Q4 2019 Earnings Call
Welcome to Walker and Dunlops fourth quarter in fiscal year 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 recorded and will be available via webcast on the company's website.
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It is now my pleasure to turn the floor over to Kelcy Duffy.
Thank you very good morning, everyone.
Thank you for joining the Walker and Dunlop fourth quarter and full year 2018 earnings call I have with me. This morning, our chairman and CEO, Willy Walker and our CFO.
This call is being webcast live on our website 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 the website Www Dot Walker Dunlop Dot com.
Besides serve as a reference point for some of what Willy and Steve will touch on during the call.
Please also note that the all references to non-GAAP financial metrics adjusted EBITDA during the course of this call.
Please refer to the earnings release close at our website 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 what you're not historical facts may be deemed forward looking statements in the meaning of the private Securities Litigation Reform Act of 1995.
Forward looking statements describe our current expectation and actual results may differ materially.
Earned Dunlop is under no obligation to update or alter our forward looking statements, whether as a result, a new information future events or otherwise.
Expressly disclaim any obligation to do so more detailed information about risks factors 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 and good morning, everyone.
The fourth quarter of 2019 capped off another extremely successful year for Walker and Dunlop.
As we delivered strong financial results, while investing heavily in new banking and brokerage talent.
Along with new business lines and technology.
We added 26 bankers and brokers during the year.
Expanding our sales force by 16%.
And generated record lending and brokerage volumes.
We acquired a technology company in Q1 that has become the cornerstone of new products and services for our clients.
And we continue to invest in expanding our service offering and the asset management and appraisal businesses.
As we begin 2020, and a new decade for Walker and Dunlop.
We feel extremely well position to continue expanding our service offering and brand as we become the current premier commercial real estate Finance company in the United States.
We generated a record total transaction volume of $9.8 billion in the fourth quarter.
This growth was led by our debt brokerage and multifamily property sales businesses.
Two areas in which we have made significant investments over the past few years.
Record loan and sales volume in the quarter generated diluted earnings per share of a dollar and 34 cents and adjusted EBITDA of $64 million.
It is wonderful to see such strong profitability in a quarter. When we knew our agency lending volumes would be down and we were carrying the cost of all the new banking and brokerage talent that we hired during Q3.
As shown on slide three for the full year, we generated $817 million of total revenues up 13% from 2018.
Diluted earnings per share increased 10% to $5 in 45 cents to.
The fifth time over the past six years that our team has delivered on our guidance of double digit earnings growth.
We grew adjusted EBITDA by 13% to $248 million, reflecting the growth in both origination fees and servicing income.
If you turn to slide four you can see that during 2019, we added bankers and brokers across the country and entered several new markets.
We have carried our 2019 recruiting success into the new year.
Adding a multifamily property sales team in Austin in early January and acquiring two exceptional mortgage banking companies in New York and Ohio, just last week.
The team we added in New York is particularly exciting and something of a game changer for our debt capital markets business.
Well, we have seen tremendous growth in this business over the past several years as highlighted by our record volumes in 2019.
When it comes to Mega transactions for the very largest commercial real estate owners, we have generally only been competitive financing and selling multifamily assets.
The New York team that we brought on last week has done billions of dollars a financing on office retail and hospitality assets for some of the very largest commercial real estate owners.
Coupled with the great team, we brought to Walker and Dunlop in 2017 with the acquisition of Deerwood real estate capital in Northern New Jersey.
Presence in the Greater New York Metro takes a big leap forward with this addition.
The investments we've made in our multifamily property sales business over the past several years drove record sales volume of $5.4 billion in 2019.
We more than doubled the size of our team during the year positioning us extremely well to reach our 2020 goal of more than $8 billion in brokerage sales volume.
Our 2019 total debt financing volume was $27 billion.
Led by 23% growth and our debt brokerage business to record $10.4 billion.
As you can see on slide five.
We had another very strong year with the GE Etsys moving up in the league tables to finish the year as Fannie Mae's largest multifamily lending partner and Freddie Mac's third largest partner.
Since 2012, Walker and Dunlop has either been the number one or number to Fannie Mae DUS lender.
And the number three or number for Freddie Mac <unk> cheese go lender.
Every year for eight years.
Over that period of time due to industry consolidation.
The tying a property sales with financing by the global real estate services firms.
And the timing of construction and balance sheet financing with permanent financing by the banks.
Some of question, whether WD could stay at the top of the league tables.
Yeah at eight years later, we're not only still at the top of the league tables with Fannie and Freddie, but we have built a scaled multifamily property sales business.
And our using our balance sheet and joint venture with Blackstone mortgage trust to effectively compete with banks.
We have a number of emerging businesses that are growing very nicely.
Our Blackstone joint venture had a terrific year originating $436 million of loans and furthering our partnership with the largest owner of commercial real estate in the world.
Our asset management business, including JCR capital.
Ended 2019, with nearly $2 billion of assets under management.
We remain very focused on continuing to raise new funds that JCR that can be used by our bankers and brokers across the nation to meet their clients financing needs.
In the small multifamily loan origination business. We finished 2019 as Fannie Maes number four lender and originated $145 million of loans.
The small loan multifamily market is enormous.
