Q3 2020 Walker & Dunlop Inc Earnings Call
Multifamily property sales business rebounded nicely in Q3, we.
We started the year with a very strong first quarter sales volume of $1.7 billion, and then watch the market collapse in Q2 closing only $447 million of sales.
But due to our team brand and technology investments, we saw our multifamily property sales volume rebound to $1.1 billion in Q3 as investors re entered the market with conviction.
We have a significant pipeline moving into Q4 and expect to close $2 billion to $3 billion in property sales volume in the quarter, bringing our annual total to over $5 billion, which is a significant accomplishment given the market fluctuations this year.
Our lending and brokerage volumes and overall financial performance in 2020 are due to having the very best people brand and technology in the commercial real estate industry.
We have continued to add the very best bankers and brokers to our team. Despite the impact of the pandemic, bringing on new brokerage teams in Austin, Miami, Nashville, and San Diego.
And new bankers in New York, Dallas, and Columbus, So far in Twentytwenty.
We have a distinct competitive advantage against our larger competitors today.
Where our domestic focus on multifamily is generating strong financial performance cash flow and the ability to continue investing in our platform to drive growth and market share gains.
Winning and closing the largest multifamily financing likely to be done in 2020, the $2.4 billion Southern management deal that we closed in Q2 was a marquee deal where Walker and Dunlop when head to head against our three largest competitors and one.
Every subsequent time, we've gone head to head with one of those three competitors, we have been able to reference that deal and underscore how and why WT one.
At the same time, we launched the Walker webcast just as the pandemic was taking hold across the United States.
To provide our clients and the market with insights and analysis not just on the commercial real estate industry, but on all topic areas that are relevant to the unprecedented world we live in today.
The webcast is expanded Walker and Dunlops brand in ways, we could have never imagined.
Our total viewership of the Walker webcast has exceeded 200000 to unique views our.
Our email distribution list has expanded from 19000 distinct E mail addresses at the beginning of the pandemic to over a 120000 today.
And we have received half a million views of webcast clips across all social media channels.
While our competitors have tried hard to imitate the Walker webcast the quality of our guests and weekly viewership will be hard to replicate.
Finally, as our team and brand of expanded our investment in and use of technology has continued to differentiate Walker and Dunlop and allowed us to gain market share.
We have taken our market share with the Gses from 10% last year to 13% this year.
Our growth in 2020 has been due to a combination of exceptional service from our talented bankers brokers and underwriters the breadth of our brand and the insights our technology provides to both us and our clients.
In the third quarter, 69% of the loans Weve refinanced, we're new to Walker and Dunlop.
Let me repeat that number 69% of the loans, we refinanced in Q3 2020 or not from our servicing portfolio and were either new loans from an existing Walker and Dunlop client or new loans from a new client.
And as it relates to new clients, 25% of our total financing volume in the third quarter was with new clients to Walker and Dunlop.
We will continue to grow our client base and market share by leveraging off our incredible team brand and technology.
While the current market conditions make the success of our technology strategy most apparent in our debt financing business. We have also been focused on integrating the data science and data analytics that power, our multifamily appraisal business apprise throughout our platform.
At its core our businesses evaluation business relying on value to make loans sell assets and manage our servicing portfolio and we have been investing heavily in developing and scaling our faster and more accurate method for valuing multifamily properties.
We are extremely excited about what the integration of this technology will do for our business over the next several years.
Let me turn the call over to Steve to discuss our financial results in more detail and then I'll come back to discuss what we see for the rest of Twentytwenty and our next five year strategic plan that we have been developing this year Steve.
Thank you Willy and good morning, everyone.
Our third quarter financial performance once again demonstrates the strength and durability of the Walker and Dunlop business model as we continue to perform incredibly well during these challenging times.
Our combination that steady cash generation extremely strong credit fundamentals and long term focus on providing exceptional multifamily financing sales capabilities continue to generate above market growth in top and bottom line performance as evidenced by the 16% year over year increase in revenue during the quarter to $247 million.
The 19% growth in diluted earnings per share to $1.86 cents.
