Q2 2021 Walker & Dunlop Inc Earnings Call
Refinancing hot loans held by our competition as a result of insightful technology being put in the hands of our talented bankers and brokers.
Since we started reporting last year on refinances that are new to Walker and Dunlop, we've refinanced $16 billion of loans away from the competition.
The total commercial real estate finance market is projected to be $486 billion in 2021.
We originated over $10 billion of loans and Q2.
Which included record debt brokerage volume of $6.3 billion.
Along with $4 billion of lending with Fannie Freddie HUD and on our balance sheet.
As you can see on this slide our.
Our debt brokerage volume of $6.3 billion in Q2, 'twenty..1 is up dramatically from $1.9 billion and Q2, 2019 and up 320% from $1.5 billion.
In Q2 of last year.
$10 billion of debt financing and Q2 places us at an annual run rate of over $40 billion.
Well on our way to $65 billion by 2025, which would give us over 10% market share of total commercial real estate lending in the United States.
Another area of our business, we are expanding dramatically is small balance lending on multifamily properties and mark.
Dominated by our Big Bank competitors, Jpmorgan and Wells Fargo.
We grew our small balance loan volumes by 45% for the first half of 2021 over 2020.
And the recently announced acquisition of tap tap a technology platform that can size and generate a lone quote on small multifamily properties in minutes will accelerate this growth.
As we continue automating our loan underwriting processes launched tap tap expand our brand has the largest multifamily lender and the United States and combined our best in class people and technology.
We will disintermediation banks and gain market share.
Our multifamily investment sales business has the momentum of a freight train.
We have added brokers and 7 major msas over the past year leveraged to the brand and technology from our lending businesses and watched our volumes explode.
The market fundamentals for apartment sales are exceedingly strong with zelman the research and advisory firm, we just acquired reporting and its recent apartment transaction survey that June buyer demand increased for the 14th consecutive month to the highest index score since September of 2015.
Our sales activity of $3.3 billion and Q2 'twenty 1 is up 648% over Q2, 2020 and up 203% from Q2.2019.
1 of our largest competitors in this space CBRE recently announced that their global property sales platform, which covers all commercial real estate asset classes saw a 152% volume growth from Q2, 'twenty and 27% growth from Q2.2019. It is great to see our multifamily property sales per.
That form which is focused on the largest commercial real estate asset class in the United States growing significantly faster than the competition.
We are and exceedingly strong pipeline for the remainder of the year with $6.6 billion of listings that we are either currently marketing or have already closed for Q3 and Q4 and.
And as we add more top brokers to our team like the group, we just added here in Denver.
Integrate zelman and market research into our marketing materials and apply our database insights to uncover sales opportunities. We will achieve our 2025 goal of 25 billion and annual multifamily investment sales.
At the core of our lending and investment sales business is valuation.
What our property is worth to determine the size of the loan or the sales price.
Our automated appraisal business apprised as another example of where our focus on technology will scale and new business and pull market share from our largest competitors the.
The global commercial real estate appraisal business is a $9.8 billion revenue market with profit margins around 14%.
Today, CBRE has roughly 7% market share generating over $650 million of annual revenues.
And we entered the appraisal business last year after automating the majority of the appraisal process with our technology partner <unk>.
We did 50 appraisals and Q1 of 2020 and grew that number 5 times in Q1 of 2021 to 250 and.
And Q2, we grew our quarterly volume by another 48%.
After a significant amount of investment and technology and hiring of appraisers over the past 12 months, we expect to see continued growth and this business due to our product being faster cheaper and better than the competition.
And our technology based approach will allow us to generate significantly higher margins than the competition.
As we continue growing our services business like debt and property brokerage and invest and our technology enabled businesses like small balance lending and appraisals. We will continue building Walker and Dunlop and do a broader more diversified technology enabled financial services company. This transformation will not only propel our growth forward, but jen.
Rate more cash earnings.
As slide 7 shows our Q2 revenues a year ago of $253 million were comprised of 64% cash revenues and 36% noncash mortgage servicing rights due.
Due to growing our services businesses, such as debt brokerage and property sales. Our Q2.2021 revenues of $281 million were 78% cash and only 22% noncash mortgage servicing rights.
As you can see on the right side of this slide the shift and revenues drove our adjusted EBITDA to $67 million up 37% over Q2.2020.
By expanding our cash and carry services businesses, such as debt brokerage property sales and asset management servicing and appraisals, we will increase cash revenues and expand the multiple that investors used to value Walker and Dunlop.
As you can see on slide 8.
Our debt brokerage business has grown at a compound annual growth rate of 22% over the past 5 years.
