Q3 2019 Earnings Call
Please standby your program is about began.
Welcome to Walker and Dunlops third quarter 2019 earnings conference call and webcast hosting the call today from Walker and Dunlop its Willy Walker Chairman and CEO . He is joined by Steve Theobald, Chief Financial Officer, and Kelcy Duffy Vice President of Investor Relations today's call is being.
Accordingly, and will be available via webcast on the company's website.
At this time, all participants have been placed in listen only mode and the floor will be opened for your questions. Following the presentation.
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Now my pleasure to turn the floor over to Kelcy Duffy. Please go ahead.
Thank you Barry good morning, everyone. Thank you for joining the Walker and Dunlop third quarter 2019 earnings call.
With me this morning, our chairman and CEO , Willy Walker and our CFO he be about.
This call is being webcast live on our website and a recording will be available later this morning.
Our earnings press release and website provide details on accessing the archive webcast.
This morning, we posted our earnings release and presentation to the Investor Relations section of our website Www Dot Walker Dunlop dotcom.
Besides serve as a reference point for some of what Willy and Steve will touch on during the call.
Please also note that we all references to non-GAAP financial metric adjusted EBITDA during the course of this call.
Please refer to the earnings release posted on our web site for a reconciliation of this non-GAAP financial metric.
<unk> 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, but in the meeting 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 result of new information future events or otherwise and we expressly disclaim any obligation to do so.
More detailed information about risks factors can be that can be found in our annual and quarterly reports filed with the FCC I'll now turn the call over to Willy.
Thank you Kelsey good morning, everyone and thank you for joining us.
The third quarter was one of the most successful quarters and Walker and Dunlops history due to strong financial results.
Record numbers of bankers and brokers hired.
Positive regulatory decisions.
The implementation of technology, and new and innovative ways and the continued progress towards our 2020 goal of January $1 billion annual revenues.
As shown on slide three.
We generated $212 million a total revenues in Q3, 15% increase from a year ago.
Which drove diluted earnings per share a dollar and 39 cents, a 21% increase over last year's Q3.
As Steve will discuss later during a quarter when we added a significant number of bankers and brokers to the platform, we still generated outstanding financial returns due to the strength of our underlying business model.
With over $1 million of revenue per employee.
A $92 billion servicing portfolio generating huge amounts of cash.
And a debt to equity ratio of <unk> 0.3 times.
We feel exceedingly well position financially to continue growing our business.
On the first day of Q3.
JLL closed on its acquisition of HFSA.
The combination of these two competitor firms created an unprecedented recruiting opportunity for Wnd and we took advantage of it growing our sales force by 13% during the quarter.
There are three primary reasons for our recruiting success.
First we recruited a number of talented teams away from a large global real estate services firms in 2018, and those games played a major role and establishing a reputation within the industry that wnd is a great place to work and succeed.
Second with age of not being acquired by JLL and Eastdil secured being spun out of Wells Fargo.
Walker and Dunlops, it's somewhat uniquely as the client focused commercial real estate Finance company with Big company capabilities, you have to touch and feel of a family owned business.
In the client focus world of commercial real estate finance and sales.
That combination of Big company capabilities with small company touch and feel is gold.
And third the culture WMD is very different from many of our competitor firms as we celebrate collaboration and reward exceptional sales performance.
Those three cultural and market factors combined make Walker and Dunlop fantastic place for highly talented professionals to join and be successful.
On the regulatory front the Trump administration is white paper on housing Finance reform.
So with the release of FHLB raised 2020 multifamily GRC scorecard.
Well welcome developments during the quarter.
And then the conservatorship of Fannie Mae and Freddie Mac as outlined in the administration's White paper would be a very positive development for the housing finance industry and Walker and Dunlop.
The 2020, G.S.G. multifamily scorecard announced by the Federal housing Finance agency in September .
Divides Fannie and Freddie with $100 billion each of lending capacity over the next five quarters.
Which as you can see from slide four is up from past annual volumes.
The scorecard, Santa Clara message that I, just say under the new leadership of director Mark Calabria views the capital provided to the multifamily market by the G.S. she's as vital part.
Particularly as part of the solution to the current affordable housing crisis in America.
As you can see on slide five.
The mortgage bankers Association most recent forecast for the size of the multifamily finance market in 2020 is $390 billion.
Implying Fannie and Freddies combined market share will be around 41% if they use all of their capacity.
41% market share in an expanding market.
Provides for volume growth for both Gses.
It also pushes their market share down to levels, where the regulator would like to see them.
The clarity provided by the 2020 scorecard allows walker and Dunlop to continue to benefit from our strong market position and scale with the Gses well also continue to focus on building out other areas of our business that will complement our future growth.
I'll now turn the call over to Steve to discuss our Q3 financial performance in more detail and then I'll come back to discuss our progress towards vision 2020, and how technology is transforming our business Steve.
