Walker & Dunlop, Inc

Good morning. I'm Jenna Sims, Senior Analyst for Investor Relations at Walker & Dunlop, and I would like to welcome you to Walker & Dunlop's second quarter 2022 earnings conference call and webcast. Hosting the call today is Willie Walker, Walker & Dunlop Chairman and CEO. He is joined by Greg Furkowski, Executive Vice President and CFO. 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 line 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 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 Greg will touch on during the call. Please also note that we will reference the non-GAAP financial metrics, adjusted EBITDA, adjusted EBITDA margin, 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 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 will now turn the call over to Willie.

Thank you, Jenna, and good morning, everyone. Walker & Dunlop had an extremely strong second quarter with record Q2 origination volume, revenues, and adjusted EBITDA, demonstrating the return on investment we have made in our people, brand, and technology over the past several years. This fantastic growth and performance was done in a rapidly transforming macroeconomic environment. With the second quarter beginning with a 10-year treasury rate of 2.39% and increasing by 110 basis points, to reach a high of 3.49% in June. Within this fluctuating interest rate environment, our team continued to execute exceedingly well on behalf of our clients, closing total transaction volume of $23 billion, up 67% from the second quarter of 2021, and generating total revenues of $341 million, up 21% year over year. Our strong top line results drove diluted earnings per share of $1.61 and dramatic growth in adjusted EBITDA to $95 million, up 43% year over year. We have underscored this transformation from non-cash revenues and earnings to cash revenues and dramatic growth in EBITDA over the past year. And Q2 2022 continued this trend as our business transitions from a lending-centric mortgage bank to a broader technology-enabled financial services company. We introduced an adjusted EPS metric in Q4 of 2021 to strip out non-cash mortgage servicing rights and underscore W&D's cash earnings. And in Q2 2022, adjusted EPS was up 42% year over year to $2.04 a share. 67% growth in total transaction volume was led by strong growth in debt and property brokerage services, which were up 47% and 136%, respectively, from Q2 2021. The robust supply of capital from debt funds, life insurance companies, and banks throughout 2021 And the first half of 2022 drove the growth in our debt brokerage volumes, while the dramatic amount of equity capital looking to be deployed into multifamily real estate is what drove the spectacular results in our property sales business. Walker & Dunlop, for much of our history, was considered a niche multifamily agency lender. The growth in these two services businesses, generating over $17 billion in transaction volume in Q2 alone, underscores the dramatic diversification of product offerings at W&D. And once again, technology provided us with a competitive advantage in finding new loans and clients. with 68% of our refinancings in Q2 being new loans to Walker & Dunlop and 25% of our total transaction volume being done with new clients to the firm. Overall debt financing volume was up 44% year over year, including a very strong quarter of lending with Fannie Mae, which was up over 100% from Q2 of last year. It is important to note, however, that most of that growth with Fannie was due to closing a $1.9 billion portfolio loan, which while a wonderful execution for our client, was a floating rate loan where we booked a relatively small origination fee which is customary for large structured transactions and an insignificant mortgage servicing right due to the loan being a short-term floater with limited yield maintenance. Nonetheless, it is one of the largest transactions in our company's history and propelled our market share with Fannie Mae to 19% for the first half of the year and 14% with the GSEs on a combined basis. With a dramatic amount of capital in the debt capital markets over the past year and a half, both Fannie and Freddie have struggled to compete. Yet as rates have risen and recessionary fears have grown, capital flows have diminished, leaving a good portion of the market to Fannie Mae and Freddie Mac. With 59% of their annual lending capacity still intact as we enter the back half of the year, Fannie and Freddie have the very real opportunity to lend the entire $92 billion of lending capacity they still had as of July 1st. We saw the agency step back into the market in a meaningful way in July, and due to our leadership position with Fannie and Freddie, we expect strong GSE origination volumes for the rest of the year. All of the new businesses we've invested in over the past two years, affordable housing, research, small balance lending, and appraisals, produce significant growth and strong financial results in Q2. Alliant, the large affordable housing owner investor we acquired at the end of 2021, had an extremely strong quarter with $30 million in revenues, up from $19 million in the first quarter. Zellman, our housing research arm, saw significant growth in its core research product, likely due to investor demand for insight during turbulent times and the marketing reach of Walker & Dunlop. Small loan originations total $259 million for the quarter, up an eye-popping 171% year over year. And Apprise, our appraisal company, completed 734 appraisals, up 97% over Q2 of last year. Both small balance lending and appraisals are being assisted by Geofi, the data science company we acquired in February to accelerate growth in these technology-enabled businesses. The acquisitions of Alliant, Zellman, and Geofi added $18 million in personnel expense in Q2 22 over Q2 21. And while that put downward pressure on earnings this quarter, we