In addition.
Return on equity for the quarter was 20% up from 18% last year, while operating margin held steady at 28%.
Q3, adjusted EBITDA was $45.2 million down from 54, and a half million Q3 of last year.
There is significant upside to EBITDA in 2021 beyond as the cash generated components of our business increase.
First our servicing portfolio has grown by 13% over the past year and now stands at $103 billion as you can see on slide eight.
In addition, the weighted average servicing beyond the portfolio has increased to 23.4 basis points at the end of Q3.
We earned $60 million of high margin cash there was in Q3 up 10% from last year and those revenues will only continue to grow with the increased to both the portfolio and a weighted average service.
Second volumes from our debt brokers and property sales teams have been constrained in 2020 due to the impact of the pandemic on commercial real estate market.
As a result, we have not seen the boost in adjusted EBITDA that these cash generating businesses can provide when they are operating at full capacity as we saw in the first quarter of this year.
And finally, while we expect interest rates to remain low in the near term.
Future increase in short term rates will have a positive impact on the interest income we earned from our now $2.8 billion events for deposits abounds, we expected continued growing as our overall servicing portfolio grows.
We ended the quarter with close to $300 million of cash on the balance sheet further bolstering our already strong liquidity.
During the quarter, we repurchased 234000 shares at an average price of $53.12 per share.
Utilizing $13.5 million of our $50 million authorization.
We felt the repurchasing stock at these levels presented a very attractive return for our shareholders based on our future outlook for the business, including our expectation for continued strong earnings growth.
Current exceptional credit performance of our portfolio and the significant reserves, we've already taken to cover any future losses.
We currently have $26 million available for share repurchases used between now and early February next year.
And yesterday, our board of directors approved a dividend of 36 cents per share payable to shareholders of record as of November 13.
I think it is important to point out that many companies have had to eliminate or significantly reduced their dividends. During this crisis, while we have been able to maintain on is due to the underlying strength of our business model.
We fully expect to increase the dividend rate next quarter as we have done each year since we instituted in 2018.
We remain active in seeking out growth opportunities in the market, including recruiting and M&A opportunities as our financial performance and liquidity position gives us the ability to take an offensive stance. There, we'll let it set us up for continued growth in the future.
As I mentioned, we continue to see France had the credit performance of the portfolio.
At the end of the quarter, we had only one 6 million dollar Fannie Mae loan still in forbearance.
That is one loan in the portfolio of over 2500 loans, which by the way we believe with our production volumes. This year is now the largest brand in the portfolio in the country.
Third quarter provision expense was three and a half million dollars and included a $2.4 million charge related to an increase to the reserve on the one loan in our interim loan portfolio that defaulted in the first quarter of last year.
The remaining $1.1 million of the quarterly provision expense was driven by the growth in the at risk portfolio. During Q3, as we did not make any changes to our loan loss assumptions during the quarter.
There were no other delinquent loans in our at risk servicing or interim loan portfolios at the end of September.
This performance is a testament to the durability of the agency model and the strength of multifamily lending.
As detailed on slide nine and our portfolio of 5345, Fannie Freddie and HUD loans, we had only nine loans in forbearance at September 34.2% of the entire agency portfolio.
And as I noted earlier, we only have credit risk on one of those loans.
We feel great about the performance portfolio, so far, but it's still too early to declare victory yet.
The unemployment rate continued to remain at a high level and the economy is not even close to perform in a pre pandemic level.
We continue to believe that meaningful job gains are necessary to stabilize the economy before we can put credit rearview mirror in the meantime, we continue to think the current reserve balances sufficient to absorb any losses that may come through in the portfolio.
We had an amazing first three quarters of the year and are carrying a lot of momentum into the fourth quarter. The pipeline looks great and includes a continued rebound in both debt brokerage and property sales volumes.
Posting a gain on sale margin of 223 basis points in Q3, we expect the increase in debt brokerage volumes and continued strong agency originations to deliver a gain on sale margin in the range of 200 to 220 basis points in Q4.