Thank you Willy and good morning, everyone.
Once again, our unique market position and focused business model generated strong financial performance across the board.
The third quarter results add to our exceptional year to date performance positioning us well to meet our 2019 financial targets.
Told transaction volume for the first nine months of the year was $22.2 billion, a 19% year over year increase led by growth in property sales Fannie Mae and brokered volumes.
We continue to enjoy a macroeconomic backdrop that is constructed for U.S. commercial real estate, particularly multifamily.
Turning now to slide six.
During the quarter, our overall transaction volumes increased by 16% from last year.
Putting record quarters for brokered originations at $3.1 billion up 29% from last year and property sales of $1.6 billion of 83% from last year.
These are the two areas in which we have been heavily investing and you can see the success of those efforts coming through in our transaction volumes.
Our overall GST volume of 3.8 billion in the quarter was down slightly year over year as an increase in Fannie Mae volumes was offset by decline in our Freddie Mac volumes.
Our high volume picked up in the quarter to $281 million up 42% from Q3 2018.
The combination of higher volumes with bad in Hot and an increase in the margin on our Fannie Mae business. During the quarter resulted in a gain on sale margin of 162 basis points and increased from 150 basis points last year.
I wanted to spend a few moments talking about what we see has the potential impacts of the new GFC scorecard on our financials going forward.
To begin with the clarity over what the market opportunity is for Fannie and Freddie over the next five quarters is welcome.
With $200 billion of combined lending capacity through the end of 2020, the geographies will continue to be the dominant providers of capital to the multifamily industry.
And this will benefit wnd as one of their largest partners.
You wouldn't know what from a strong Q3 financial results, but we did see a significant slowdown in Fannie and Freddies lending volumes in September as they waited to see what the new FHLB scorecard with gray.
And it took them most of October to ramp their lending back up and start with winning business again.
With both GST is out of the market for September and October we expect to only originated around $1.5 billion of loans with each geography in Q4.
Well that is below our typical Q4 lending volume for Fannie and Freddie given the contracted the new scorecard.
Slow Q4 will simply pushed more capacity into 2020.
Both geographies are fully back in the market today and given the robust pipelines, we have across our entire lending platform. We're very optimistic about our outlook over the next five quarters.
I would add that even with light GST volumes in Q4, Wnd should still finished 2019 with double digit growth in revenues and earnings as we established at the beginning of year.
Revenue for the quarter was up 15% from Q3 $18 million to $212 million, bringing year to date total revenues to 600 million up 18% from the same period in 2018, driven largely by the increase in transaction volumes year over year.
Our year to date financial metrics are highlighted on slide seven.
Diluted earnings per share was $1.39 for the quarter up 21% from the same period last year, while year to date diluted EPS was $4, an 11 cents up 15% from last year as we remain on track to deliver double digit EPS growth in 2019.
As you can see on slide eight.
The servicing portfolio was at $91.8 billion at September Thirtyth and continues to fuel growth in servicing fees, which contributed a $159 million to year to date revenues, an increase of 8% year over year.
Our portfolio now includes over 7000 loans and continues to exhibit strong credit fundamentals.
During the quarter, the average LTV and debt service coverage ratio for new loans was 67% and 1.47 times, respectively, consistent with the historical healthy levels sort of characterize this commercial real estate cycle.
[noise] adjusted EBIT da remained strong in the third quarter at $55 million down slightly from 58 million Q3 18 as growth in cash revenues was outpaced by growth in expenses, primarily the 15 million dollar year over year increase in personnel costs, which was driven largely by increased commission expense.
The 11 million dollar increase in noncash MSR revenues in Q3 did not benefit adjusted EBITDA in the quarter, but will contribute to higher cash servicing fees and therefore, adjusted EBITDA growth in future periods.
Year to date adjusted EBITDA was 184 million up 15% from the first nine months of 2018, driven by our strong growth in cash revenues.
We achieved a third quarter operating margin of 28%, bringing year to date operating margin to 29% well within our annual target range of 27 to 30.
As Willy mentioned, we had amazing success in recruiting new original origination teams into our company during the quarter.
Expenses related to recruiting and Onboarding, our new recruits totaled approximately $2.5 million.
Three personnel as a percentage of revenue was 44% up slightly from 43% in the third quarter of last year, even as we have added 115 employees to the company over the past 12 months.
Your today 2019 personnel as a percentage of revenue was 42% up from 40% in 2018, but within our historical range.
We ended the third quarter was $66 million of cash on the balance sheet and an additional 138 million being used to fund agency loans, rather than borrowing on our warehouse lines, bringing our total available cash to $204 million.
During the quarter, we used 2.7 million to buy back 50000 shares, leaving us with 45.8 million of board authorized repurchase capacity.