In 2019 was a fantastic start for Walker and Dunlop in this space.
And finally, we launched a prize our new appraisal company in partnership with GE API.
We're offering the market if I read a compliant multifamily property appraisal and under five days when the current market takes two to three weeks.
We're extremely excited about the price business not only for the growth and future revenues it will bring to Walker and Dunlop.
But for the exciting ways. The a price technology can help our core lending and sales businesses and our customers.
As shown on slide six we ended the year with our loan servicing portfolio just over $93 billion.
With a weighted average servicing fee of 23 basis points and an average loan life of nearly 10 years.
The servicing business generates extremely consistent and high margin revenues.
While also keeping Walker and Dunlop in constant contact with our customers over the life of the loan.
We're very focused on completing vision 2020, and generating $1 billion, an annual revenues through the growth of our banking brokerage servicing and asset management businesses.
We invested heavily in 2019, and new talent businesses and technologies that not only help us achieve vision 2020, but your position Walker and Dunlop for continued growth for many years to come.
Ill now turn the call over to Steve to talk through our quarterly and full year financial performance in more detail Steve.
Thank you Willy and good morning, everyone.
By all accounts 2019 was a phenomenal year for Walker and Dunlop.
Not only did we achieve another year of stellar financial results, we've made tremendous progress towards achieving our strategic objective and set the stage for growth in 2020 and beyond I.
Im going to briefly provide some color on our Q4 results and a recap of the full year and then focus on what we expect to see in 2020.
Strong total transaction volume drove fourth quarter revenues of $217 million diluted earnings per share of $1.34 cents and adjusted EBITDA of $64.1 million are keeping natural metrics for operating margin of 27% and return on equity of 17% in the quarter were in line with our expectation.
And closed out a year fantastic financial performance across the board.
We delivered record Q4 total transaction volume of $9.8 billion as we achieved record debt brokerage volumes of 3.9 billion up 40% year over year and property sales volumes of $2 billion nearly double the amount we did in Q4 of last year.
Our GRC originations were largely in line with our Q4 forecast of wanting to half billion dollars each with Freddie Mac volume coming in right at the $1 billion, Mark and Fannie Mae volumes slightly above our estimate at 1.7 billion.
When the geographies temporarily pulled back on their lending our scaled capital markets capabilities allowed us to broker multifamily deal flow to alternative capital sources.
This helped to boost our brokered loan origination and allowed us to continue to meet our clients' needs with the best available execution during a period of market uncertainty a true testament to the breadth and diversification of our platform today.
Fannie and Freddie both have terrific 2020, scorecards, giving them and their partners lots of capital to work with.
As you can see on slide seven.
After doing the combined $35.7 billion of business in the fourth quarter of 2019.
They have already have just over $164 billion of lending capacity to be used in 2020 under the current capped setting us up well for another year of strong GFC lending.
Hi, good contributed $197 million for the quarter principal lending and investing added $532 million of a total due primarily to strong results with the Blackstone joint venture.
Gain on sale margin during the quarter was 159 basis points right in the middle of our expected range of 150 to 170 basis points. This result is consistent with a year ago quarter has increased margins on our Fannie Mae originations were offset by the shift in our mix to more brokered originations, which are lower margin since we don't record anymore.
We get servicing rights.
Personnel expense as a percentage of revenue was 45% for the quarter compared to 42% in Q4 of last year. The significant recruiting that we accomplished in Q3 in Q4 2019 was the primary driver of the increase as he added personnel cost of the new teams, we're not offset by any incremental revenue from them during the quarter.
Also during the quarter, we recorded a $4.5 million provision expense related to alone on a student housing property at the University of Missouri.
Like the loan that defaulted in the first quarter of 2019, the issues that led to this loss were related to university specific events, including a decrease of enrollment and significant changes in student housing policy.
Fortunately, we do not have any additional exposure to student housing in this market.
The remainder of our overall portfolio continues to perform very well from a credit perspective.
We continue to see prudent and conservative underwriting standards with Q4 originations underwritten at 64% Ltvs and 1.42 times debt service coverage ratios.
Turning now to our full year 2019 results, we generated earnings per share a $5 in 45 cents up 10% from 2018 on record total revenues of $817 billion, a 13% year over year increase.
This year's results provide tangible evidence of the diversification of our business as our GST and hot originations were down on the year as reflected on slide eight while our overall loan origination volumes increased by 5% to $27 billion driving the increase in revenue and earnings.
Looking at multifamily specifically, our overall multifamily debt financing volume increased in 2019 as our debt brokerage platform grew its multifamily lending from 56% of total brokered originations in 2018% to 61% in 2019.
Finally, our property sales volumes nearly doubled to $5.4 billion for the year driven by the robust market and the benefits of our 2018 hiring leading to our record transaction volumes for the year of $32 billion.
Expense related to recruiting and Onboarding, the new bankers and brokers, we added to the business in the second half of 2019 totaled approximately $6.7 million, including $4.2 million in the fourth quarter and his Willy mentioned in January we acquired two capital markets companies, both of which provide deep expertise in strategic.
Rick markets for WMD and bring over $900 million of life insurance servicing that will be added to our growing portfolio.