And with year to date earnings per share growth of 24%, we are well on track to delivering double digit earnings growth for the seventh year of our 10 years as a public company.
Our portfolio is performing extremely well our transaction platform is taking market share from the competition and we amassed a significant cash position.
All of which gives us flexibility to both return capital to shareholders through our quarterly dividend share buybacks and evaluate market opportunities that will position us for continued growth over the next several years.
As borne out by the staff that Willie went over related to our historical performance relative to the S&P 600 financials.
Our business model consistently demonstrate that it was built to sustain market downturn due to our focus on multifamily access becomes cyclical capital and a strong credit standards that underpin our servicing portfolio.
While our business also performed well when times are good as a result of our great people strong brand and investments in growth and technology.
As we close out on 2020 and look ahead, we will continue to leverage this winning formula to power our features sets ventures.
Thanks for your time this morning, and I'll now turn the call back over to Willy.
Thank you Steve.
Our exceptional performance over the past several years and through the first three quarters of 2020.
Puts us at the doorstep of achieving almost all of the component parts of the five year growth plan that we set out at the end of 2015 called vision 2020.
Our longstanding mission has been to build the premier commercial real estate Finance company in the United States and as we have set ambitious growth objectives to bring us closer to achieving that goal exceptional financial results have followed.
The first part of vision 2020 was to grow our debt financing volume to over $30 billion by the end of 2020.
On a trailing 12 month basis, we are now at $31.4 billion of debt financing and are projecting that we end 2020 at a similar annual run rate.
As you can see on slide 11 over the past five years, we have grown annual loan originations at a 14% compound annual growth rate and we believe we continue that growth trajectory given the people brand and technology, we have built.
As the right hand side of this slide shows we have grown our servicing portfolio at a 16% compound annual growth rate, which push the portfolio over the $100 billion Mark early in the third quarter, achieving the second component of vision 2020.
We have doubled the size of our servicing portfolio from $50 billion to over $100 billion over the past five years and now stand is the eighth largest commercial loan servicer in the United States.
The third objective was to grow our multifamily property sales volume to over $8 billion a year.
And while we will come up short of that goal as you can see on slide 12, we have grown that business from 1.5 billion in 2000 $15 billion to $5.3 billion for the trailing 12 months, ending Q3, 2020, a 28% compound annual growth rate.
We are seeing acquisition volume pickup as institutional capital begins to re enter the market and investors look for opportunities to invest in multifamily properties.
The fourth component of vision 2020 was to build an $8 billion asset management platform and while we won't achieve that goal after entering that business later than we anticipated with the acquisition of JCR capital in 2018.
As you can see on the right hand side of the slide Sunsetting. Our vision 2020 objective, we have grown our AUM to $1.9 billion and we continue to focus on building out this area of our business over the next several years.
When we established vision 2020 in 2015, the underlying goal was to take wmds annual revenues from $468 million to $1 billion.
And as we have seen since we started establishing bold ambitious five year growth plans for Walker and Dunlop back in 2007.
With our team focus and determination we have consistently achieved the majority of our goals as shown on slide 13 over the trailing 12 months, we have generated $951 million of total revenues and over the last two quarters. We are on a $1 billion annual run rate on an incredible accomplishment for our team.
Okay.
So with vision 2020 behind Us the drive to 25 begins now are.
Our next five year bold ambitious strategic plan will be rolled out at our Investor day on December 10th.
But I will share a number of component parts, we are focusing on today.
At our core WMD finances communities places, where Americans shop work play and live.
And our future growth plan is based upon expanding our impact on American communities as we continue to scale, our business and deliver strong financial results.
The first component will be to become the number one multifamily lender in the country. After finishing 2019 as the fifth largest with $16.7 billion of lending volume.
Three of the company is ahead of US in the league tables has specific capabilities that we are going to invest in to advance in the league tables.
JP Morgan is the largest multifamily lender at $22.7 billion of financing in 2019 with the majority of that lending Don on small loans.
We are a license small loan lender with both Fannie Mae and Freddie Mac and we will invest in technology solutions that will allow us to scale, our small loan origination business dramatically.