The closest pure play comp to this business is our old competitor HFF prior to being acquired by J L. L and 2019 for 17 times trailing earnings.
Similarly, we can compare our multifamily property sales business to Marcus and Millichap.
As you can see on slide 9 over the past 5 years Walker and Dunlop has grown our multifamily property sales business at a compound annual growth rate of 32% versus Marcus Millichap, 2%.
Marcus <unk> Millichap is currently trading at over 32 times trailing earnings we expect Walker NAS valuation to trend away from specialty finance companies and towards technology and real estate services firms as we move forward.
While our services businesses, such as debt and property brokerage continued to expand dramatically. We are still a major lender and will continue generating significant mortgage servicing rights.
Fannie Mae and Freddie Mac, both carried over a significant amount of business from 2020 to begin 2021, and then they hit the brakes we.
We thought they would reenter the market and Q2, but are just now seeing them price and win business at historic levels.
With almost 60% of their annual lending capacity still in hand, we should generate significant mortgage servicing rights from our Fannie Mae and Freddie Mac lending in the back half of the year.
And our HUD business has simply been on a tear originating over $600 million of origination volume and both Q1, and Q2 and proving that with the right team and rate leadership HUD volumes can become more consistent and valuable over time.
To become the largest multifamily lender and the United States at the end of 2020 WMD had to jump over JP Morgan Wells Fargo, and CBRE and the lending League tables.
Those 3 large global firms along with J L. L have significant market share and the commercial real estate lending and services arena.
All for firms employ tens of thousands or hundreds of thousands of employees and while they have big brands and market presence. They couldnt stop WMD from jumping over them and the league tables due to our people brand technology and focus we.
We will use our relatively small size, we only have 1100 people brand and combination of people and technology to innovate faster and win.
As you can achieve from this slide <unk> revenue per employee dwarfs, our larger competitors underscoring the strength of our business model and opportunity for us to continue investing.
Entering new businesses that are currently dominated by our larger competitors will expand our product offering and allow us to meet more of our clients' needs for.
And for example, banks such as JP Morgan and Wells Fargo are major players and the affordable housing market, both by lending on affordable properties and buying tax credits WMD is already a large player in the affordable lending business, but as we add technology to scale in this space, we will take business from the large incumbent lenders.
The growth and our multifamily property sales business is dramatic it as we look to expand into other commercial real estate asset classes, such as office retail hospitality and industrial we will take business from the large global service providers like <unk> and CBRE.
Similar to our property sales businesses, our appraisal business is focused solely on the multifamily industry today.
But as we shift towards non multifamily property sales and grow our non multifamily debt financing volumes, we will apply the same technology driven people and process to appraisals on all commercial real estate asset classes.
Finally Wells Fargo, JP, Morgan and Morgan Stanley All have scaled research and investment banking capabilities that cover every sector, including commercial real estate a recent acquisition.
Acquisition of Zelman and provides us with 1 of the best research platforms and the industry, along with and investment banking team currently focused on the single family housing market.
And there will be expanded to include commercial real estate.
<unk> has a massive opportunity to leverage our existing market presence relatively small size and focus on technology to broaden our product offering and beat the large incumbent service providers and we plan to do just that.
I will now turn the call over to Steve to discuss our second quarter and year to date financial results and more details and then I'll be back with some further thoughts Steve.
Thank you Willy and good morning, everyone.
Q2 demonstrated the breadth and diversity of our platform's capabilities as increases in overall transaction volumes generated strong cash revenues and meaningful progress towards our long term growth plan to drive to to 25 to.
We continue to invest and people to support future growth expand.
Our market.
And advance our technology initiatives to differentiate our execution and insights from the competition.
I'm going to focus my initial remarks, and the first half of the year is that time period and truly exhibits the transformation of the company that Willy just described and going through to Q2 results.
During the first half of the year, we generated total revenues of $506 million.
Up 4% from a very strong first half of 2020.
Year to date diluted EPS of $3.50 to.
And is up 2% over the first half of 2020.
Year to day total transaction volume of 20 to $2.6 billion.
Has been driven by record debt brokerage and property sales volumes, which helped to increase cash origination and property sales revenues by a combined 28% year over year to $215 million.
At the same time to growth and our servicing portfolio, which ended the second quarter at $112 billion.
With a weighted average servicing fee of 24.5 basis points generated $135 million of cash servicing fees and the first half up 20% over the same period last year.
The strong growth and our cash revenues propelled our adjusted EBITDA to $127 million for the first half of 2021.
Up 13% over the same period last year as shown on the right hand side of this slide.
