Walker & Dunlop, Inc

Good morning, everyone. I'm Kelsey Duffy, Senior Vice President of Investor Relations at Walker & Dunlop, and I would like to welcome you to Walker & Dunlop's first quarter 2022 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. 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 metrics, 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. We had a strong start to 2022 with our people, brand, and technology continuing to differentiate Walker & Dunlop in the marketplace and contributing to strong growth across the enterprise. We saw growth in almost every business line, and key financial metric due to the investments we have made and the performance of our fantastic team. The market's rapid transition to pervasive inflation and higher rates has required our bankers and brokers to think proactively and innovate for our clients, which they did in spectacular form throughout Q1. In times of market volatility, Walker & Dunlop has a long standing track record from the depths of the great financial crisis to the lockdown of the pandemic of executing on behalf of our clients and growing dramatically. We held our first all company meeting in over two years in Denver at the end of March. Over 1000 Walker & Dunlop employees gathered to hear speakers, participate in trainings, and celebrate our collective success. I told the team in my closing remarks that we have created something very special at Walker & Dunlop. I equated it to catching lightning in a bottle. And I have no doubt that everyone left Denver feeling like they are part of an amazing team. Beyond highlighting the people and technology of Walker & Dunlop at our Denver meeting, we also previewed our new brand campaign titled Community Starts Here. For as long as I've been CEO of Walker & Dunlop, we have talked about the what of Walker & Dunlop, what we do, how we do it, and what it can do for our clients, investors, and employees. But we haven't focused on the why, why we do what we do, and why does it make a difference. In Launching Community Starts Here, we are underscoring that the capital and services Walker & Dunlop provides allows for communities where people work, shop, live, and play to be created and cultivated across the country. Answering the why, why do we do what we do, and why does it make a difference is vital in the post-pandemic hybrid workplace where human capital retention and performance is exceedingly important. The breadth and diversity of our platform is more evident in Q1 2022 than ever before, due to the dramatic investments in companies and human capital we made over the past year. We helped our clients navigate challenging market dynamics from war, inflation, and rates, and grew total transaction volume 40% to $12.7 billion. Total revenues grew a comparable 42% year over year to $319 million and drove diluted earnings per share of $2.12, up 18% from the first quarter of last year. This top and bottom line growth, which was clearly aided by our Q1 acquisition of GeoFi, is exceptional when considering the competitive landscape, macroeconomic environment, and investments in human capital and technology we have made over the past year. 40% growth in total transaction volume was once again led by strong growth in debt brokerage and property sales volumes, which were up 31% and 153% respectively from Q1 21. Our lending with Fannie Mae grew 30% over Q1 21 and our overall GSE market share grew to 12.3% due to the strength of our Fannie volumes up from 11.4% in Q1 of 21. Fannie and Freddie only lent $31 billion to the multifamily market in Q1, leaving them with $125 billion, or 80% of their total 2022 lending capacity, which has remained a reliable, consistent capital source for multifamily borrowers to use over the remainder of the year. Technology will continue to underpin Walker & Delop's growth. During the quarter, 61% of our refinancing volume was on new loans to our servicing portfolio, and 19% of our total transaction volume was with new clients to Walker & Dunlop. Two data points that reflect our use of technology, which in combination with our talented people and expanded brand, are driving continued growth in volumes. In February, we closed the acquisition of Geofi, our prized joint venture partner and a wonderful commercial real estate technology company. As we outlined in the Geofi press release, there is a very significant earn-out component to the acquisition that will keep the GeoFi team focused on growing our two most technologically enabled businesses, small balance lending and appraisals. These two businesses grew dramatically during the first quarter with small balance originations of $176 million up 54% from Q1 21 and the completion of 711 appraisals up 187% over Q1 of last year. While these two businesses are only beginning to impact our financial results, they have huge markets to penetrate and have taught us a ton about how to combine technology and human capital to enter new markets successfully. One of the most important facets of Community Starts Here is Walker & Dunlop's commitment to developing and financing affordable housing. The acquisition of Alliant Capital brought with it investments in over 100,000 affordable apartment units, as well as the ability for Walker & Dunlop to provide both debt and equity financing on affordable properties to our clients. We spent Q1 integrating Alliance team and products into W&D in