We are thrilled to have these new additions to the Walker and Dunlop family and expect both acquisitions to be accretive to our earnings once we get through our three to four month integration period.
Our $93 billion servicing portfolio grew 9% during the year and generated strong cash revenues that helped fuel the growth in adjusted EBITDA of $248 million for the full year up 13% from 2018.
Our profitable scale driven business model continues to produce strong margins and even any year with signet significant investment we were able to generate a healthy Paul your operating margin of 28% and a return on equity of 18% both within our expected ranges.
And our sustained strong performance enabled us to lower the spread on our senior debt by 25 basis points in November within a year of having refinance the debt saving us over $700000 and interest expense on an annual basis.
Thank you bears repeating that in 2019, we incurred expenses to increase our origination capability capabilities with 26, new bankers in brokers absorbed the impact of three loan defaults and made significant investments in technology, while still delivering strong margins and returns with double digit earnings and adjusted EBITDA growth.
We ended the year with $121 million of cash on the balance sheet and another $109 million being used to self fund our agency loans.
We will continue investing in new businesses, new bankers and brokers and new technologies to make us more efficient and more insightful well also having the ability to return a portion of our capital to shareholders.
Yesterday, our board of directors voted to increase our quarterly dividend payment by 20% to 36 cents per share our second consecutive yet consecutive annual increase of 20% since we initiated the dividend in February 2018.
We delivered a total shareholder return a 52% in 2019, and we'll continue to to deploy our capital to support future growth, while enhancing shareholder returns with dividends and share repurchases.
2019 was a record setting year for our company on many fronts, continuing a long track record of superior growth and financial performance.
We look ahead at Twentytwenty, we're very optimistic there we can continue these trends.
Slide nine lays out our financial targets for the year.
Once again, we expect to grow earnings per share and adjusted EBIT da by double digits as we benefit from our 2019 and early 2020 investments and the strong market environment in which we operate.
We will continue reinvesting in the business, which will naturally temper, our overall profitability since revenue growth typically lags expense growth as our new bankers brokers and businesses ramp up.
We expect to maintain our operated operating margin between 27, and 30% and return on equity in the 18% to 20% range for the year.
In addition, we expect gain on sale margin to remain between 150 in 170 basis points as brokered debt originations continue to become a higher percentage of our overall debt financing volumes.
One last 2020 topic I want to cover before I turn the call back to really is the new accounting standard for loan losses or Cecil as it is commonly referred to.
Seasonal establishes a life of the loan concept for credit losses, which in most cases will result in higher reserves for credit loss than the previous GAAP requirements.
The new standard will be widely adopted effective with the first quarter of 2020 and requires a onetime adjustment to the allowance based on the new expected loss calculation.
We expect the adoption of Cecil will result in a onetime increase to our allowance for risk sharing obligations of somewhere between 30 and $35 million with a corresponding after tax decrease to equity.
After that onetime adjustment, we expect our ongoing quarterly provision for credit losses expense will correspond with the net change in our Fannie Mae at risk portfolio, along with any changes in either specifically impaired loans or in our expectations for future losses.
Our financial performance in 2019.
Was fantastic and is the result of previous investments in the platform are profitable business model that continues to provide strong cash flow and the hard work and consistent execution of our team.
We're very excited about the momentum we're carrying over into 2020 and our outlook for another year of strong financial results I will now turn the call back over to Willy.
Thank you Steve.
As Steve just reviewed our Q4 and full year 2019 results were extremely strong.
We grew earnings per share an EBITDA by double digits. Once again, we invested heavily in technology and human capital, we diversified our revenues dramatically.
We continue to drive the company forward with solid leadership any unique corporate culture.
2019 was quite a year.
It was very clear from almost every discussion at the National multifamily housing Council annual meeting in Orlando, Florida, two weeks ago that there is a very bullish sentiment throughout the multifamily industry and more broadly the commercial real estate industry due to low rates low unemployment, 2% GDP growth and a go.
Mobile search for yield that has made multifamily investing almost a proxy for fixed income.
Every client we spoke with in Orlando is a net buyer.
Which should push cap rates, even lower in the coming year.
This strong macroeconomic backdrop should drive robust property sales and financing activity in 2020.
And will require wnd to maintain our diligent underwriting standards as cap rates can press and equity yields are pressured.
We have an extremely strong credit culture at Walker and Dunlop.
I'd like to thank our Chief Credit Officer, Richard Warner for his exceptional leadership over the past 20 years.
When Richard Retires. This April our Chief Underwriter, David Lee, who has tremendous industry experience will assume the chief credit officer role and maintain our fantastic reputation for risk management.
As I mentioned previously we're very focused on completing vision 2020 this year.
The components of vision 2020 are outlined on slide 10.
To accomplish this we need significant growth in a number of our businesses.
We lent or brokered $27 billion of debt in 2019, so to reach our vision 2020 goal of over 30 billion and annual volume, we will need to grow our volumes by just over 10%.
With the addition of new teams in New York in Ohio over the last week and the incremental lending volumes that are 2019 hires should add.
We had the team on the field today to accomplish this ambitious growth objective.
As I mentioned earlier the growth we have seen in our multifamily property sales business has been tremendous and here too we have the team on the field today to accomplish our 2020 vision of over $8 billion, an annual property sales volume.