While we control and Walker and Dunlop is the team we put on the field every day and their capabilities to meet our clients' needs and.
And 2020.
Our clients needed capital during uncertain times and.
And WMD met those client needs, primarily with the countercyclical capital of Fannie and Freddie.
Sorry folks my screens are freezing up here.
Okay.
And our 2020 financial performance, particularly our non cash mortgage servicing rights.
Yeah.
Drew and spectacular fashion.
Generating record amounts.
Of revenue.
This year transaction volumes increased by over 90% quarter on quarter generating record amounts of cash origination fees and property sales revenue.
Transaction volume and mix of revenue so far and 2021 is a reflection of Walker and Dunlop and enhanced positioning and the market as the go to provider of financing and capital.
<unk> execution and demonstrates the successful diversification of our business over the last few years.
And while our results prove we arent just and agency lender anymore. We did and 2020 is the second largest GSE lender and the countries with a combined Fannie Mae and Freddie Mac market share of 12%.
Year to date as shown on slide 12, our GSE market share is held strong at 11%.
And based on Fannie Mae's recently released midyear lender rankings we've.
We've maintained our position and Spanish number 1 partner with our 2021 deliveries outpacing and the second ranked lender by 32%.
However, because of the year over year decline and Fannie and Freddie as overall production, our non cash margin servicing rights revenues are off by 24% year to date.
Putting us behind pace to achieve double digit earnings growth for the year.
And our last call, we signaled to an increase and Fannie and Freddie activity after the slow start to the year.
And as you can see on this slide our applications with Fannie and Freddie which are a strong leading indicator of future rate locks have increased significantly over the past 3 months, particularly in July reflecting the gse's steadily increasing appetite for deal flow as we move into the third quarter.
This recent application activity gives us greater confidence to both agencies are back and the market and focused on lending to the over $80 billion to have remaining to deploy this year.
With the tremendous growth and transaction volume, continuing and the increasing and competitiveness of Fannie and Freddie as we entered Q3.
We are on track for flat to 5% earnings growth on a year. However, if the current strength of our pipeline and market fundamentals hole and we still have the ability to once again achieved double digit earnings per share growth something that has been a hallmark of ours. Since we went public in 2010.
On all of the metrics, we are reaffirming our initial 2021 targets, including double digit growth and adjusted EBITDA, which is on track for a record year due to the strength of our overall transaction volume.
Yeah.
Personnel expenses increased by 32% and the quarter driven by increases in both commissions expense, which were up 59% due to the significant increase in cash origination and property sales fees and fixed personnel related expenses up 19% due to the substantial hiring we've done over the last year.
We continue to invest heavily and future growth with a focus on increasing our production teams expanding our brand and technology capabilities and supporting our new business initiatives and our path to achieving our drive to to 25 objectives.
To illustrate this point year over year growth and salary expense saw the highest increases and small balance lending investment sales Walker and Dunlop investment partners marketing and I'd.
Reflective of the fact that we are making investments and new initiatives and technology as well as continuing to add bankers and brokers and their support staff to the platform.
All of these investments and the lower mortgage servicing rights revenues drove personnel as a percentage of total revenues to 47% for the first half of 2021.
Higher than our historical average, which is and the low to mid 40% range.
We are and in investment stage this year and our addition of head count to support our emerging businesses is driving this expense ratio up as is the fact that a higher percentage of our revenues are coming from cash and origination fees and which prepaid commissions.
With higher agency volumes forecasted and the second half of the year, we expect personnel cost as a percentage of revenue to trend downward from current levels over the next 2 quarters.
Second quarter operating margin was 26%, bringing year to date operating margin to 29% within our target range of 29% to 32% for the year, reflecting the fact that our scaled business model to support significant growth investment while remaining very profitable.
Q to return on equity was 18%, bringing row to 19% for the first 6 months of the year also within our annual target range of 19% to 22%.
For the second consecutive quarter, we lowered the loss forecast used to determine the allowance for risk sharing obligations, resulting in a $4.3 million per 10 cents per share benefit to provision for credit losses in Q2.
Strong credit fundamentals, we described in our last earnings call, including very few loans in forbearance, no pandemic related defaults and the portfolio and and extremely healthy debt service coverage ratio of our at risk portfolio still hold true today.
We believe that the macroeconomic trends underpinning the multifamily industry today continued growth and GDP rising property values low interest rates and declining unemployment levels.
And it up for continued strong performance for the foreseeable future.
Given these dynamics, we feel very comfortable with the $60 million allowance for credit losses that remains in place to cover future losses and our portfolio.
We ended the quarter with nearly $330 million of cash and the balance sheet during.