Our strong cash position and financial results continued to support our quarterly dividend payment yesterday, our board of directors authorized a dividend of 30 cents per share payable to shareholders of record on November 22nd 2019.
We continue to grow our overall capital base, while still generating strong returns with a return on equity of 18% for the third quarter and 19% for the year to date period right in the middle of our high teens to low 20% target range.
Our third quarter and year to date financial results are reflective of both our competitive advantage in the market today as well as our profitable business model, which continues to generate the cash we are investing in future growth.
The recruiting success achieved this quarter sets the stage for a fantastic 2020, and beyond and we aren't even close to done yet.
With that I'll now turn the call back over to Willy.
Thank you Steve.
The Q3 and year to date financial results that Steve just ran through.
Illustrate the growth Walker and Dunlop has achieved by remaining focused on our long term mission of creating the premier commercial real estate Finance company in the United States.
Vision 2020 was established in 2016 is a roadmap to generating $1 billion, an annual revenues by the end of 2020.
Hiring and investments we've made over the past several years, including the 22 talented bankers and brokers, we hired in Q3 alone.
We'll provide the human capital and sales growth to achieve vision 2020.
Our revenues for the 12 months ended September Thirtyth were $815 million.
Adding $185 million of incremental revenues over the next five quarters will be challenging.
But we have brought on the people and made the investments to have a real shot at achieving that goal.
The cornerstone of vision 2020 as outlined on slide nine.
Is continuing to scale, our debt financing platform to originate $30 billion to $35 billion of annual loan volume.
While we were already in market leader with the Gses in hard when we established vision 2020.
We knew there was a large opportunity to scale our debt brokerage business across the nation.
And we have done just that.
Growing our brokered volume from $4.2 billion in 2000 $16 billion to $9.3 billion over the last 12 months.
Scaling our debt brokerage platform has helped to fuel growth in our overall mortgage banking volumes, which were $17 billion in 2016 and have grown to $27 billion on a trailing 12 month basis.
Fantastic, 59% increase over 2016.
Given the additions to our debt financing team this year and the overall macroeconomic environment, we should reach our goal of $30 billion to $35 billion by the end of 2020.
The second component of vision 2020 was launching and growing a multifamily property sales business to annual volume of $8 billion to $10 billion.
We ended this business in 2015 with the acquisition of Engler financial.
And over the past four years, we have added 28 property sales brokers across the country and grown our sales volume to $4.4 billion over the last 12 months.
Our growth has been dramatic and impressive.
And with 50% of our current team having joined US just this year, we have visibility on brokering $8 billion to $10 billion or the multifamily properties in 2020.
The third pillar of vision 2020, and clearly the most lucrative is building 100 billion dollar loan servicing portfolio.
For the past several years, we've added an average of $10 billion of net new loans to our servicing portfolio on an annual basis.
And with the portfolio at $92 billion today, we are within striking distance of our 100 billion dollar goal.
Wnd is now the seventh largest commercial loan servicer in the country.
And with an average servicing fee of just over 23 basis points and average loan duration of just under 10 years, we have an asset base and cash flows that may wnd look more like a lot more like an asset management firm then a mortgage bank.
Crossing the 100 billion dollar Mark in 2020 will be an amazing milestones.
And provide us with long term prepayment protected cash flows that we can continue to reinvest in our business.
The final piece of vision 2020 is to build an eight to 10 billion dollar fund management business.
This is the one component of vision 2020 that we are unlikely to achieve.
Well, we made great progress over the past 18 months in entering and scaling this business.
The acquisition of JCR capital in 2018 brought with it around $750 million and assets under management as well as a registered investment advisory platform to raise new funds.
We ended Q3, 2019 with $1.6 billion and assets under management at JCR and in the Walker and Dunlop Blackstone mortgage Trust joint venture.
And given the momentum, we're seeing and raising JCR fund five.
As well as a new separate account with a longstanding walker not partner.
We will have established a good sized fund management platform at Walker and Dunlop by the end of 2020 with the opportunity to reach our goal of eight to 10 billion in a U M. In the following years.
Well, we focused on achieving vision 2020, we're already setting building blocks in place for our next five year strategic plan.
We have had an amazing track record at Walker, and Dunlop of establishing and achieving five year be hags.
The AG stands for big Harry Audacious goals, a term established by Jim Collins and his legendary Buck built to last.
One component of Wmds 2025 be had lend variably be technology.
Over the past 18 months, we've made significant strides in driving efficiencies in our business processes.
As we've implemented technology to become more efficient.
We have also aggregated large amounts of data that make us more informed in our credit underwriting and more insightful to our clients.
We've also built the database that combined loan details with operating data from our servicing portfolio.
That allows us to accurately project property performance on a borrowers entire portfolio.
Even in cases, where the borrower may have never done alone with Walker and Dunlop.