As I mentioned during our Q3 earnings call. It is unlikely that our asset management business will achieve our stated objective of $8 billion and assets under management by the end of Twentytwenty.
But with $2 billion of AUM today, and a fantastic team across the country, both raising and deploying capital.
We will continue scaling this business to achieve our objective.
And finally, our servicing portfolio should surpass the 100 billion dollar mark by the ended the year given our projected loan origination volumes.
If we do all this we will have made great progress towards generating $1 billion, an annual revenue, which was the underlying goal when we established vision 2020 several years ago.
As we close out on vision 2020, and set our sights on another five year highly ambitious business plan, we will focus on the following areas.
First we have established a brand and reputation in the commercial real estate industry as one of the very best service providers.
We will continue adding the very best bankers and brokers to our company to further expand our client base and transaction volumes.
Second we will continue investing in new products and services for our bankers and brokers to sell.
Property sales as a business we weren't in five years ago and today, we're one of the largest multifamily property sales brokers in the country, which has dramatically expanded our service offering and relevance to our customers.
Five years ago, we did very little lending with our balance sheet to compete with banks.
Today, our balance sheet lending along with our joint venture with Blackstone mortgage trust, our lending over three quarters of a billion dollars a year.
Allowing us to meet our clients' needs and compete head to head with banks and specialty finance companies.
So we will continue adding services.
Such as property sales beyond multifamily.
And products such as prefer the preferred equity fund we are currently raising a JCR capital.
Broaden our capabilities and meet our clients' needs.
Third we will use technology to provide new products and services to make us increasingly efficient and insightful.
We created our database of commercial real estate debt to focus on refinancing opportunities with existing and prospective clients.
We then acquired a technology company I know Doe to apply machine learning to our loan underwriting to make us more insightful and efficient.
And then we built an appraisal business in partnership with Geo Fi that is dramatically faster and more transparent than today's market offering.
Each one of these point solutions has a role in our business today, but what is most exciting is how all of these technology solutions combined are making our bankers and brokers more insightful about their clients what they need today and how we can help them build for tomorrow.
Given our growth brand in capital there are more opportunities for us to pursue today than ever before.
It is important for us to remain disciplined while adhering to our mission of being the Premier commercial real estate Finance company in the United States.
Using legendary business out there Jim Collins analogy, the Walker and Dunlop flywheel is spinning at a faster and faster rate as our reputation and financial success grow.
What is fundamental to continued growth our two things first we must maintain the corporate culture that has made wnd such a special place to work.
We established something called the Walker way last year, putting words to the core tenants that underpin the unique culture Walker and Dunlop caring insightful tenacious.
Collaborative and driven.
And second we must continue to establish long term highly ambitious goals and apply the appropriate resources and capital to ensure we achieve them.
It's an exciting time for Walker and Dunlop and our team.
Many congratulations to all of my colleagues at WD for a truly fantastic year.
The investments, we made coupled with our terrific financial performance position us exceedingly well for continued success in the future.
And thank you everyone, who joined US. This morning for this call I'll now turn the line over to the operator for any 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 answered you may remove yourself from MCU bypassing the pound cake again, we do asset while you pose your question you pick up your handset to provide optimal sound quality.
Our first question will come from Jade Rahmani with KBW.
Thanks, very much certainly very strong performance and growth.
Growth in the non GC businesses, the brokered business as wells investment sales.
Well in terms of June 2020 goals.
I was wondering if you could share some insights into how you are prioritizing M&A versus the ongoing recruitment of new producers and or capital markets teams.
Good morning, Jade Thanks for joining us.
I think gives you can see starting out the year by bringing in a team which was a recruiting effort in Austin.
Followed by the acquisition of two companies will continue doing both.
I think it at.
As I said in the call given the brand given the platform and given the culture of Wnd there is very clearly.
A market impression that Wnd is a great place to work and that has made it so that a won't our recruiting efforts are being extremely fruitful, but then be we are getting a lot of inbound from people, saying we have seen what other companies have benefited from by becoming part of Walker and Dunlop and the growth.
That bankers and brokers on those platforms have enjoyed and maybe we ought to talk so it's really a combination is as Steve underscore Jade, we have plenty of capital to be able to continue to invest in both hiring as well as acquiring talent.
Our next question comes from Jason Weaver with Compass point.
Please go ahead.
Hey, good morning, and congrats on the quarter will you mentioned a few key hires briefly in your opening remarks, but after such a big 2019 can you give us an update on if you're still accelerating recruiting efforts here and what geographic areas within the country you're focused on.
Hi, Jason.
So.
We.
We just added two teams in the last week so.
The Manhattan as I outlined in the call. The Manhattan AD was was was fantastic and broadens us significantly into.
Both that market as well as new asset classes, and when I say, new asset classes and not as if we haven't done a lot of financing on office retail and hospitality, but this team has a reputation of doing mega transactions in the largest commercial real estate market in the United States. So that's that is somewhat of a game changer.
But as we've outlined before Jason there are still plenty of markets, where we do not have teams.
Operating today. So for instance in the investment sales space on the multifamily side. We don't have teams in Houston, We don't have teams in Phoenix, We don't have teams in Denver, We don't have teams in Seattle to name a few.
