Walker & Dunlop, and I'd like to welcome you to Walker & Dunlop's fourth quarter and full year 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 Walker & Dunlop 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, and adjusted diluted earnings per share during the course of this call. Please refer to the appendix of the earnings presentation for a reconciliation of these non-GAAP financial metrics. 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 & 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. It's a pleasure to be doing this earnings call from Walker & Dunlop's new offices in New York City. We just held our quarterly board meeting in our new corporate headquarters in Bethesda, Maryland. The building, our space, and the sense of community are truly spectacular. We decided to sign both leases in the depths of the pandemic when few others were committing to physical office space. And we are now benefiting from the collaboration, creativity, and teamwork that are happening daily in these two offices. Our continued investment in people, brand, and technology produced fantastic Q4 and full-year financial results. We generated total transaction volume of $27 billion, up 91% from last year. Record transaction volume led to record quarterly revenues of $408 million, up 16% over last year, and diluted earnings per share of $2.42. What a quarter. Yet amongst those fantastic results, the most noteworthy is adjusted EBITDA, up 89% to $110 million on the quarter due to our continued transformation of Walker & Dunlop from a mortgage-centric finance company into a technology-enabled financial services firm. The services businesses we have been investing in over the past five years grew dramatically in Q4. Debt brokerage, where Walker & Dunlop acts as an intermediary between lenders and borrowers, increased total transaction volume by 237% in the quarter to $12.7 billion, our largest debt brokerage quarter in W&D's history by a wide margin. Property sales where Walker & Dunlop acts as a broker between buyers and sellers of multifamily properties grew to $9.3 billion during the quarter, up 226% over last year and more volume in one quarter than we did in all of 2020. These two services businesses accounted for over $20 billion of transaction volume in Q4, an incredible accomplishment and reflective of the talented professionals we have recruited to W&D, the brand we have built, and the implementation of valuable technology solutions. Since we launched our Galaxy database in early 2020, we have been reporting to investors how this data tool has helped us grow both existing and new client relationships. This technology has given our bankers and brokers a true sales advantage and contributed to 75% of our refinancings in Q4 being new loans to Walker & Dunlop and 37% of our total transaction volume in Q4 being done with new clients to W&D. For the full year, these technology efficacy numbers tell a similar story, with 71% of our refinancings being new loans to our portfolio and 30% of total transaction volume being done with new clients to Walker & Dunlop. It is the combination of our talented bankers and brokers, brand, and technology solutions that have driven these amazing results. While we have grown our services businesses dramatically, we continue lending throughout the year and finished 2021 once again as Fannie Mae's largest multifamily lender and Freddie Mac's fourth largest partner. We ended the year neck and neck with CBRE as two of the largest providers of capital to the multifamily industry. And with HUD, we had a strong fourth quarter and record year of lending, originating $2.3 billion in mortgages, largely on affordable properties. Beyond the fantastic results of our core lending and services businesses, we made three highly strategic acquisitions during the year. Zellman & Associates is our entry into market research and investment banking. Zellman's industry-leading, housing-focused research provides our bankers and brokers with market insights and intelligence that enhances their client relationships. It has been a true pleasure to have Ivy Zelman and her colleagues as part of the W&D team. TapCap was acquired to lay the foundation for automating our small balance loan quoting. underwriting, and closing processes. We rolled out our small loan quote app in Q4 and are very pleased with TapCap's technology and our client engagement with the new app. Since its launch, our site has received over 18,000 views, and we now have an email subscription list with nearly 50,000 current and prospective small loan customers. Finally, Alliant Capital is the largest and 14th acquisition in W&D's history that closed right at the end of 2021. We now have the full suite of services to be a powerhouse in the affordable housing industry, one of the fastest growing and most underserved sectors of the multifamily market. Sean Horwitz and the Alliant team have just started working at W&D, and it is a pleasure to have them with us. We are constantly focused on where we are going at Walker & Dunlop. And in a moment, I will run through the fantastic progress we have made in just one year towards achieving our five-year strategic growth plan called the Drive to 25. But given the changing economic landscape and investor questions about rising interest rates, inflation, and major macroeconomic changes and how they will impact our business, I thought it would be instructive to look back for a moment. Over the past 10 years, we have had the 10-year Treasury at a low of 52 basis points and a high of 3.24%. We've had the Dow industrials close at a low of 10,655 and a high of 36,489. We've had three distinct presidential administrations, four acting and