our quest to build the very best affordable housing platform in the country. We should begin to see the synergies between the two companies emerge as we move throughout 2022. Zellman, which we acquired in 2021, continues to be viewed as one of the very best housing research firms in the country. Zellman's market knowledge and customer relationships have contributed nicely to sales growth in our banking and brokerage businesses. We remain focused on expanding Zellman's investment banking capabilities from the single-family housing market into commercial real estate. The addition of $14 billion in assets under management with the acquisition of Alliant Capital did not diminish our growth expectations with Walker & Dunlopx Investment Partners, where we raise commingled funds to place capital into the transactions our bankers and brokers work on every day. As investors have seen us do before, we will be very active in the market when risk adjusted turns are attractive. Think for a moment what we've been able to accomplish over the past three years to generate the financial results of Q1 2022. We invested heavily in property and debt brokerage in 2019 to expand our service offering. We then used our leadership position with Fannie, Freddie and HUD to wildly outperform during the pandemic lockdown of 2020. When the market returned in 2021, we brought our expanded service offering to grow transaction volume 66%. And yet rather than simply meet the demands of the recovering market, we made three major acquisitions in investment research, affordable housing, and technology. And so to grow revenues 42% in Q1 2022 in the current market environment and generate 18% EPS growth, while assuming dramatic increases in overhead and personnel expenses due to three acquisitions, is truly fantastic. I will now turn the call over to Steve to discuss our Q1 financial results in greater detail, and then I'll come back to discuss what we see ahead. Steve?

Thank you, Willie, and good morning, everyone. As Willie just described, we started 2022 with a solid first quarter in which we were able to leverage the breadth of our platform to meet our clients' needs within uncertain market conditions while generating strong financial results and creating momentum for future growth. First quarter diluted EPS was up 18% year over year to $2.12, while the strength of the cash generating components of revenues continued to drive growth and adjusted EBITDA, which was up 3% to $63 million. Growth in adjusted EBITDA was offset by the year-over-year increase in expenses related to the three significant acquisitions we made during the last 12 months. We are currently working to integrate these acquisitions and are extremely excited about the benefits and synergies we will begin to see in our financial results once these companies are fully integrated and gain scale. Revenue contribution in the first quarter from these acquisitions was $24.7 million, and we expect this number to grow over the course of the year due in part to the seasonal nature of alliance revenue, but also as we achieve our planned synergies. Adjusted earnings per share for the quarter was $1.09 in Q1 of 2022 compared to $1.35 in the prior year quarter. Through the acquisition of GFI, we revalued our previous 50% interest in a prize, our appraisal joint venture, based on the $117 million value of the business. This resulted in the recognition of $40 million of revenue in the quarter, which flows through to net income and earnings per share, but is excluded from our adjusted EBITDA and adjusted earnings per share due to its non-cash nature. Q1 personnel expense as a percentage of revenues was 45%, up from 43% in the first quarter of 2021. Personnel expenses have naturally increased as we originate more transaction volume and as we welcomed the Zellman, Alliant, and GFI teams onto the platform. These acquisitions added $12.4 million of additional personnel expense in the first quarter. Q1 growth in personnel expense was also driven by the increased commissions expense resulting from the strong growth in transactions volume. As you may recall, at the end of 2021, we doubled the size of our senior secured term loan to $600 million and assumed alliance fixed rate securitized debt facility in the amount of 155 million. The increase in outstanding debt resulted in a $4.6 million year over year increase in interest expense in Q1 of 22. While the term loan is tied to SOFR, it has a 50 basis point floor, and we locked in our rate for the first six months of this year, so we will not see any impact from rising interest rates on our interest expense until the second half of the year, at which time we should see offsetting increases in the interest income from our escrow deposits, which are at $2.5 billion and expected to grow over the rest of this year. Q1 operating margin was 28% within our annual target range of 26 to 29% and return on equity for the quarter was 19% within our annual target range of 19 to 22. We ended Q1 with $141 million of cash on our balance sheet after closing the acquisition of GFI and paying company bonuses during the quarter. Our strong financial position has allowed us to close a number of strategic acquisitions over the past year that are in line with our drive to 25 objectives, including the largest acquisition in our history at the end of 2021. We continue to increase our cashflow generation to support