Since we started using this database a year ago. We have originated 65 loans for 39 different sponsors totaling over $1.9 billion of new loan activity.
We have just scratched the surface of what we can be achieved through our technology and data analytics investments.
And we're very excited about how these initiatives will continue to change the way our clients VW, Andy and the inside our bankers and brokers can provide.
Before I close our prepared remarks, I'd like to loop back to what I said at the beginning of this call.
Q3, 2019 was one of the most successful quarters in Walker and Dunlops history due to our financial performance recruiting success.
Regulatory clarity technological implementation and continued progress towards our long term strategic goals.
We've had plenty of quarters with one or two those areas showing fantastic performance, but rarely all five and that is extremely exciting.
Two weeks ago for the first time ever we brought together our entire company to hear from our executive team and outside speakers participate in training sessions and celebrate our collective success.
We held a meeting in Dallas, Texas, because as our President Howard Smith said, when we do things that Wnd, we do them big.
The all company retreat was a wonderful way to welcome the new employees, who joined US in Q3, and underscore what makes Walker and Dunlop such a great place to work for our 811 employees.
One of our outside speakers with Bill Emerson, who for 15 years as CEO of Quicken loans transformed quicken into the largest single family mortgage originator in the United States.
While consistently being ranked a great place to work with exceptional customer service.
Bill listen to a number the WD presentations before he spoke and encouraged wnd to think big and continue down the technological innovation path that we have started to implement.
They'll didnt need to tell anyone in the audience to think big but his insights after having scale quicken at what he described as quote the intersection of culture and technology Unquote, we're incredibly informative and appropriate given where wnd finds itself today in executing on our long term growth plan and mission to become.
Premier commercial real estate Finance company in the United States.
We will continue to recruit exceptional bankers and brokers to Walker and Dunlop leveraging off our position as a company with big company capabilities, yet the touch and feel of the family owned firm.
We will continue to drive towards vision 2020 to achieve our financial goals and grow the services, we provide to our loyal and fantastic customers.
And we will continue to develop and deploy technology to make a smarter more efficient and more insightful and all we do.
I'd like to thank my Walker and Dunlop colleagues for all you do to make our company so great and congratulations on a fantastic Q3.
With that I'd like to ask the operator open line for questions.
The floor is now open for questions. At this time, if you have a question or comment Please press star and one on your Touchtone phone if at any point. Your question is answers you may remove yourself from the Q by pressing the pound Keith again, we do asset while you pose your question you pick up your handset right optimal sound quality.
And we'll take our first question from James Jade Rahmani with KBW. Please go ahead.
Thanks, very much for taking my question.
Just in terms of the 2020 commentary you provided with respect to the MBA forecast of 390 billion that implies about 9% growth is that what you're.
And in certainly expecting for the overall market.
Jade I mean, we look at those numbers as you know Freddie Mac also gives their estimate of market size as well.
We we don't have an internal economists group to make our own projections as far as the overall market size.
But given the velocity of the market today.
Without any external shocks from a macro economic standpoint, I think thats, probably a pretty good calculation that the M&A has no reason to not think it's a good number.
And have you dug into the drivers of that increase.
What would be driving the growth at this point in the cycle given cumulative multiple years of extremely strong production is it new deliveries is it construction loans.
Is it.
Revised what what or what's driving that level of growth.
So there were I believe the MBA had projected 320000, new units delivered in 2019. So you have all that those deliveries, which by the way have been absorbed.
Extremely well by the market.
And then you also just have a lot of capital chasing deals and therefore transaction volumes I think are underpinning a lot of that number jade. So theres a core refinancing number in there which by the way we do not have a significant volume of refinancings in our portfolio for 2020.
But there is a core refinancing volume and Theres a lot of new M&A activity of of trades and investment sales.
And given the growth of our investment sales platform.
We look to be a big beneficiary, both on the investment sales side as well as on the lending side.
And in terms of the recruiting environment.
You stepped up recruiting it seems just based on press releases meaningfully in the quarter and I believe this is in advance of the FHLB scorecard. So just wanted to get your some insight into your thinking about what gave you the confidence to ramp up.
Cruising carry those personnel costs and thinking about the dynamic of potentially having the growth brokered and.
Potentially even the private label CMBS conduit business, which could have lower margins than the agency business.
If you look at the recruiting we did in the quarter Jade.
The majority of the.
Bankers and brokers that joined us where in our investment sales business and our capital markets business. So the.
We have been scaling those two platforms as both Steve and I mentioned during our prepared remarks.
And the growth of those two business lines has been.
Outstanding.
And yet at the same time, there's still a huge amount of growth for us to capture in both of those businesses. So the recruiting we did for instance in the investment sales space.
All of those hires are putting brokers in new geographies. So we added teams in the quarter in places like Southern Florida.
We added another banking team in Houston.