Wells Fargo finished 2019 is the second largest multifamily lender in the country leveraging off their commercial and investment banking platforms. We will build investment banking capabilities that will be married up with our scaled lending platform to expand the services, we provide to our clients and grow revenues.
Finally, CBR he was the third largest multifamily lender in 2019 using their position as the largest multifamily property sales brokerage firm to drive financing volumes Walker and Dunlop will continue to recruit the very best investment sales brokers to our company.
As well as continue to invest in cutting edge technology to become the largest multifamily property sales broker in the country.
All of these investments in people and technology will drive revenue and profit growth and make Walker and Dunlop the number one multifamily lender in the country and at the same time, we will be financing tens of thousands of safe affordable homes for Americans.
The investments we make to achieve number one in multifamily lending will also help us help us expand into financing other commercial real estate asset classes, where people work shop and play.
We will continue to add debt brokers to our team who can finance office retail and hospitality assets with third party capital as well as capital Walker and Dunlop raises and controls.
The technology investments, we continue to make enterprise in the small balance lending business will allow us to provide insights to our clients that will power and new investment banking capabilities, such as valuation capital raising and M&A advisory.
Finally, we will continue to focus on recruiting the very best and most diverse workforce to Walker <unk> Dunlop to allow us to meet our clients needs with exceptional service and execution.
We are more invested than ever before and expanding the range of backgrounds experiences and perspectives that comprise WD have set ambitious long term goals to expand to the representation of females and minorities in our management physicians and among the company's top earners and I'm very pleased adjacent Gallup joined us in Q3 as vice.
President of diversity equity and inclusion.
I will finish this call where I started it these.
These are extremely challenging times for our world country and industry.
There are Americans suffering and dying from COVID-19, there are millions of unemployed Americans, who want to get back to work and their clients of Walker and Dunlop whoever motels retail properties and office buildings that are suffering due to the economic downturn.
We are mindful of all these challenges and remain focused on providing capital and advisory services to our clients to help them weather. This storm.
While we continue to invest in our people brands technology and to finance communities, where people work shop play and live.
We have an incredible track record of growth and profit since our IPO in 2010 and with the scale. We have achieved by accomplishing vision 2020, and the investments we will continue to make we had the opportunity to scale our company dramatically over the coming years.
I could not be more thankful and impressed by all the incredible work our team has done during Q3 and throughout these chat this challenging year.
We have done so much right and as reflected in our growth client satisfaction market share and financial results.
Thank you to everyone, who joined US this morning, and I will now ask the operator to open the line for any questions.
The floor is now open for questions. At this time, if you have a question on the phone. Please press star nine Marty on your computer. Please correct maintain at the bottom of your webcast screen.
Thank you. Our first question is coming from Henry Coffey of Wedbush.
Henry just on mute.
Yes can you hear me now yes.
Yes, sure Jim Great sorry about that to two very basic questions rates go up.
How does that affect volumes and how does that affect the overall tone of the business.
Good morning, Henry and thank you for joining us and.
Look where rates are right now two things one few expect rates to move significantly I had Peter Linneman on the Walker webcast two weeks ago, and Peter would said that he would be very surprised if the 10 year gets above 150 over the next three years, but you think about how much rates have fallen and what the effective coupon rates that were less.
Running at today Henry.
Rates could move significantly and I do not think they impact our overall volumes and the second thing as you well know unlike the single family mortgage industry, which is refinancing every single loan they possibly can right now due to prepayment protection in the commercial mortgage industry, there's only a certain amount of loans that we actually can refinance.
Given where rates are today and given the the opportunities and so one of the interesting things. There is as much as rates are extremely low I don't expect them to go up and we also have the opportunity to continue refinancing rates over the coming year loans over the coming years.
Given that prepayment protection component to commercial mortgages.
Of course, the other side of the equation is quote rates don't go up then we have a softer economy.
Other particular pockets in 2021 within the the guarantee book that you're worried about.
I know you haven't had any issues.
Multifamily generally doesn't have a lot of issues.
If you look at your existing book other either problems are frankly, maybe opportunities there.