On the mortgage banking side.
There are plenty of major markets, where we don't have mortgage banking talent today out originating loans for us so.
The most exciting thing is we have all this momentum right now, but then there's still a lot of white space out there. If you will as it relates to both geographic opportunities as well as product line opportunities for us to continue to add to the platform.
Fair enough and more on that on the Msf transaction can you expand a little bit on the rationale behind there is that a meaningful service expansion for your non GST servicing capability.
Hey, what's interesting I I'm sensing from your question.
And don't let me put some words in your mouth, why Ohio, you'd be surprised how much banking activity. There is in Ohio, and I'd add one other piece.
Columbus, Ohio was our fastest growing and ROI market in the country for 2017 in 2018 in our multifamily portfolio. So Columbus top III growth on the multifamily side for those two years and are in our servicing portfolio. So I'd just say that we're super excited.
That team on board.
We have a lot of if you will white space in the Midwest to continue to grow we have fantastic teams up in Wisconsin and in Chicago, but adding this team in Ohio gives us a great presence in a very important part of the country.
I'd say, Jason this is Steve with respect to the servicing question.
Yes, I Miss out has.
Just $1 billion of life companies servicing which will add to the that portfolio, we already had almost $10 billion of.
Mostly life insurance company.
Servicing already show.
It's not necessarily to game changer, but it certainly adds a lot more scale to that part of the portfolio.
Okay. Thank you and just one more and I'll jump off.
The scorecard behind that you have any new thoughts on the ongoing policy discussion whether they get they may look may continue to rely on a dollar volume cap or perhaps move to a target percent of market share.
Yes, I actually do because I interviewed director Calabria last week at the real estate round table meeting here in Washington, and asked him point blank, whether we should expect any significant change. The 2021 scorecard I was honestly expecting the director to demure on the question in sort of say, you'll see when we put it out.
And instead he looked at me in said no you shouldn't expect any changes it will be if there are changes it will be incremental.
And so his comments on that or.
I think quite enlightening to the people in attendance.
So those of US who are in this market extremely welcome news that we shouldn't expect any significant change the 2021 scorecard from the 2020 scorecard.
Alright, great. Thanks again guys.
Thanks, Jason.
Our next question comes from Steve Delaney with JMP Securities. Please.
Please go ahead.
Good morning, everyone and congratulations on moving back to number one with Fannie and back to the top three with Freddie.
I'd like to start with the big jump in the fourth quarter property sales.
Yes.
2 billion dollar volume it looks like about 90% increase year over year was there a large portfolio involved there or is this just represent sort of the typical year end rush to get transactions Don.
Thanks, I'd say I'd say, it's more the latter Steve.
Regarding any sizable portfolios I think it's a function of.
Two things one.
We've obviously dramatically expanded the size of the team.
And right.
Folks we hired in 2018.
We are contributing pretty meaningfully to the volumes we did in 2019.
And then Q4 tends to be.
As you are I think question alludes to yield the.
Hi, watermark from a transaction volume perspective in the year as folks are trying to get things done before the end of the year. So I think combination of.
[music].
Strong market time of the year and the increase to the team is what's really propel that growth.
Yes that helps.
Good for us to size 20, 2021 opportunity. We can we can deal with the seasonality, but it sounds like your your base case is it at much higher point, obviously than we were a year ago are they moving onto the eight Ks acquisition I mean brokered was.
Pretty significant this year over 10 billion up about 25% year over year, when we think of eight Ks and read the article and saw some of the multi hundreds hundreds of millions of dollar size transactions. They do when we think about.
That that impact in 2020 for one.
Unlike a lift out.
I would assume pipeline is just whatever pipeline. They head is you bought and you have that in place. So there's no really six month by month delay in rebuilding a pipeline and too.
Larger low market all of that when we look at the you know from $10 billion basin and and 2019.
Are we thinking.
10%, 15% incremental benefit or should we be boulder and assumed this is more like a 25% to 30% impact in your brokered volumes from from just this acquisition.
Let me take.
Stab at that and Steve can jump in I cant any pets that he wants sure and good morning, Stephen Nice to have you on the call.
So.
A couple of things first of all as with all deals. There is some negotiation on what part of the pipeline that there had been working on stays with them and comes to us. So.
I would just say to you that the pipeline. They were working on if you will stays with them and then anything they're working on today comes to us and so I would give it sort of a three month sort of if you will ramp up period, where the deal flow, they're working on actually contributes to wmds financials.
So thats 0.1, but you are correct. Unlike a team coming over from another platform, where they leave everything and had some adjustment period, the cash team and platform comes directly into Wnd, but I would say, it's not starting day, one because the deal flow that they were working on a lot of that stays with them from a financial standpoint.
Got it thanks for clarifying that yes sure the second thing on it is that.
If you look at their track record.
They are a multibillion dollar year team.
And with their reputation in the market and their client relationships and the health of the market today.
Theres no doubt in my mind that they continue to do multiple billions of dollars of transaction volume on an annual basis.
Whether that gets us to 2030, 40% growth on the year quite honestly, it's it's very hard to tell one of the big issues. There Steve is the following.