We added investment sales team in Chicago, we added and investment sales team in Portland, Oregon added investment sales team in San Diego, So, we're adding talent to the platform in geographies, where we've not had coverage in the past and so all of that is not only.
Great to expand into those geographies, but to some degree it's it's a 100% accretive because we don't even have bankers and brokers in those markets. Prior to those hires. So all of that is just very net beneficial to the underlying platform.
Where we don't have an existing.
Operation and today, we do.
Thanks, very much for taking the questions I'll get back in the Q.
Our next question will come from Steve Delaney with JMP Securities. Please go ahead hi, good morning. Thank you good morning, and congratulations on the strong quarter.
Going back for just a minute to the G.S. ease back away in late August and September .
Willy in your mind was that.
Close to 100% cap driven and the momentum in their volumes.
Or could it have also possibly been due to the rate volatility we were saying I mean, they yes.
Apps or an issue, but also based on their pricing loans they need to know what the execution is gonna be in the securitization market as well. So im just curious if you have any thoughts on that or is talk to anybody at the G.S. sees it kind of gave you some clarity on on why they reacted so cautiously.
Thank you.
Good morning, Steve and thanks for being on the call.
Sure.
I would put forth to you that it had very little to do with rates and every value.
Annual volumes and.
Two things one trying to make sure that as the regulator under new director Mark Calabria was defining the 2020 scorecard that they were not.
Doing volumes that would make the.
The FHLB and the regulator put a put a downward cap on their 2020 volumes. So I think both of them. We're running at a pace up until August there was going to put them into a number well north of $75 billion of annual origination volumes, each and I think they both felt that if they continued at that pace. If there was it.
Real chance that the regulator would put in a.
Downward revision to the caps for 2020, so they both hit the brakes basically saying, we're not going to go over that number and we're going to stay at that number for 2019.
And I would say to you as well once they put on the cap the brakes and then the regulator came out with the scorecard.
What we've seen before is that neither Gee I see no lender can just quarter SAP them fingers and come right back into the market.
And as Steve said in his prepared remarks, both of them are right back in the market and the business, we're doing we love and they're both playing there commensurate role if you will in the markets today, but it took a more I'll get back up and get going.
But the clarity the new scorecard is provided has been fantastic because we know the role that they're going to play going forward and I would also add that it is the first scorecard under director Calabria. So this was the moment, where director Calabria would establish the role he wanted to see Fannie and Freddie play in the multifamily space and it was a very.
But if scorecard.
That's helpful. Thanks. Thank you are you in Steve for given the clarity, but you gave us on Fourq you because it was it was unclear to us how much how much of that impact would have been in Threeq and Fourq, you and and I think we have that answer now, but rolling out to 2020 100 billion I mean, I think we're the market. We all took the new caps infrastructure is being at it.
Proves meant.
Under the under the old structure and 100 billion.
Over five quarters sounds like sounds like a lot, but also we can't overlook that the requirement at 37, and a half percentage that needs to be classified affordable. So as you look at your mix of business now.
In terms of larger loans and newer projects that may not be deemed affordable.
His case could that be a particular.
Potential a barrier for you and also in terms of borrower demand for larger loans that wouldn't be considered affordable could we still get a little tight next year in that regard.
Thanks.
Yeah on the on the affordable side Steve.
Both Fannie and Freddie.
Said, both publicly and if you will personally.
That they should have no problem getting the 37.5% affordable requirement.
Given their historic business mix. So it's it's great that the regulator has them focused on that market segment that they will continue to provide capital to that market segment, because it is very much needed.
Horse as it relates to.
Any challenges as it relates to their lending mix, we've heard no.
If you will concerns or warning signs from either of them that that's going to be overly challenging.
Then as it relates to larger loans.
As you as you well know we've had.
Our history, we've done sort of mega portfolios, but our average loan size. It w. Andy is somewhere around 18 or 19 million box. So actually some of our large competitors such as JLL NCB. They they're sitting there doing 50 and $60 million loans I would say that there might be a moment, where fannie and Freddie do shy away.
From those larger loans, a little bit and the and the class a stuff they will still doing them, but they might shy away from them a little bit for us, which is more of a middle market from that does institutional business.
I don't see any issues as it relates to our overall deal flow and not finding a home for those to those financings.
And I don't think Willy.
Yes, Steve specialist, yeah, sorry with respect to.
Wnd, where we are extremely active in the affordable space ourselves.
Right.
One of the largest manufactured housing community lenders with the agencies.
Continued to do that so I think will we will certainly be contributing.
Our share of that 37.5% overtime.
Got it and Steve one for you.
On page three the trends, obviously all look great.
Year over year up 15% to 20%, but if you.
EBITDA surprisingly down 6% I apologize if youve explained that but could you remind me what that is or is there one particular item in there that caused that decline.
Yes, I think Steve we.