permanent directors of the Federal Housing Finance Administration, and three chairs of the Federal Reserve. And yet, as you can see on this slide, we have grown revenues at Walker & Dunlop from 152 million to 1.26 billion, earnings per share from $1.60 to $8.15, and adjusted EBITDA from $32 million to $309 million over the past decade in a continuous, dramatic, and wildly consistent manner. By investing in new services and technology-enabled businesses, we have a business model that allows us to grow dramatically in up markets and also provide countercyclical capital when the markets dislocate. This has allowed revenues to grow at a compound annual growth rate of 24% over the past decade, EPS at a compound annual growth rate of 18%, and EBITDA at a compound annual growth rate of 25%. We have seen plenty of change over the past decade. including a pandemic that radically changed all of our lives. Yet throughout, WND's performance has been both incredibly consistent and dramatic in terms of growth and financial performance. So now looking forward. The five-year highly ambitious strategic growth plans we launched last year, the Drive to 25, has an overreaching goal of doubling revenues from $1 billion in 2020 to $2 billion by 2025. Our progress towards the Drive to 25 after only one year is simply fantastic. We set a goal to grow our debt financing volumes to $65 billion by 2025. And in 2021, we increased it by 40% to $49 billion. In property sales, we set a goal to grow to $25 billion by 2025. And in just one year, grew volumes by 214% to $19 billion. Our loan servicing portfolio ended 2020 at $107 billion, and we finished 2021 at 116 billion, 8% growth, which is what we need to maintain to achieve our Drive to 25 goal of $160 billion. Finally, we ended 2020 with $1.8 billion of assets under management. We set the ambitious goal to grow AUM to 10 billion by 2025, and with the acquisition of Alliant Capital, added $14 billion of assets under management and achieved our Drive to 25 goal in 2021. Beyond these financial metrics, the drive to 25 contains ambitious environmental, social, and governance goals, including quantitative goals to increase diversity, equity, and inclusion at W&D. W&D is in a select group of companies that published ambitious quantitative DE&I goals, which are tied to senior executive compensation in our 2021 proxy statement. WND was also just added to the 2022 Bloomberg Gender Equity Index, which puts us among only 418 publicly traded companies in the world to be featured on this prestigious gender-focused index. And while we still have a long way to go to make W&D and our industry more diverse and equitable, we were ranked number 13 on the Washington Business Journal's Corporate Diversity Index for large companies, putting us high in the ranks with some incredibly large and diverse DC-based companies that share our commitment to diversity and inclusion. Finally, W&D once again was recognized as a great place to work by Fortune magazine, making that eight out of the last 10 years we've made that list. I have always said being a great place to work is the most important honor we can receive. For if you have a great place to work, the financial results will follow and follow they have. I'll now turn the call over to Steve to provide more detail on our fourth quarter and full year financial performance. And I'll then come back to discuss our outlook for the future. Steve.

Thank you, Willie, and good morning, everyone. 2021 ended with very strong transaction volumes, solid earnings, and record adjusted EBITDA. In the fourth quarter, we recognized record total transaction volume of $27 billion, up 91% year over year, which drove a 16% increase in total revenues to $407 million. For the full year, total transaction volume was 68 billion, up a phenomenal 66% from 2020. 2021 revenues totaled $1.3 billion, an increase of 16% over the prior year. As we look ahead to 2022, the strength of the commercial real estate market and growth in the W&D brand and sales force set the stage for the continued growth and diversification of our business. Q4 transaction volume was driven by debt brokerage and property sales volumes, which were up 237% and 226% respectively from the same quarter last year. The growth in our servicing portfolio, which ended the year with $116 billion of loans and a weighted average servicing fee of 24.9 basis points, generated $73 million of cash servicing fees in the fourth quarter, up 15% over Q4 20. The increase in cash fees generated by debt brokerage, property sales and servicing drove quarterly adjusted EBITDA to $110 million, up 89% year over year. For the full year, loan origination, property sales and servicing fees were up a combined 33% from 2020, driving 43% growth in adjusted EBITDA to $309 million, crushing our goal of double-digit EBITDA growth for the year. Q4 diluted earnings per share of $2.42 was down 7% year over year, reflecting the decline from last year's massive quarter of GSE lending volumes. 