They have access to so much deal flow and our so prolific in that market that I'm sure. There brokered volumes will stay the course, if you will the big juice in this deal for both of them and OS is them, becoming a major source of agency originations and so one of the things to be seen there is they are now on.
The very best agency platform in the country and so it's up to us to take all of their deal flow and get a certain percentage of that flowing into agency originations.
Because as you know the economics behind that are fantastic. So sure what percentage of their big if you will aggregate number.
How big that grows thats I think that they'll keep if you will.
Consistent in their annual origination volumes I think the being challenged for I'll send up for that is to make sure that we are taking a certain percentage of good percentage of their business on the multifamily side and using our platform and reputation with the agencies to be able to put agency debt on those deals.
The one thing I would also say on that Steve is as you know the agencies have not been terribly competitive in the New York marketplace.
They are very focused on affordable housing. These days, they're very focused on non trophy assets. These days and so this team has a reputation of doing trophy assets. So you shouldn't expect quite honestly, a $750 million Fannie Mae Freddie Mac loan on a what I call brass.
And glass trophy property in Manhattan.
At the same time, the Manhattan market does have huge swaps of affordable housing, which is our very big expectation the agencies are very competitive on.
That's great color really I'm, not really I was focusing just on the on the big.
Office hotel et cetera, and not really focused on the fact that your agency business could benefit from having these guys onboard. So thank you. Thank you for that color and just one final one for me.
Third quarter call, we were in a different environment right with respect to the Gses I guess, we've just gotten the caps, but I.
I think on that call you touched on kind of alternative ways to serve the multifamily market is still GFC volumes become problematic and you mentioned private CMBS and your comments about continuing to expand product service offerings I'm just curious if that.
A building a private CMBS team is part of your thinking for strategic development down the road.
So we have a team today that focuses on CMBS and is doing table funding on CMBS lending with a number of the conduits.
Turning to the that.
Steve said it in his comments during our call Steve and that is the following if you looked at Q4 2019, and you look at our agency volumes versus 2018 to 2019, we did a billion dollars less of Fannie Mae lending in the quarter, and we did $700 million less of Freddie Mac.
Lending in the quarter year on year quarter on quarter.
And yet at the same time, we put up fantastic profitability on the quarter because of the diversification we put in at Walker and Dunlop in the investments we've made to build up our brokerage business to build up both our property sales brokerage business and our debt brokerage business.
If you add to that the loan loss, we took in the quarter. It was an incredible sign of the diversification that we put into the company to be able to have our agency volumes come down, which we predicted we tell everyone. We're going to have lower agency volumes in the quarter as Steve highlighted in his comments, we have a great scorecard for 2020 and they should be back in very robust.
In the market, but for Q4, we had lower agency volumes, our debt brokerage business and our property sales businesses kicked in we took a ton of that multifamily business that wasnt going to Fannie and Freddie and found other sources of capital for it and we generated a fantastic quarter from an earnings and EBITDA growth standpoint, So I think you take all that.
Together and you've been covering us for quite some time that really demonstrates the diversification and the investments we've made in the platform to move away from being known as just a really really good agency lender to being a great commercial real estate financing company.
Got you you hit it on the head Willie we your agency numbers for almost spot on there 1.6 billion behind or new estimate last week, and which you would you did that I had not factored into air model is essentially you were 14 cents better in the non agency.
Parts of your business so.
You just you described exactly my reaction when I looked into the numbers. This morning. So thank you both for your comments I appreciate it.
Thanks, Steve.
Our next question comes from Henry Coffey with Wedbush. Please.
Please go ahead good morning, everyone. Let me add my congratulations great quarter.
Dividend.
Wonderful change I think so.
Couple of questions, increasing the dividend from 30 to 37 cents, but not buying back stock what was the thought process behind that is a great great news, but I'm wondering how were you thinking about it.
Yes, Henry first of all thank you for the the comments.
And the question.
So just to be clear the dividend was increased to 36 about 37.
Sorry.
That's right.
And the Henriette shocked me that you are asking about the dividend first question I had Steve and I, both smiled at each other when we heard you come right in on congratulations on increasing the dividend.
Well, yes, I am the oldest person on the call. So we like dividends.
So with respect to the decision.
Henry when we first I'll go back to when we first established the dividend two years ago. It was.
With the I think.
Intent to increase that dividend over time.
To reflect the fact that.
With our expectation is that the business is going to continue to grow and perform generate cash flow to support that.
So.
Looking at your one we did a 20% increase.
Year to we've done a 20% increase I don't want to necessarily commit to that the annual increase but.
Clearly, we're working on establishing a pattern at this point in time.
And I think as I.
Mentioned in my comments.
We're.
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I'm very confident that we can sustain that increased dividend and continue to feed the.
The business if you will.
To generate that growth. So we're sitting on a fair amount of cash we're generating a fair amount of cash.
We've obviously put some of that to work here in the beginning of the year with the two acquisitions we announced.
Our expectation is we'll continue to do so we have plenty of capital available do that.
On the share buyback.
Right I Didnt mention this into my in my remarks, but the board did reauthorized another $50 million.
Share repurchase.
The resumption.
Again as we've done historically.
When we see opportunities.
To buy stock we do.