love these investments. Alliant and Zellman are growing faster than Proforma, and Geofi has the ability to not only transform our emerging businesses of small balance lending and appraisals, but also our legacy banking and property sales businesses. The continued evolution and diversification of Walker & Dunlop from a lending-centric mortgage bank into a broader financial services company has taken us from competing predominantly with the likes of J.P. Morgan and Wells Fargo to now going head-to-head with CBRE and JLL as well. It is the unique combination of our people, brand, and technology that has driven our growth. And while financial services is at the core of all we do, it is our investments in innovative technology, similar to CoStar and Rocket, that allow us to successfully compete against these much larger firms. Looking at W&D's growth versus CoStar, as well as CB&JLL, is instructive. As this slide shows, over the past five and 10 years, W&D and CoStar have grown revenues and EBITDA at essentially the same compound annual growth rate. Yet CoStar trades at around 30 times EBITDA to Walker & Dunlop's under 10 times. There is plenty of multiple expansion available to W&D if we continue to execute on our goals. In terms of CB and JLL, as WND has replaced non-cash mortgage servicing rights revenue with cash services fees, WND's EBITDA has grown faster than CB and JLL over the past five years. And as you can see on the right side of this slide, we've not only grown faster, but at a higher margin. This is exceptional performance by our team to generate financial results that compare so well against the most technologically sophisticated and largest brands in our industry. And given our scale and investments, we should be able to maintain this exemplary growth and performance going forward. One final note on our market positioning before I turn the call over to Greg. The dollar remains exceptionally strong. And while global markets deal with a war in Europe and the lingering impacts of the pandemic in Asia, Walker & Dunlop's US-centric business feels very well positioned. And while commercial real estate remains an attractive asset class for inflationary adjusted returns, multifamily, where W&D is exceedingly strong, continues to outperform and be the most favored asset class. Finally, W&D's access to countercyclical capital and demonstrated growth in up markets make us feel very good about our future results, regardless of the macroeconomic environment. I will now turn the call over to Greg to discuss our second quarter and year-to-date financial results in more detail, and then I'll be back with some further thoughts on what we see ahead. Greg?

Thank you, Willie, and good morning, everyone. As Willie just described, the first half of 2022 reflected the diversity of our company from a mortgage-centric lender to a broader technology-enabled commercial real estate financial services firm, and our ability to not only execute but also grow during challenging market conditions. Second quarter transaction volumes grew 67% year over year to $23 billion, generating 21% growth in total revenues to $341 million and diluted EPS of $1.61. The trend of our debt brokerage and property sales businesses fueling our growth in total transaction volumes continued in the second quarter. And those volumes combined with growth in our servicing and asset management businesses drove exceptional growth in adjusted EBITDA to $95 million, up 43% year over year. Our debt brokerage volumes grew 47% to $9.3 billion this quarter on the strength of capital markets executions throughout much of the second quarter and illustrating the benefits of the investments made in growing this team over the last several years. Our property sales team navigated a challenging market and not only grew volumes 136% to $7.9 billion, but delivered the second strongest quarter of property sales volume in our company's history. Our GSC volume also grew 74% to $5 billion this quarter. And as Willie just mentioned, we closed a $1.9 billion transaction with Fannie Mae during the quarter that boosted Fannie Mae volume to $3.9 billion. Our HUD volume this quarter was $201 million, a year over year decrease of 70%, leading to a decrease in related revenue. The decline in volume and revenue is due to two primary factors. First, HUD offers a streamlined refinance product that over the last several years enabled our borrowers to lock in historically low interest rates without changing any other terms of the loan. As interest rates have risen, streamlined refinance volumes have declined significantly, and we do not expect to originate streamlined refis moving forward. Second, the HUD product is an attractive source of capital for ground up construction, with 26% of our HUD volumes being construction related last year. As costs for new construction increased simultaneously with interest rates during the first half of 2022, many of our clients delayed their construction projects and the related financing activity. HUD is an important source of capital for many of our customers, and these recent disruptions have no impact on our long-term confidence in the HUD product. We expect to see our HUD volumes pick up in the coming quarters as more construction projects get back on track, but revenues will continue to be down on a comparative basis because of the lack of streamlined refis. Finally, our proprietary capital originations declined 59% this quarter to $132 million. Our proprietary lending is not a significant driver of our overall financial performance, and we took a cautious approach to lending our balance sheet capital this quarter. We did not extend ourselves while rates rose sharply, and importantly, we did not hold any collateral that needs to be securitized or warehouse lines subject to mark-to-market margin calls. We will continue to take a conservative stance to balance sheet lending, but as the