During the second quarter.
We closed on the acquisition of tapped out and we continue to pursue a number of acquisition opportunities are directly aligned with our drive to 25 strategy.
Yesterday, our board of directors approved a quarterly dividend of <unk> 50 per share payable to shareholders of record as of August 19.2021.
And the servicing portfolio continues to grow along with the related cash revenue streams, our strong cash flow and existing cash position give us significant and financial flexibility as we continue to pursue growth opportunities and invest heavily and our people brand and technology.
The combination of which will continue to differentiate us and the market and drive growth and revenues and earnings. Thank.
Thank you for your time today I'll now turn the call back over to Willy.
Thank you Steve.
As you just heard our business model financial results and extremely strong cash flow and cash position of nearly $330 million are allowing us to continue investing and people brand and technology to make Walker and Dunlop. The most technologically sophisticated financial services company in the commercial real estate industry.
We know our actionable technology is the best and the industry not only from the financial proof points of new clients and new loan refinancings, which I mentioned previously but from talking to bankers and brokers. We recruited from competitor firms quote you are well ahead of the competition unquote is a direct quote from <unk>.
Family property sales broker, who decided to join Walker and Dunlop after being actively recruited by and seeing the technology of 5 of our large competitor firms and while it is nice to know that we have superior technology to our large scale banking and real estate services competitors, we must do more.
And costars recent earnings call CEO, Andy Florance spoke of a refinancing tool that costar is developing for their clients.
We built that tool at Walker and Dunlop for years ago.
Have done $16 billion and financing volume over the past 6 quarters as a result of that tool.
And our improving upon it every day to make it more insightful for our clients bankers and brokers.
<unk> also pointed out the volume they are doing on their tenex sales platform and highlighted 3 large deals that ran through the platform to make the case that stabilized properties and not just distressed properties can be sold on tenex.
We have the people and technology at Walker and Dunlop to sell for $7 billion and multifamily assets in the first half of 2021 and don't need to wait for a distressed market to see dramatic growth and our sales business based off of our current strong pipeline for the second half of 2021.
We have a unique opportunity at WMD to combine our large market presence relatively small number of employees and technology to meet our customers' needs and accelerate our growth.
Our brand continues to expand thanks to the terrific work of our bankers brokers and marketing team for <unk>.
Walker webcast attracts fantastic guests and is being watched somewhere between 60 and 100000 times per week on replay via Wmd's Youtube channel and our podcast driven by insight.
We don't charge for the webcast, nor do we promote or advertise anything about Walker and Dunlop.
And the webcast has been viewed nearly 2 million times.
And the growth of our brand is reflected and the astounding, 90% growth and total transaction volume in Q2.
We will continue producing the walker webcast to share insights and ideas about the world, We live in and expand the Walker and Dunlop brand.
As Steve mentioned, our lending pipeline with Fannie and Freddie has rarely been stronger and the change in leadership at the Federal housing Finance Agency FHFA is welcome news.
Acting director Sandra Thomson knows the GSE multifamily businesses exceedingly well and we expect FHFA to review several actions taken by former FHFA director, Mark Calabria, such as reducing the Gse's annual lending limits from 80 billion to 70 billion each.
And as well as the 52 week Rolling average measurement of the caps.
Most fundamentally however, new leadership at FHFA should return the organization to regulate and the Gse's and not trying to run them.
As a massive amount of capital continues to search for asset based investments we feel extremely good about the outlook for the commercial real estate.
Industry and Walker and Dunlop.
Our transaction volume and revenue growth and Q2 is emblematic of the team and capabilities. We have built as we have scaled WMD from being a small family owned company into 1 of the largest commercial real estate financial services companies in the world.
With that growth, we have become a trusted advisor to our clients with the capabilities and meeting more and more of their needs.
And as we continue to expand our cash and carry services businesses, such as debt brokerage property sales asset management servicing and appraisals, we will increase cash revenues as well as the multiple that investors used to value our earnings.
Steve stated earlier that we have visibility to flat to 5% EPS growth for 2021 and given the investments. We are currently making and tremendous growth, we are seeing and our debt brokerage and property brokerage businesses that will be a very successful year.
This company has grown earnings per share at a compound annual growth rate of 30% since we went public in 2010, 30%.
And the people brand and technology to make Walker and Dunlop, what it is or more relevant to our customers today than ever before.
We will remain focused on expanding into new businesses applying people and technology at every opportunity and achieving the drive to to 25.
We had James curve author of the book legacy on the Walker webcast yesterday, what was most exciting to me as I read Coors book about the extraordinary culture that defines the most successful rugby team of all time to New Zealand. All blacks is that many of Coors observations about the all blacks can be said about Walker and Dunlop we.