So it's really there for those events.
I think right now having the consistency of the dividend in the dividend increase.
Is is our bias in terms of what's best for shareholders.
No I would agree completely.
In.
Really.
And answering your question was Steve you you went down kind of a list of things that involves creating an essence deployment of capital. The CMBS stable funding in that group the preferred fund by your investment manager obviously your relationship with Blackstone. So in addition to expanding.
Origination capacity as you start thinking about capital.
What are the other projects possibilities call them investment funds.
That you could develop at WD that would.
Continued to expand your ability to to touch.
Markets outside of the GE Si business.
So Henry as we I hope fully outlined in our call.
Because of the.
Sort of accelerated pace of recruiting and people who want to become part of the Wnd platform.
We will continue to put capital into that both.
Acquiring origination talent.
Well as hiring new origination talent.
The second piece to it is the asset management business, which we've discussed previously because we've built up this great distribution network, we now have relationships with borrowers across the country and owners of property across the country that need capital. So the the continued investment co investment as well as investment in in new funds at JCR is a is.
Very important piece to the strategy and we will continue to raise capital there that we can then deploy out through this great network of bankers and brokers across the country.
The third thing is that we've used our balance sheet and balance sheet lending extremely strategically over the past several years to really differentiate ourselves from the competition as it relates to moments where clients need something for us from us that gets them either an opportunity or positions.
Him to be able to move their company forward and so I can run down a list of four or five examples over the past couple of years, where a client is called US up instead could you do this for us and we've used our balance sheet to be able to step in and basically allow them to do something that others wouldn't allow them to do and that is not only differentiated us but it's also brought in.
A significant amount of interest income off of using that balance sheet to be able to lend in that manner. So we want to maintain capital on the balance sheet to be able to sort of if you will do those special situations and then the final Pcs technology as I tried to run through in my remarks, without basically giving all of our.
Competitors, a complete X ray of what we're doing we've invested in technology.
I believe is making our bankers and brokers highly highly insightful to what their clients not only need today, but where theyre going tomorrow and I believe that continuing to invest in the technology solutions that make our bankers in brokers better than the rest of the market will only help them and help our clients and make Walker and Dunlop that much more relevant to.
Through our clients. So those are sort of the four areas of continued capital investment for 2020, and the final thing I'd say to you is that we will spend this year developing our next five year business plan with some very significant be haggens as Jim Collins says.
As we have historically dot and so I think one of the other exciting things is as we build that strategy. During the year, we will roll that out to investors sometime in the fall to kind of paint the picture of what WD will look like in 2025 and as you can imagine we've already started doing a lot of work on it and some other things we've been investing in are going to play into that.
As you for the next five years.
You know another part thank you very much for that another big part of the theme of this quarter is not only all this good news, but you also were able to deliver significant results with bad news. So you had at fault you've had a couple wouldn't you say three this year can you talk walk us through the process.
You have a default do you have a provision.
What goes on next how do you resolve that.
That's not something that happens that often so I'd be interested to hear what the flight path on a default looks like.
Henry with with respect to the defaults in the at risk portfolio Thats pretty straightforward.
When the default happens banded basically steps in and takes over management of the asset at that point in time.
Survey in essence due to the special servicing work.
In terms of working working out that asset they manage the foreclosure process they manage the asset.
And then typically.
It takes about.
Two years.
For the asset to be stabilize.
Re marketed and sold.
So we won't actually settle.
The two defaults that happened.
At the University in Missouri until likely 2021.
And Henry if I can I just want to quickly jump in there just.
Set in the call. These are both very location specific defaults. These are not market defaults.
And so the underlying fundamentals of our portfolio are fantastic.
University, Missouri after the Ferguson riots had enrollment fall significantly the University change their on campus housing policy to acquire all freshman to live on campus and that has made it so that all the student housing off campus has had low occupancy numbers and we suffered two defaults as Steve said in our comments, we do not have.
Another student housing loan at the University, Missouri, So we're out of that market, we've taken our lumps, but it is very much a university specific issue here and not a broader issue.
On the overall multifamily market.
No I get that and I don't I appreciate you highlighting at that it there.
It.
We will keep asking when does multifamily slowdown and I think the answer is not yet.
So thank you.
Yes, Thats right.
And then the third default is the the load in our interim loan portfolio, which we are still.
Working through that with the borrower trying to get a restructuring in place.
Thank you.
Yep.
Our next question comes from Jade Rahmani with KBW.
Thanks very much.
Sorry for getting cut off or are there still a bunch of questions I wanted to ask about just on the loan default are you seeing any broader trends on student housing can you also quantify what percentage of the at risk portfolio is a student housing CMBS is showing a notable increase defaults in student housing not just in Missouri. So if you could provide.
That color would be helpful.
Jade I don't have we don't have that but we'll get it to you as it relates to the percentage on student housing.
And I think the your comment as it relates to CMBS pools that theres no doubt from a pricing standpoint, right now on student housing.
The both Fannie and Freddie.
Our if you will have their in Chennai up as it relates to student housing Freddie is.
Pulled back in that space quite a bit.
And so I think your your comment is correct. While these are both University, Missouri related defaults.
Generally speaking there is some concern about the overall student housing market.