This particular quarter, we obviously had a significant increase in MSR income.
Okay.
Which doesn't count towards EBITDA, because we back.
Cash revenue.
And if you look at just the the amount of hiring we did in the quarter plus the.
Commission expense that we paid out this this quarter.
Given the success, we had on the volume side those cash expenses.
Essentially exceeded our.
Cash revenues this particular quarter.
Got it got it thank you both for the comments.
Thank you Steve.
Our next question will come from Henry Coffey with Wedbush. Please go ahead.
Good morning, and let me, let me add my congratulations on a great quarter.
Well, we look at profitability metrics I know you didn't mention you know that emmis of that you're servicing fees are sort of coming down as some of the older product matures.
About where where that gross number will be for the next few quarters around 23 basis points.
Yes.
Henry it's super hard to predict obviously.
Not knowing what the future is going to look like but I, we had seen decline in that average servicing fee rate over the last few quarters and that certainly slowed in Q3 I mentioned this in my remarks that we did see an increase in our.
Fannie Mae servicing.
Margins this past quarter.
I think a function of.
Yes, a little bit less competitive dynamic in that space resulted in us seeing an increase there I think you're still seeing.
Servicing fees from 10 years ago rolling out of the portfolio.
And 10 years ago.
Yes, we were still not long removed from the great financial crisis and.
That was a period of time when there wasn't much lending activity going on outside of the agency. So.
Yes that dynamic still exists I think the other thing that is still occurring is the the mix. The overall mix of our servicing portfolio is changing as we're doing more brokered business with life insurance companies that servicing is yes.
Being added to our portfolio in many cases.
And those are coming on at lower than our average servicing fee rate.
Thank you and then.
I know you sort of just one over this but basically we're talking about it in the fourth quarter not dramatic.
Fall off in Fannie and Freddie volumes, but basically going to 3 billion.
Is the.
Brokered business turning out to be more robust going into year end with rates where they are.
Should we be altering our total origination estimates all that much I know this could have a more more brokered less Fannie Freddie could have an impact on GAAP earnings, but then be equally positive to EBITDA. So what should we be thinking about.
We've got the to the 3 billion dollar number is there an offset from the brokerage side of the business.
And then obviously the expectation would be for a bigger than expected in March we am I thinking about all this the right way.
Yes, Henry I think.
Without obviously, giving guidance around origination volumes for Q4, I think yeah. We.
While those well be Fannie Freddie volumes that we discussed in the call for Q4 are below what we would typically you expect to see.
A fourth quarter.
We're obviously still pretty optimistic about.
The future here the markets are still very good.
Jay Das specifically about the MBA forecast.
So we clearly are still seeing strong financing volumes.
Out in the marketplace.
Jumping on yet Henry I just jump in on that just quick first of all were one month into Q4.
So we look at a pipeline and we're trying to tell the market about where Fannie and Freddie were for September and October which has driven our pipeline to where it is today and we're giving people some insight into what we think Q4's can look like there I think big the Q3 numbers from a capital market standpoint show the growth that we are experiencing that business line and so.
So.
I would lead to your question, yes, our capital markets business has been growing.
Significantly and there is nothing in the market that would say that it should not continue to grow.
And so.
Just under a lot underscoring what Steve said, the overall financing market in property sales markets today are transacting.
At a at a great pace.
Very healthy environment, we're not the only company in our industry that is reporting good earnings this quarter and I think a lot of people see tremendous opportunity going forward I wouldn't say there with the hiring we have done we positioned ourselves exceedingly well to have increased volumes across all of our lines in 2000.
And then 20 in 2021 and that Steve pointed to in his prepared remarks, that's what really gets exciting is when you take the hiring we didnt Q3, and you played into the personnel for 2020 in 2021, we've we've hired a lot of growth in Q3 of this year and that's great.
Just on a bigger picture.
When we went through the S.A.J.
Right paper.
We've got other comments I think he's talking about a $20 billion.
Criteo or something with the GNC, but as this business evolves.
Is there a tweener market developing something between the GE as he's in the insurance companies.
Hi, there people that you know picked up that white paper and said Hey, we could build the multifamily business.
Inside of this.
Or is it just you know that was nice let's just go on with business the way it is.
So if you look at the $390 billion market size expectation from MBJ for 2020, and you take that Fannie and Freddie should do what 160 billion.
Combined between the two of them at 80 billion. Each that's still leaves a 202 hundred plus billion dollar market for other capital to meet in the multifamily space. So there were 3220 distinct lenders, who provided capital the multifamily industry last year, Henry and Walker and Dunlop was the fifth.
Barges and so I think the real question, you're asking is is there an opportunity for Walker and Dunlop to be providing capital to that other $230 billion, that's going to go out to multifamily in 2020 and the very direct answer is yes. So we've entered the small loan space with the agencies we can.