A deep history that is known and precious.
We have a track record of exceptional performance, we have a reputation of establishing bowl highly ambitious 5 year growth plans and achieving them.
And we have and exceptionally talented group of professionals that live the Walker way tenacity, caring collaborative and insightful and driven to deliver.
And exceptional services to our customers and returns to our shareholders.
I want to congratulate the WNBA team for all we accomplished in Q2 and thank all of the analysts and investors who joined US for the call. This morning, I'll now turn the call over to Kelsey to open the line for any questions. Thank you.
For it now open for questions. At this time, if you have a question on the phone. Please press star line or if Youre on your computer please click rate hand at the bottom of your webcast screen.
Our first question is coming from Steve Delaney of JMP, Inc.
Thank you Kelsey and good morning, everyone I hope, you're all staying safe and well.
Obviously, we were maybe a little too aggressive on bottom line EPS debt at $2 and Bob sets.
But I do note that on a 6 month basis Youre 114.
Million still works out to an annualized 90%, which is at the bottom end of the range to add in your 2021 goals.
And just looking at our model. This morning, we were to white on personnel expense.
Saying that growth comes at a cost and I think it appears to me anyway that the near term costs.
To your growth and your hiring has likely been and that personnel. What we were at 44% of revenues and 141 was 49% Steve you made some comments on that which I appreciate it.
I think you indicated that you would expect debt percentage to trend down and the second half.
We're currently at 47% and our model for what that is worse could you just when you say trend down and give me some idea relative to the 49% you.
You might expect or what you would suggest to us that we consider using thanks.
Sure, Steve and thanks for the question and I appreciate you being on the call. This morning share.
Yes, I think in terms of.
The overall trend, it's really a function of <unk>.
Expectations that we're going to be booking more mortgage servicing rights and the second half of the year.
And.
As you as you know we don't pay commissions on the mortgage servicing rights directly so that that is what we're expecting to happen that will drive that overall percentage down so.
So I think it to.
A full percentage point or 2 over the next few quarters.
Okay, Great. That's very helpful and then on.
Slide 13, Willy is pretty dramatic we've been tracking the business.
Delivery volume month to month and it seemed like things were they were trying to be cautious and stay not get ahead of a $70 billion annual run rate, but can.
Can you just talk a little more about what this acceleration and May June and July.
Is this all driven by internal.
Sort of internal policy practice at the Gse's or is there any borrower behavior reflected here that there is a pick up and just acquisition activity.
I guess, what I'm pointing to is on the GSE volume was that more internally dictated by the gse's themselves or was it market driven based on borrower demand. Thank you.
Sure Steve.
Couple of a couple of things first of all as you do and as many other analysts to the <unk>.
Monthly GSE volumes are all public information and so I would say as you were talking about your model and your model update.
I would just.
Posit a lot of models should have probably been updated seeing what the slow delivery levels were that the agencies were publishing in May and June and I am expecting a number of models would have been adjusted accordingly had people been tracking what the agencies were getting as deliveries and saying Walker Knauf is good for 11 or 12% of this look at where Fannie has looked at where Freddie.
Is that means and my model is now out of line as it relates to what theyre going to do and Q2.
As it relates to the pickup and activity, it's all a function of pricing.
And it's Fannie and Freddie if you look at the $6.3 billion of brokerage that we did in Q2.
The biggest outlier as it relates to where we place that debt was with debt funds net funds were extremely active and the market and Q2, they priced underneath life insurance companies, they priced underneath C MBS and they want a tremendous amount of business.
And what was so rewarding for us to see is that as debt funds came into the market and have the most competitive bid we were able to match up the financing for the clients with the most competitive source of capital and as you well know when the agencies want to be and the market. They win and as you also know the agents.
These have and annual cap that they've been very good at getting to so that slide that Steve showed as it relates to where their volumes went to and as you know very well on our last earnings call, we thought Fannie and Freddie were coming back in and if you actually look at that slide you can see that in the month of March they started to tick up a little bit and then they basically flat line for Maine.
For May and June rate. So April they started to uptick a little bit and then for May and June they fell back down.
You can see that dramatic pickup in July as it relates to sign applications.
And as I said in my script, we've rarely seen a more robust agency pipeline I would put a quick caveat on that though and the Freddie just raise pricing by 20 basis points day before yesterday, so while our Freddie pipeline is extremely strong right now.
We'll see how competitive they are and the market by raising pricing by 20 basis points, but a lot of it I think has to do with <unk>, where they were on pricing be the competitiveness of the debt funds, which I would expect to.