our growth initiatives, as well as our ongoing dividend payments and any opportunistic stock repurchases. To that end, yesterday, our board of directors approved a quarterly dividend of 60 cents per share, payable to shareholders of record as of May 19th, 2022, consistent with last quarter's dividend. With our recent acquisitions, we are updating the presentation of our financial disclosures to reflect a new operating segment presentation, which is included in our earnings release and 10Q filing. Agency lending, debt brokerage, property sales, and valuation services are now included in the capital markets segment. Our more recurring revenue streams, including servicing, low-income housing development and tax credit syndication, asset management, proprietary capital, and investment research are now included in the servicing and asset management segment. Infrastructure, treasury, and other corporate services are included in the corporate segment. This new financial reporting structure reflects the impacts of the Zalman, Alliant, and GFI acquisitions, and we believe will provide the investment community with even more transparency into our overall financial performance going forward. For the first quarter, the capital market segment generated total revenues of $164 million, up 12% from Q1 21, and net income of 47 million, down 17% year over year from 56 million. The decline in net income was primarily due to the increase in personnel expense, including a $16 million increase in commissions as we continue to hire new origination teams, grow our small balance lending team, and grow origination volumes. The investments we have made in our people, brand, and technology are continuing to benefit our total transaction volume, with Q1 total transaction volume up 40% year over year to $12.7 billion. This growth was primarily led by property sales volumes up 153%, debt brokerage volumes up 31%, and agency volumes, which were up a combined 7% year over year due to strong Fannie Mae volumes. We already have a large GSE pipeline for Q2 and fully expect both GSEs to hit their volume caps by the end of the year, which in combination with our expectations for continued growth in debt brokerage and property sales volumes should benefit our capital markets and overall company financial performance for the remainder of the year. Q1 adjusted EBITDA for this segment was $11 million, down from $17 million in the first quarter of last year due primarily to the increase in personnel expense that I just mentioned. The servicing and asset management segment generated total revenue of $111 million during the quarter, up 42% from the first quarter of 21, and earned net income of 33 million compared to 27 million in Q1 of last year, a 19% increase. The strong increase in revenue and net income was due to the addition of Zellman in July of 2021 and Alliant in December of 21. We ended the quarter with $116 billion servicing portfolio, up from 110 billion at March 31st, 2021, with a weighted average servicing fee of 25 basis points and 17 billion of total assets under management, which includes Alliant, WDIP, and our Blackstone joint venture. During the quarter, our calculated 10-year historical loss rate declined from 1.8 basis points to 1.2 basis points, resulting in provision benefit of 9.5 million compared to a provision benefit of 11.3 million in the prior year. From an overall perspective, the credit metrics in our portfolio continue to look really good. This segment should consistently generate extremely strong adjusted EBITDA due to its cash-oriented recurring nature. And in Q1, it contributed $88 million of EBITDA compared to $69 million, up 26% from the first quarter of last year. Finally, the corporate segment generated $44 million of revenue, primarily from the $40 million apprised revaluation adjustment. Since the majority of our corporate overhead is allocated to this business segment, net income and adjusted EBITDA will typically be negative. For the first quarter, net income for this segment was negative 8 million compared to negative 26 million in the prior year, as overall headcount in this segment increased due to the growth of the company. Adjusted EBITDA, which excludes the impact of the apprised valuation adjustment, was negative 36 million compared to negative 26 million in the same period last year. We plan to hold an investor day on May 19th, during which we will provide more detail on our segment financials. We hope all of you can join us to take a deeper dive into our new reporting structure and hear more about the new business initiatives that are part of the drive to 25. Walker & Dunlop has a longstanding reputation for putting our clients' needs first. And during a period of market uncertainty, our clients have benefited from our ability to meet their needs with the capabilities of our broad and diversified platform, allowing us to grow our transaction volumes and market share. As we move into the second quarter, market conditions remain uncertain and our clients' needs for the best advice and service will be even more vital. We have a strong pipeline of business for Q2. And while none of us can predict the future, we have built a diversified and resilient business model and expect to achieve our goals of double digit earnings and EBITDA growth for the full year. Thank you for your time this morning. I'll now turn the call back over to Willie.