That could come your way, if we have a weaker than expected economy in 2022.
Im sorry 2021.
So.
As you know Henry we take no risk on any non multifamily loan in our servicing portfolio. So as it relates to Walker and Dunlop and risk management as Steve ran through in great detail.
Our very scaled multifamily product portfolio and the at risk portfolio has performed exceptionally well.
So we do not see anything as it relates to Walker, and Dunlop and any potential losses or risk in 2020, one on non multifamily assets and as Steve said, our multifamily portfolio has performed exceptionally well.
Are there opportunities I think there will be opportunities Henry in the hospitality space in the retail space.
But the other thing to keep in mind is that the banking system is extremely well capitalized the life insurance companies that have loans on commercial real estate have extremely low leverage loans with lots of coverage to them and so it's my expectation that you don't see a lot of workouts.
And foreclosures on commercial properties in bank portfolios as well as life insurance company portfolios, which really only leaves CMBS as collateral that will be distressed and needing to be worked out foreclosed upon with a recapitalization of those assets and as you know over the last two.
10 years, while CMBS has come back somewhat it is by no means a very significant form of financing to commercial real estate and so I think there are plenty of investors out there looking for opportunities.
But I think because of the capitalization of the banking system as well as the life insurance companies that are in the commercial real estate space, the number of workouts and opportunities will be limited.
Great. Thank you and congratulations on a great.
Great quarter, and what's been a tremendous year.
Thank you Henry Henry.
Thank you. Our next question is coming from Jade Rahmani KBW.
Thanks, very much can you hear me we can.
Great good to hear from them from.
From everyone I.
Willy I wanted to ask you if you could comment on how you see the M&A landscape, taking shape and just generally speaking do you think large scale mergers of equal types of transactions create value in the brokerage space.
Equal sized companies and represent an opportunity for Walker Dunlop or do you think that cultural personal personnel considerations offset the benefit as we've seen a lot of friction costs in recent deals I'm just curious about your thoughts there.
Yes, Jade first of all thanks for joining us this morning.
Second as you well know we've been quite an acquisitive company over our history.
And one of the key transactions that we did at Walker and Dunlop was in the depths of the financial crisis. In 2009, we acquired column from credit Suisse and that was a transformative deal for our company and on the backs of that acquisition, we ended up going public in 2010. So.
To put it very bluntly, we're always looking for opportunities to acquire great companies and continue our growth path.
With that said I would say a couple of things one.
Culture is incredibly important at Walker and Dunlop and while there are several firms out there that I think have.
The opportunity to add services and scale to Walker and Dunlop, We would never make an acquisition of a company that didnt fit culturally with Walker and Dunlop and I can think of two or three out there it would not be a fit in any way. The second thing is I think that the the value of the global brands. The Cds in the JLL to this work.
Yes.
Our very diminished today.
I think that those platforms have lots and lots of they are not getting the synergies of being global platforms. Because the world is on kind of rolling shutdowns as we're seeing in Europe right now and the second thing is that they are very broad in there in many many different markets and commercial real estate, there and leasing there and property management those too.
Asset classes or or or divisions are as you well know jade suffering right now and so those platforms right now have certain divisions that are doing well and others that are suffering dramatically. We are very for fortunate given our focus on multifamily and also on the United States to be able to perform so well during these.
Times, which I think gives us the opportunity coming out of it to.
To grow even faster.
And so are we looking for M&A opportunities always and at the same time do we have the capital to do it without a doubt as Steve talked about in the call given our cash balances today and also our borrowing capacity.
But it would have to be.
Exactly the right company from a cultural standpoint, and it would also have to be a company that doesn't have a lot of things dragging on it right now to make it make sense for us.
And so as a follow on are you seeing.
It seems that based on the press.
Press releases, you guys have put out that theres.
Continued pace of hiring are you seeing a lot of opportunity to recruit talent and can you also comment as to what the year on year growth.
The front office brokerage head count this.
Yes, I don't have the exact number on where we are from a bank or broker standpoint, but I think were too I don't know, Steve you got to 210 to 20.