Broaden that out.
We have our joint venture with Blackstone.
To be able to originate multifamily bridge loans.
We have our capital markets group, which is sending loans across to life insurance companies banks and CMBS.
We have our own CMBS group that is table funding CMBS loans, and we are consistently looking for opportunities to either find bankers and brokers, who can deploy capital or raise capital at our new fund management business that can be deployed into the market. So we see a lot of opportunity in providing capital to that other part of the market.
Fannie and Freddie aren't covering currently.
And but anything for Fannie and Freddie its steady as she goes and there's not going to be the emergence of either third GFC or GST like structure.
Or the merger of the Fannie Freddie business or.
I mean, it seems like GE as see reform is kind of in urban myth right now in the markets are just taking care of the business themselves.
I would not under estimate.
Director collaborators desire to get Fannie and Freddie out of Conservatorship, and so there's a lot of focus and a lot of.
Time being spent on achieving that mission.
And the second thing I would say is as it relates to emerging Fannie and Freddie and the multifamily space.
I think they has been declaratory and saying that they greatly appreciate and want to maintain the two securitization models and distinct the securitization models that Fannie and Freddie have for multifamily loans. So I see the merging of those two enterprises together into one common platform as exceedingly remote.
Great. Thank you very much.
Henry.
Yes.
Our next question will come from Jason Weaver with Compass point.
Please go ahead.
Hi, good morning, and thanks for taking my question.
Just trying to close then on the asset management outlook as it pertains to you in gold.
Can you tell the targeted side.
On five and what other plans are in the pipeline for further fund.
Wanting Jason Thanks for joining us we.
We haven't we haven't we're out marketing JCR fund five can can I tell what the cover is on that.
So with the target, yes, so we're looking to raise $250 million, Jason into JCR fund five and.
Looking at a first close quite soon and have some great commitments for that fund a and then as it relates to how we continue to grow the business what comes on fund six and do we go out in a acquire other.
Either fund platforms or actual.
Portfolios.
That is still TBD, but we wanted to kind of give investors an update on his we established that goal back in 2016 with no fund management business I took the 16 and 17 and a little bit of 18 to find a company to acquire.
We're thrilled that we've acquired JCR and have a really solid platform, but achieving that $8 billion to $10 billion goal.
Barring some opportunity that we don't see right. This moment, we probably don't achieved that goal by the end of 2020, but as I tried to say we've got a great platform that we can start to build upon and given the JCR had 750 million of 81, when we acquired them and we're now at 1 billion sex with the combination of our Blackstone business as well as what's at JCR.
The growth is is significant.
Alright, thank you.
The same subject regarding 2020 goals do you have any expectations of a number of new brokers, you're looking to add in investment sales near term.
We haven't we haven't.
We haven't put that out there I would just say that the the market is in no way settled right now.
So there is still a significant amount of opportunity for us to continue to build off of the Q3 momentum in bringing on additional talent to our platform as I tried to underscore in my comments.
We really do have a very unique market positioning today and that is paying dividends with people who want to really be a part of the growth of affirm that as big company capabilities, but this touch and feel of a small company.
And so I think that we will continue to benefit from our market positioning and also benefit from the recruiting we've done because every time, we add someone to the platform and they joined Wnd and they see how productive they can be on in a company that is such a great place to work that momentum just builds upon itself.
Okay. Thank you I'd also say congratulations on another strong quarter.
Thank you thanks, Jason Thanks for being on.
Our next question is a follow up from Jade Rahmani with KBW.
Thank you for taking the follow up in terms of the affordable component of WD business does it line up what the 37.5% targets that they affect your fast put out.
In what sense lineup, we have as Steve said Jade we.
We're very big originator of manufactured housing, which.
Typically qualifies as affordable we have our HUD business, which you saw some pretty significant growth in the quarter and that that that is all affordable.
Business that we're doing on the HUD side, and and many opportunities there come both into hot as well as into Fannie and Freddie and.
We also have specific bankers in the affordable space.
Who thank a lot of the affordable housing developers and owners so.
I guess, if you are saying do we have bankers and brokers, who focus on that segment of the market, yes, very much so and so we see big opportunity. There I would also say that are small.
Balance lending operation as well qualifies in the affordable space and Weve as you know brought on a team about a year ago now and they've hit the ground running in 2020, 2019, and we see an opportunity for significant growth there as well.
I guess the question is.
37.5% of WD is GFC origination volumes in the affordable category.
Yeah.
I don't have enough that my head.
I'm looking.
And across table and don't have a week ago now we.
Don't know the answer that question Jay Okay.
In terms of the Fourq you outlook.
Do you expect should we expect an increase in gain on sale margins as a result of the pullback that the Gses had.
I think they widen their pricing and that could be a benefit to gain on sale margin.
Or would gain on sale margin decline.