To start to migrate towards other commercial real estate asset classes to.
To chase yield so as Fannie and Freddie reenter the market and put competitive bids against those debt funds I'm quite certain that the debt funds will sit there and say I don't really like the spreads on where I am on multi right now I'm going to go look for an office property and a retail property that has recovered from the pandemic and get better spread.
Has the competitive landscape there is dramatically different than what it is on multifamily when the agencies are at our active.
Thank you bad for the comments are helpful.
You bet to.
Thank you Steve Our next question is coming from gains in mining at <unk>.
Okay.
Thank you very much.
As the company's revenue sources diversify.
And Walker and Dunlop.
Reduces its share of earnings that historically have come from the GSE and since the other business lines are going are growing faster.
Great way to look at earnings might be on a cash earnings basis.
Backing out the net MSR gains.
And so if you did it that way I assume that cash earnings is going to grow double digits.
This year because that would be in line with the double digit growth expectation and you have for adjusted EBITDA.
A correct assumption.
Yes, Jay that's absolutely correct.
Okay.
Thank you very much it's clear to that.
WD is gaining market share and that these initiatives and investment sales and the brokerage business.
And really gaining a lot of traction you mentioned that the debt funds, where the biggest growth driver in the broker business do you view that as sustainable.
Okay.
Well as I just to Jade I think that the debt funds look they all have tons of capital rate. The issue with it is is do they stick focused on multifamily as the agencies reenter or do they move to other asset classes at the end of the day, they're going to want to deploy capital and we have the team to be able to deploy that capital so and our world a great scenario.
Is that the agency has come back in and we place a lot of debt with the agencies and at the same time the debt funds remain competitive on other asset classes and we placed a lot of financing on other asset classes with the debt funds.
And so I think that the.
The most noteworthy thing is the growth and that broker to volume we've made investments as you well know over the last several years to add bankers and brokers to Walker and Dunlop and Q2 was emblematic of those investments really paying off and the growth. We tried to go back and show not only growth off of Q2 to 2000 and <unk>.
'twenty, which as you well know was a very unique quarter as we headed into the pandemic, but we backed up to Q2.2019 to show the explosive growth off of a very normalized quarter from 2 years ago and as you could see going for I can't remember the number I think it was $1.3 billion and $1.6 billion 2 years ago to over $6 billion this quarter.
And <unk> really grow dramatically and as I said, I think I can't remember exactly the number but we've got over $6 billion of lifting agreements and low and and deals we've already done in Q3 and queue for.
And that drives financing decisions and so I think 1 of the biggest changes to how I feel from our competitive position and using the past we were always viewed as a finance company that was really the best to just financing and now that we've got real scale and our investment sales business.
How our clients view us is far more strategic it's less of great. You're really good at financing go do that many people view that product as a commodity to be honest with you, even though our bankers and our every day, making huge difference and the way that.
Properties or financed but they view that side of it a little bit more as a commodity whereas if you have access to deal flow. If you have the product they focus on you and they focus on the firm much more and I think that has a lot to do with the 90 per cent growth and our transaction volume and queue to is their clients are looking to W and D to do more and more.
And then just lastly, and related to sneak delay and these question.
Yeah and tons of the margin outlook and some of these other business areas take hold to anticipate any diminution and the way the the range and Mitch Martens had been running the to to adjusted EBITDA margin was 33 per cent, which was in line with 30 per cent that we were modeling and the.
Operating margin was also fairly close do you think that there is operating leverage and the business that could allow for margin to sustain themselves or or even and potentially expense. So I'll kick that to Steve. After I just give you some quick thoughts on it.
Ever since we went public 1 of the big Conundrums that Walker and Dunlop is that our business model and businesses are so profitable that anything we did to expand the platform and invest and other businesses would look dilutive to earnings because the core agency business with so profitable and I think that.
Investors and and the market and and and we got used to just generating these outsized returns and to be honest with you J and I don't think we got a lot of credit for it and.
And we we if you look at us and complex to the services firms as you well know almost on every metric whether it's EBITDA margin net income margin return on equity margin all that stuff, we for outperform and so I think 1 of the things that your seniors and we're investing and these other business is to continue to diversify the platform and those are going to be.
Dilutive to those to those margin, but it's going to make us of for more scaled uhm diversified company and so you're seeing to things happened right now a just the direct impact of doing so much cash and carry broker business and last mortgage servicing right income and the quarter and the other thing is you're saying.
Invest we have 50 to people and our appraisal business today.