Well you know looking at the service servicing portfolio. If you see you know.
Any bifurcation and tons of the unit concentration between larger and smaller type type multifamily sure. So we are I I believe we are somewhat I don't Wanna say, we are uniquely position, but we were extremely well position between those two extremes that you just effectively outline gate so.
Where you're seeing weakness is on the very large high rise buildings in major urban centers. Many of those assets are owned by large.
Mm multifamily reach such as E Q or Avalon Bay, and a couple others I'm not picking them out specifically that they have credit issues I'm, just saying they are the large publicly traded multifamily reads and lots of those properties are owned by those types of borrowers who are not.
[noise] consistent or historic borrowers, a walker and Dunlop because they typically aren't doing secured financing through the agencies and they typically or using their credit lines to go and borrow and on to finance those assets and so we don't have a significant amount of exposure from a credit standpoint, so what I call.
Paul Brass and glass trophy assets in major Msas, like New York and San Francisco.
Then you've got the middle of the market, which is held up extremely well from a credit standpoint, which is reflected in the numbers that C talked about in in our prepared remarks, and then where you have weaknesses in small loans and as much as I, just said that Walker and Dunlop will focus on becoming a big small loan lender going forward using a lot of.
Technology in our expert underwriting capabilities that we have demonstrated over decades.
The small loans space right now is where you're seeing significant weakness because it makes sense right. If you've got a four unit multifamily property and one person has lost their job and isn't paying you now have 75% economic the economic occupancy you've just lost 25 per cent of your Rent-roll and so you are so.
<unk> weakness and that and right now very Fortunately Walker and Dunlop does not have a large portfolio of small loans, which is hurting some of our competitor firms.
Okay. That's a <unk> <unk> go ahead, <unk>, sorry, J and I was just gonna jump in I've been apologies I was on mute earlier. So we're at 203 banker's and broker's as of the end of September which is up 13, that's for the year.
And so it's just a follow on on that point, you know I've gotten a few questions from some top tier investors on this they look at your fee revenue. Your your cash revenue, excluding non-cash MSR games and it grew by slower pace than your personnel expense, but do you want to talk to Hal Uhm how that.
Feeds into it to the future revenue profiled because servicing fees.
Or in the future and so the production that these brokers are driving even though that in this quarter. You know those broke her head count was up 13%. It it translates into larger servicing revenues in the future would you like to speak to that dynamic.
Sure Uhm, so you're you're correct in that the is the servicing portfolios growing pretty significantly this year that bodes well for cash servicing fees and as I pointed out in my earlier remarks, it's not just the growth in the portfolio, but we've actually seen yeah, a little uptick.
In the weighted average servicing fee as a result of the strong servicing margins were seen on our Fannie Mae business.
So that's kinda generate a lot of future cash in and drive growth. There. In addition, you know I think a lot of our success on the agency side is driven by the fact that is really pointed out multifamily as the the game right now and a lot of our brokers, who historically have done you know potentially a lot of <unk>.
Office retail.
And other nine multi types of transactions are doing a lot more on the multifamily side and by definition more on the agency front. So we're seeing a lot of production coming from that team that when things start to normalize will get back to generate a being more brokered transact.
<unk> to our life comes in C M B S et cetera.
And that will also then generate more cash revenues and then you know I I pointed back to the first quarter of this year pre pandemic, we did almost $4 billion, a brokered volume isn't that quarter, which was an all time high for us and the expectation is once the.
No market gets back to a more normalized level. That's the you know that's the level of production that our team is capable of generating on a regular basis.
Thanks for taking the questions and great job on the transaction volume growth.
Alright next Jake.
Thank you as a reminder, if you'd like to ask a question. Please press star nine on your phone or the right hand, and at the bottom of your screen.
Okay. At this time, we have no other questions. So I will tend to call back over to willing for closing remark.
Great I want to thank everybody for joining us. This morning congratulate my colleagues at work or no up for an absolutely fantastic quarter as well as year and whichever you want a great day and thanks again for joining us.
Thanks, everyone.