markets stabilize, we fully expect there will be opportunities for us to step in and support our clients in the coming quarters. Over the past several years, our business has undergone a transformation into a technology-enabled commercial real estate financial services firm that also manages $136 billion of assets earning stable recurring cash revenues. That transformation was reflected in the dramatic 43% growth in adjusted EBITDA and 42% growth in adjusted EPS. Our financial performance used to be closely linked to our transaction volumes and the mix of business we originated. But because we have grown, added more service offerings, and scaled our asset management business, we introduced segment financial results to provide more transparency into our operating structure and overall financial performance. Revenue from our transaction volumes is reflected in the capital market segment, and the mix of originations helps explain the financial performance for that segment this quarter. Although transaction volume grew 67% this quarter, segment revenue did not grow in line, increasing only 6% to $208 million. We invested heavily in scaling our debt and property sales brokerage businesses over the last several years, and revenue from those businesses grew dramatically this quarter. However, HUD revenues declined $23 million, offsetting a large portion of the growth from our brokerage businesses. As a result, cash revenues for this segment increased 16%, while non-cash MSR revenues decreased 16%. The increase in cash revenues drove an increase in variable commission costs, and when coupled with the addition of the development team from GFI that is included in this segment, increased personnel expenses a percentage of revenue from 61% last year to 67% this year. Although the acquisition of GFI is already being reflected in the growth rates of the small balance lending and appraisal businesses, the combination of those businesses is not yet accretive to our overall operating margins. When coupled with the decline in HUD revenues, operating margin for the segment decreased from 37% last year to 31% this year. Finally, although net income from this segment declined $7 million this quarter due to the decrease in non-cash revenues, we were very pleased with a 19% growth in adjusted EBITDA to $17 million. Over the last year, we acquired Zellman and Alliant, both of which are reflected in SAM, our servicing and asset management segment, which delivered fantastic growth across almost every financial metric this quarter. Revenue grew $47 million or 56% over last year, benefited by $37 million of revenue from the Alliant and Zelman teams this quarter. Revenue for the SAM segment also benefited from the rise in short-term interest rates, as we saw escrow related revenues nearly triple over the same quarter last year to $7 million. We expect continued increases in short-term rates to further boost escrow related revenues, and I'll touch on that more in a moment. Although the added headcount from acquisitions increased personnel expenses a percentage of revenues from 11% last quarter to 17% this quarter, the operating margin for this segment expanded from 35% to 38%. Our total managed portfolio stands at $136 billion, made up of a $119 billion loan servicing portfolio and $17 billion of assets under management. We are well positioned to continue adding assets to both portfolios with only moderate increases to headcount, presenting a powerful opportunity to further scale the operating margins within this segment. Net income increased 66% to $38 million this quarter, but perhaps most exciting is that adjusted EBITDA for SAM increased 43% to $105 million. The stability of the recurring cash revenues produced by this segment are hugely valuable to our business model and provide us with a terrific source of liquidity to strengthen our company and create long-term shareholder value. Our corporate segment produces little to no revenue because it includes our functional support groups, as well as the cost of our corporate debt and earn out related expenses. For the second quarter 2022, total expenses for the corporate segment increased $12 million or 43% over last quarter. The largest component of that increase, about $5 million, is the increase in interest expense on our corporate debt. Our term debt is indexed to SOFR, and when we closed the borrowing late last year, we locked the index rate through the end of June. We will see increases in our borrowing costs in the coming quarters as short-term rates rise, but our escrows serve as a natural hedge that I will detail in a moment. During the quarter, we also recognized $1.5 million of costs for acquisition-related earnouts. When we close an acquisition, we estimate the fair value of the earnouts, and as those earnouts are achieved, we adjust our estimates, often resulting in additional expense. Through just six months, the Alliant team has achieved 23% of its earnout target, leading to the majority of that expense recognized this quarter. Our consolidated operating margin this quarter was 22%, and year-to-date is 25%, slightly below our target range of 26% to 29%. This compares to operating margin of 26% in Q2 last year and 29% on a year-to-date basis in 2021. The decrease in operating margins on a quarterly and year-to-date basis is primarily driven by the decrease in operating margins within the capital market segment, but also to a lesser extent by the increased support costs of our corporate segment. We expect our agency lending volumes to pick up in the second half of 2022 as HUD lending picks up and the GSEs deploy their $92 billion of remaining lending capacity. As our agency volumes increase, we expect our operating margin to increase as well due to increases in non-cash MSR revenues from those executions. Rapid increases in interest rates present challenges. However, the $2 to $3 billion of escrow balances we hold in