2021 diluted EPS of $8.15 was up 6% over 2020, slightly higher than the projections we provided during our last two earnings calls. Due to the significant growth in EBITDA as we shift our business mix from lending-centric to services-centric, we are introducing an adjusted EPS metric this quarter that excludes the impacts on earnings of non-cash MSR gains, amortization and depreciation, provision for credit losses and stock compensation. This non-GAAP metric should be useful in evaluating the cash generation capabilities of our business by eliminating the impact of the revenues and expenses associated with mortgage servicing rights. For Q4 of 2021, the adjusted earnings per share was $2.25 compared to 69 cents in the fourth quarter of last year. For all of 2021, adjusted earnings per share was $6.51 compared to $3.84 in 2020. Historically, as you can see on slide 11, adjusted EPS is tracked closely with our adjusted EBITDA and is strongest in years with high cash revenues, including loan origination and property sales fees, escrow earnings, and servicing fees. Q4 personnel expense as a percentage of revenues was 48%, up from 45% in the fourth quarter of 2020, largely due to increases in commission expense. Commissions represented 62% of all personnel expenses in Q4 of 2021, compared to just 53% of all personnel expenses in Q4 of last year, due to our dramatic growth in transaction volumes. For the full year, personnel expenses and percentage of revenues was 48%, up from 43% in 2020. Along with the year over year increase in commissions expense, our elevated 2021 personnel expense ratio reflects our investments in people to launch and acquire new businesses and continue expanding our product offerings. Staying with expenses, fourth quarter other operating expenses increased year over year by $14.3 million, primarily due to two one-time charges. The first was a $2.7 million write-off of the deferred issuance costs related to our original senior secured term loan that we paid off in mid-December in conjunction with the Alliant acquisition. The second one-time expense was a $7 million earn-out related to the acquisition of the non-controlling interest in Walker & Dunlop Investment Sales. Due to the incredible performance of our investment sales team, this earn-out was achieved well ahead of schedule. There will be no additional expense for this earn-out going forward as the team has earned the entire amount. Q4 operating margin was 27%, down from 34% in the prior year due to the shift from a huge quarter of non-cash mortgage servicing rights last year to cash revenues from our servicing businesses this year, as well as the previously mentioned one-time expenses incurred during the quarter. Those one-time expenses accounted for 200 basis points of operating margin. So without them, the operating margin would have been 29% in the quarter. Full year operating margin was 28%, just outside of our annual target range of 29 to 32%. Return on equity for the quarter was 23%, bringing our ROE to 21% for the year within our annual target range of 19 to 22%. With the strong growth in our core products and the acquisitions we have completed over the past year, we are establishing 2022 financial guidance of double-digit revenue growth, double-digit earnings per share growth, and double-digit growth in adjusted EBITDA. Due to the transition of our business from lending-centric to more services-driven and the investments we are making in our emerging technology-enabled platforms, we are establishing an operating margin range of 26 to 29% for the coming year. and we are establishing an annual return on equity target range at 19 to 22%. There are several factors in our 2022 outlook that are important to mention. As we saw in 2021, the growth in our services businesses is driving cash revenues and cash earnings, pushing EBITDA to record levels. This trend should continue in 2022, yet if our GSE lending volumes expand significantly due to the increased lending caps, we could see increased non-cash revenues from mortgage servicing rights and a resultant increase in operating margin. There's also revenue and margin upside from increases in the earnings rates on our $3.7 billion of escrows. In 2019, prior to the pandemic, we earned $56 million on our escrow deposits. Due to the dramatic drop in rates over the past two years, we only earned $8 million on these deposits in 2021. As rates move back up, we will earn more from our escrows. Every 25 basis point increase in the deposit rate translates into approximately $9 million of additional pre-tax earnings per year. We ended the year with $306 million of cash on the balance sheet. As we saw from the market receptivity to our new debt offering in December, our current strong capital position and cash generation give us the ability to supplement our cash on hand with additional debt to continue pursuing acquisitions and recruiting top banking and brokerage talent to W&D. We ended the year with a debt to adjusted EBITDA ratio of 2.4 times. And based on our expectations for EBITDA growth and deleveraging, we expect that this will drop below two sometime in 2022. Our strong results also allow us to continue increasing the quarterly dividend. Yesterday, our board of directors approved a quarterly dividend of 60 cents per share, a 20% increase. This is our fourth annual increase since we initiated the dividend in February of 2018 at 25 cents per share. That's a cumulative increase of 140%. The current annualized dividend of $2.40 per share represents a payout ratio of 29% on 2021 net income and 25% of 2021 adjusted EBITDA, levels that enable us to continue growing the dividend while retaining sufficient capital to continue investing in the future growth of the company. 2021 was a transformative year for Walker & Dunlop as we continued investing in people, brand, and technology, saw the investments we have made in debt brokerage and property sales grow more dramatically than ever, and made tremendous progress towards the achievement of the Drive to 25. Our current financial position is extremely strong, giving us the ability to continue investing in our new businesses to expand our product offerings, while leveraging our leadership position in the debt financing and property sales markets to deliver strong financial results in 2022 and beyond. Thank you for your time this morning, and I'll now turn the call back over to Willie.