From Threeq levels, because of the mix shift toward more brokered business.
So.
As you as you know we don't what we've given as a range there in the range has been 150 to 170 basis points.
As you saw in Q3, we came in at 162, which was up 12 basis points from Q3 of 2018.
And I would not read anything more into it in the sense that we didnt change the range Onesixty. Two on Q3 is a very healthy number and Steve Didnt modify the range of 150 to 170. So if you're if you're building a model I wouldn't I wouldn't go outside of that range for Q4.
But to exactly all the points you just put in there there are a lot of moving parts here as it relates to what percentage of our volume as agency, whereas the pricing on specific agency loans and then what's the volume on the the non agency brokered volumes. So the range is 150 to 170, we haven't changed it and so wherever you want to pick your point in that range.
You're you're probably somewhere within.
You know very close to where we'll be.
Okay, just technical question on the Fannie Mae risk sharing side.
In terms of capital that you have to post.
That represents the first 5% of loss that.
You would eventually have to absorb if there were losses is it just the pledged securities.
That you post, which I believe is around 120 million.
That's that's right Jade I mean, there our minimum net worth requirements and minimum liquidity requirements associated with the the business but.
The specific set aside.
Is that pipe security account, which is essentially advantage collateral against our.
Guaranteed.
And is there any risk of that requirement increasing.
And what the FHLB is considered.
This is a.
There's a provision in the Fannie documents that they can look at it you know at least annually to assess.
To my knowledge Theres no move to increase those requirements at this at this point.
Okay.
Right.
Is it a risk it's always a risk, but there's nothing happening.
Right now to suggested that risk is happening and with the with the losses or lack thereof. In this space I'm hard pressed to think that Thats, a hot button issue for either the regulator or if any at this point.
Okay fair enough.
We talked about just real quick Steve gave the data point, our average LTV in Q3 was 68%.
And our average debt service coverage 1.47 times in our Q3 lending book.
We're not out as over our skis, nor are any of our competitor firms as it relates to the loan to they're putting out with Fannie or Freddie at this time, yes, if anything given the loss history I would argue that we're way over collateralized at the moment.
In terms of M&A Aston get asked about that.
Hentschel mergers acquisitions for Walker Dunlop and I was wondering if you think it could ever make sense to combined with the retail or elect a re designation, which arbor Realty one of your smaller competitors has.
So I'd say a couple of things first of all as it relates to combinations. We clearly have been the net beneficiary of of our size and scale in this marketplace given the HF JLL merger and whats happened after that so the idea of.
Have you know, we're very well positioned in the market today Jade in our current form in size.
As it relates to a mortgage riet, whether it be a public or private.
Right that would be a source of funding that you know we would be able to use very effectively.
We have clearly in the past looked at that as something that we might do.
Do.
So who knows I mean in the sense that we're constantly looking for the ability to raise additional capital and given our success at creating a platform to deploy it.
But it but I think to be clear that says we would love to manage a read.
As opposed to.
Transforming our company from a C corp. into a read Jade.
I think as we've looked at this.
On multiple occasions in the past and I think.
Two things that.
Don't really works out well for us one I think.
A not insignificant amount of our revenue is not good read income.
So you wouldn't gain all of the tax efficiencies.
That you might as read and secondly.
Our success has been.
Driven by the fact that weve been able to reinvest our capital into future growth of the company and obviously in a read model your dividending out all that capital to shareholders and having to either borrow or raise new equity in order to continue to grow and.
That's just not a model that we think is.
Right one for us over the long run.
Well there ever be a consideration of carving out some portion of the MSR.
Portfolio, which is very real like in terms of consistency of cash flow.
And contributing that to restructure.
We've looked at that in the past.
I think given the requirements of the.
Agencies.
That's not really feasible for us unless you become a read.
And then just lastly, I guess a related question in terms of the platform.
Have you or would you consider property management or other landlords centric services as a way to create a deeper touch points and potentially leverage off the network that you've built with those relationships.
In order to also diversify the company's revenue streams.
Yes, I would say never say never but that is clearly not in what our mission statement says today, we want to be a commercial real estate Finance company. We are commercial real estate Finance company, we want to be the Premier one and those are real estate services and we have been very definitive in saying we are.
Or not or real estate services company, we are real estate finance company. So.
All areas that we've looked at in the past.
All the.
Interesting as it relates to customer touch points, but we feel really good strategy and the people we've added to the platform and our growth opportunities in our given space now for the next several years.
So I'd reiterate never say never but thats clearly not the strategy today.
Thanks, very much for taking the questions.
Thank you Jay.
And there are no further questions at this time, so I'll turn it back to speakers for closing remarks.
Great.
Fantastic Q3, many thanks to all of you who joined US on the call. This morning, and I Hope you have a great day.
Right.
This does conclude today's program. Thank you for your participation you may now disconnect.