Can I don't have right in front of new what percentage of our at risk portfolio is student housing, but we can get that too.
Thank you.
Just turning to the earnings drivers this quarter and we try to be as meticulous as possible and our models.
Other operating expense was significantly lower than what we're projecting it was about 23% lower than a year ago about similar.
Percentage lower than the third quarter and about 25% lower than what I projected considering the 16% growth and brokerage head count could you give any color on why that fell sequentially and what kind of a quarterly run rate, we should expect going forward as about 14.9 million in the fourth quarter.
Yes, Jeff.
I'll I'll take that one so.
Last year, we had a couple of.
One off charges, one related to the refinancing of our term loan. So we wrote off the unamortized.
Issuance costs and original issue discount.
When we did the refinancing so thats part of why in Q4 of last year the expenses were elevated.
The other thing is we had a true up with respect to the Earnout calculation on one of our acquisition deals.
Again, we disclose that and talked about it.
Last year.
So thats fourth quarter of last year, you had a couple of expenses that were elevated submissions expenses look more in line.
Relative to that.
With respect to a third quarter, that's a timing of.
Some of our.
Events and expenses. So there is always a little bit of variability from quarter to quarter, but given the timing of our summer conference and are all employee meeting we had an elevated level of expenses in Q3 as a result of that.
Which again was different from Q4 of last year when our all employee meeting was late in the quarter.
So yes.
Nothing else going on there.
So looking ahead with something and on an average rate be 16 than half million or so 16, and a half $17 million and should we also expect that to grow in line with head count.
Yes that doesn't necessarily grow in line with headcount.
Yes, some of those costs are I would say independent of head count.
Got professional fees in there obviously, we're working on acquisition deals.
And what not that can drive some professional fees.
Recruiting expenses et cetera. So your your average is probably a good one to use in terms of modeling the go forward.
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And.
Yes, I don't know what else to tell you on that.
Okay.
Just on the cash team what percentage of their historical production has been multifamily.
You got to people looking at each other shaking their heads will find that out jade.
But I will I don't know the actual percentage.
But as I said previously.
They have access to a lot of deal flow and now that they're on are really really great agency platform. It's our expectation that they become even a the a bigger team in the multifamily space in New York. It has not been the dominant part of their business I can tell you that.
It's mostly been office.
Okay.
Im thinking about the.
The Freddie Mac relationship would you guys be interested in buying b pieces in the K series deals.
Which have similar.
You know risk characteristics as you're.
Risk sharing component in the on the Fannie Fannie Mae side.
You don't have to put out the direct capital would you be interested in the BP space.
Not on our on balance sheet Jade.
It's something that we might be interested in.
Yes.
Raising a fund.
And investing through that and then obviously be a co investor in that but as far as a direct.
Ownership interest on our balance sheet.
Unlikely that we'd be interested in doing that.
Would that Jay CRB would would there be a fund product that could be dedicated to that space.
To be a multi strategy commercial real estate debt.
It could be dedicated to that.
There are other there's plenty of examples out there of folks who have raised money around strictly BP is buying in the predicated.
Okay.
Just on a prize I wanted to ask if theres any parameters around eventual revenue production that you might expect out of that business, considering I think that huge.
Mentioned around 700 million, an annual multifamily appraisals, we could make some.
Margin and market share assumptions to drive toward some revenue calculation anything you could share on that.
I think that nothing more than we have it.
At this point Jade.
I think we obviously are just now launching the business.
And building out the the team.
Delivered on the business so.
I think were focused on what the market opportunity and how much of that we can capture but we haven't really quantify that beyond what we've talked about already I read your note on it Jade and I think you're back of the envelope number.
Is it good place holder as we get into this space and we'll obviously give you and others.
Updates as we sort of see how the market reacts to it but given.
The transparency and the speed with which we can deliver appraisals, we obviously have very ambitious goals here.
And at the same time, it's a completely new business for us so for us to put a stake in the ground and say, we expect X amount of revenues out of it is I think a little.
Unwise at this point.
Okay, and lastly on the seasonal reserve something KBW is very focused on.
I think.
Looking at your at risk servicing portfolio. It implies about a 75 basis point.
Potential default rate assumption and maybe 25% loss severity is that.
Line with what you're underwriting.
Okay.
Yes.
Look the seasonal as you know is a life of the loan loss concept.
So as we look at.
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Expected life of our existing portfolio.
We have.
A lot of loss history to develop.
The historical perspective on and then looking ahead and adding the forecast element to that.
As essentially how we've gotten to the 30 to 35 million dollar adjustment that I.
I mentioned so.
You will have more more to say about that in Q1.
Once KPMG gets through the rest of their audit work on this and we make the adjustment and then we'll have the first quarter provision expense to talk about as well.
Okay.
Thanks, very much for taking the questions.
Thanks, Jay Thanks.
And there are no further questions at this time, so I'll turn it back to Mr. Walker for any closing remarks.
Great I want to reiterate my thanks to those who joined US on the call. This morning, and my congratulations to Wnd team for a fantastic quarter, and a fantastic year and I wish everyone. A terrific Wednesday have a great one thank you.
This does conclude today's program. Thank you for your participation you may now disconnect and have a wonderful day.
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