connection with our servicing portfolio provide us with a natural hedge that will stabilize our earnings in this rising rate environment. For context, if Fed funds increases to 3% later this year, quarterly interest income will increase by between $11 million and $15 million over our current Q2 escrow and interest income. That increase will be offset by a quarterly increase of about $4 million in interest expense on our term debt, still providing a net benefit of between $7 million and $11 million in bottom line earnings. This is an important feature of our business model. Sharp increases in short-term rates initially slowed down some transactions, but the long end of the rate curve has stabilized in recent weeks and lending activity is picking up. Most importantly, activity at the GSEs is accelerating as they have 59% of their lending capacity left in the second half of the year. And the combination of elevated escrow earnings and strong transaction volumes in the second half of 2022 will be a powerful driver of our financial performance. The credit quality of our at-risk portfolio remains very healthy. As we did in the year ago quarter, we lowered the loss forecast used to determine our allowance for risk sharing obligations, resulting in a $4.8 million benefit to the provision for credit losses, compared to a $4.3 million benefit to the provision in the second quarter of 2021. Although COVID is still active, the economic impacts from the pandemic have largely dissipated, and we removed a majority of those impacts from our loss forecast this quarter, while offsetting a portion of that reduction by incorporating current macroeconomic conditions into the forecast. Importantly, our credit exposure is limited exclusively to multifamily assets. Despite the broader concerns of inflation and rising rates, the fundamentals underpinning the multifamily sector remain strong due to a lack of affordable single-family homes, continued rent growth, historically low unemployment, and growth in asset valuations over the last several years. Given these fundamentals, we feel very comfortable with the $48 million allowance for credit losses in place to cover future losses in our risk-sharing portfolio. As we look ahead to the second half of 2022, we are confident that we will still achieve our goal of double digit growth in adjusted EBITDA. At the same time, rising rates have slowed the pace of debt brokerage and property sales transactions relative to a robust start to the year. We are still seeing plenty of deal flow, but credit spreads are also tightening on our lending executions to soften the relatively sharp increases in the cost of borrowing over the last few months. For that reason, we slowed the pace of hiring in our core businesses, but continue making strategic hires to support the long-term growth objectives of the drive to 25. We are also adjusting our guidance for 2022 in light of a potential slowdown in transaction activity and tightening profitability, and now expect that diluted earnings per share growth will range from flat to up 10%. Operating margin will range between 24% and 27%. and return on equity will range between 15% and 18%. As Willie mentioned in his remarks, this environment is when our agency lending products have historically stepped in to provide liquidity to the multifamily market, just as they did in 2020 and in the second half of last year. If the GSEs utilize their full lending capacity and credit spreads normalize, we could still achieve our original goal of double digit earnings per share growth, but we are not managing our business with that scenario in mind, and we have taken steps to ensure we have a successful year under any scenario. We ended the second quarter with $151 million of cash on the balance sheet. We have always maintained a strong liquidity position to execute on our long-term business objectives of growth and shareholder return. Our business generates plenty of cash. And although we expect to conserve a portion of that to further strengthen our liquidity position in the coming quarters, markets like this have historically presented us with opportunities to create long-term value for our shareholders. We will continue using capital to add bankers and brokers to cover strategic markets and products in pursuit of our long-term drive to 25 goals and remain confident in our ability to achieve those objectives. During the quarter, our stock reached a level that we felt was undervalued relative to those long-term expectations, and we used $11.1 million of our $75 million board authorization to repurchase 109,000 shares of stock at a weighted average cost of $101.77. We expect to continue buying back shares over the remainder of the year as it represents an attractive use of capital when our stock is undervalued. Yesterday, our board approved a quarterly dividend of 60 cents per share, payable to shareholders of record as of August 18, 2022. Over the last four years, I played an important role in identifying the strategic opportunities that would enable our long-term growth plan. As I settled into my new role, it's been fantastic to see how those recent acquisitions have immediately enhanced our brand, strengthened our business, and brought in the services we offer across the platform. These businesses are already contributing to our top and bottom line growth, and we have only just begun to integrate them into the Walker & Dunlop brand. Our business model is resilient during times of uncertainty because of the strength of our long-term recurring cash flows. Predictable cash flows will enable us to enhance our liquidity position while simultaneously reinvesting in our business. During my 12 years at Walker and Dunlop, markets like this have historically presented us with opportunities to invest in and grow the business when others pull back. Thank you for your time this morning. I will now turn the call back over to Willie.