And guess, what our appraisal business is not generating earnings for US right. Now so that's wildly dilutive to earnings we have put a huge amount behind our small balance lending effort, because that's half the multifamily market and it's a market that we've never attack and I think 1 of the interesting things that investors have to keep in mind on that is if we wanted to go out and acquire.
1 of the existing small balance lenders out there and there are a couple that are private and there are a couple that are public we could clearly go and focus on that but that's doing business. The old fashioned way, that's hiring a lot of bankers and brokers, that's going and meeting with clients face to face and getting business. The old fashioned way, what we have consciously decided to do is not they'll make some big Act.
Physician and that space, but build the team from scratch and put a lot of technology to it and that takes time it takes to investment, but we truly truly believe that what we are going to end up with is a far more competitive offering to the market and to be able to take market share not only from those smaller competitors that we could potentially go acquire today, but the big competitors like.
J P Morgan Chase and Wells Fargo.
Yep and just to add to what Willy said J that if you go back to the Investor day presentation and December when we rolled out our drive to twenty-five strategy.
Yeah, we are anticipating over the course of time that we should be able to get some margin expansion out of the business as the investments that we're making and there is there is it really just mention to start to grow and you have to scale and contribute to the bottom line that all else equal you should see some margin.
Expansion, you know as a as a whole company overtime.
Thanks for taking my questions.
Thank you you.
And Ah.
And next question and it's coming from and how many coffee best to charity.
Henry to figure out.
Can't hear Ya.
And how 'bout now now we got you. Good morning, good morning, and thank you for taking my question. So if we kind of digest, what you've been talking about with my to colleagues.
The the.
There was a big mix mix issue on volume.
Which effects, which are limits the M. S R component of revenue.
Overhead was high.
For lots of reasons, 1 of which is is it because of the cash component you're paying more commissions and also as you discussed your investing and these businesses.
But it was kind of a 50.50 split in terms of the the the Mister. The however, you want to talk about it when we go to the last page of your press release, and we look at EBITDA, we see a whole different story, we see a business that's that's.
Putting up significant get year over year growth up 10 per cent sequentially et cetera. I mean this this last page is where all your.
Your investors focus this last pages, how we value of the stock.
Is it is it fair to to not dismiss the EPS decline, but to so to say.
There are a lot of moving parts.
This for that part of the equation and the Ebitdas grow and like a week. So the companies and Steve can dive into your question in more detail Henry and I. Appreciate it uhm, we take EPS very seriously.
We told investors to be the year that we're going to a double digit EPS growth and as Steve said, we have line of sight to zero to 5 and I can guarantee you were working every hour of every day to get the double digit EPS growth and the pipe line right now looks really encouraging but what we don't want to do is disappoint investors and and have expectations outsize, what we actually for.
<unk>, so we're trying to be as straightforward and transparent as we possibly can be but I don't want to in any way to say, we are sort of forgetting about EPS and focusing only on EBITDA, but as you are underscoring.
This business when.
At scale, which we have and $110 billion servicing portfolio and big business is generating billions of dollars of cash transactions volume to generate cash origination fees uhm is a cash cow.
And we built it up that way I will tell you that as we sat there at the beginning of the year and thought about a normal year with the agencies. We said we can both invest and these new businesses and also generate double digit earnings growth because we're going to book, a lotta mortgage servicing rights and keep moving forward and unfortunately, the agencies decided to back off and the first half of the year, but as Steve pointed to.
Out our market share is still right up there and we're 30 per cent ahead, a number 2 with and I'm a year to day. So it's not like our team is left to us or were less competitive with the agencies. It's that the agencies weren't pricing competitively and you couldn't do business with them. So what's so great for my standpoint is we got the team on the field that sat there.
And and said, Okay, we can't do it with Fannie Mae or Freddie Mac, Let's go do it with a desktop and let's go do and the life insurance company, Let's go to a C. M. B S and generated a huge amount of cash revenue and earnings and so yes, I think this quarter underscores the strength of our cash generation capability and the business and at the same time, we also have a <unk>.
A lot of confidence that the agencies come back into the market and I would also say that the change and the FHFA Director makes me quite optimistic about the 20 twenty-two score card and what Fannie and Freddie will be operating under next year Uhm and there is a wholesale change and the attitude inside of Fannie and Freddie with the change and the regulator.
As I said and my comments to change from Dr. Calabria to Sandra Thomson has made it so they'd FHFA I can go back to being a regulator and stop trying to manage the day to day operations to the agencies, which is fundamental H and it's a sea change as it relates to their ability on doing their business and not worrying about a regulator focused on all.
[noise] sorts of arcane and 8 and significant issues.
Yep and Henry I would just add to what Willy said that to me and be excited and part of all of US as we did $13.4 billion, a transaction volume and to to.
Which demonstrates that we have become to go to.
Business and and company to meet our clients capital and pronounce and needs.
Uhm, whether the agencies are they are aggressive and a particular quarter or not we did $13.4 billion a transaction volume and that's bad.
The exciting part of it.
Yeah, no I mean because of that M. S. R capitalization issue. It. So I mean this has happened before.
That's half the last time this AD and the stock was at 35 and we've we've almost broken 112, a couple of times since then.
Moving on to other topics.
And where the change and direct to out leadership and the F. H F. A.
You're most likely going to get more focus on duty to serve and more focus on affordable house, but that's my guess I said educated yes. That's all it is.
That doesn't take you into areas essentially like single family rental single family Red Bill to read manufactured housing you know these are all.
These other products are all the corner so.
Putting people into affordable housing.
Are you seeing a shift and that to areas like manufactured housing.
Bill to rent.
Et cetera, et cetera, and and in terms of the opportunities and the marketplace, yet or for how is that playing.
So you're you're educated guesses are very educated guess.
And so I would underscore educated there and I I had a I had to you know I I spoke to FHFA last week, and they're still focused on duty to serve and and affordability Uhm I did underscore the need for they're green lending programs to get back outside of the caps and.
And and said that if you think about the mountain west basically on fire. This summer and the fact that water levels are at historic lows, the Fannie and Freddie Green lending programs over the 5 years that they track the amount of conservation that they were able to achieve they saved to 8 billion gallons of water 8 billion gallons of water.
And so uhm I said to FHFA you know at a time when everyone's focused on the environment getting Fannie and Freddie back focused on it and pulling green lending out of out of the caps would be very healthy for 2022, and we'll see whether that ends up happening Henry They said to me and we want to stay focused on affordable and I said well you can do both.
So I do think that and and we've done $17 billion of affordable lending over the last 3 years.
Uhm, we have a terrific affordable team our team here in Denver, just got a S. F R listening to sell and S. F. R development. So your point about single family rental we're very much and that space. We just published and gave away our own proprietary data on <unk> S. F. R. B F R and publish that 3 weeks ago.
And we got and a huge amount of inquiries in and inbounds from clients for having published that report and having to team that's focused on S. F. R. B F R.
And then I would also say to you that in the affordable space. We're also very focused on what can we potentially do and the tax credit syndication space because that affordable space and I mentioned it and my in my script, not only lending on affordable properties, but also syndicating tax credits is a great business and somebody that would be wildly accretive to what we're doing and focusing and that.
Part of the market so you're spot on Uhm, we've got the people. We've got the if you will brand and the affordable space and will continue to expand upon it.
And then finally, you know you mentioned pricey.
Every every 1 of US gets the same question how can we track Fannie Freddie pricing you said Freddy raise their bid 20 basis points.
Is is there any public benchmark that we can turn to as outsiders to get a handle on that I know, we can watch the volume figures the volume figures weren't bad bad, but you're right. They they weren't encouraging is there any benchmark we can use to to say Oh pricing is up we can.
And do that with residential mortgage.
The challenge is doing it with multifamily yeah, I would I would say honestly Henry make friends with the C. F O at 1 of the big instead.
Institutional investors and multifamily and call him or her on a consistent basis and say what are you seeing and the market and it's very evident when the agencies.
And back into business, everyone knows it but it's not published does not like will sit there and say D. Whoa spreads to come down to ask uhm, but if you if you do call Michael Lasher, It Blackstone and say Hey, Michael Who's the most competitive source of capital and market right now when the agencies are and it you'll know exactly that answer and when agencies are out of it and he'll also knew it.
And I'll I'll leave a voicemail and back right away [laughter], So for little Guy and Nashville wants to talk to you about maybe Steve will to talk to him he's more charming William.
Great. Thank you look at this happened before.
Stock tripled since then.
I'm I'm sure that everybody will digest as well, but I do agree and appreciate your your your comments or questions and your book Exenterate January.
And your heart rate.
This time and have and no further questions I will turn it back up and and really for closing remark.
So it's a beautiful morning here in Denver, it's great having Steve across the office for me here in Denver, you're getting the north and the South view of downtown Denver and.
And.
As I said at the top of the Earth day ended up my prepared remarks, congrats to the W. N D team for a fantastic queue to and as the numbers that Steve and I put out to everyone. Today Q3 is looking I'm very healthy and I appreciate everyone participating today and the call and I Hope you everyone has a great day, thanks very much.
And for everyone.