Welcome to Walker & Dunlop's Third Quarter 2012 Earnings Conference Call and Webcast. Hosting the call today from Walker & Dunlop is Willy Walker, Chief Executive Officer. He is joined by Debbie Wilson, Chief Financial Officer; and Claire Harvey, Vice President of Investor Relations. Today's call is being recorded and will be available for replay beginning at 11 a.m. Eastern Standard Time. The dial-in number for the replay is (800) 695-2533. [Operator Instructions] It is now my pleasure to turn the floor over to Claire Harvey. Please go ahead.

Thanks, Clint. Good morning, everyone, and thank you for joining Walker & Dunlop's third quarter 2012 earnings conference call. Joining me this morning are Willy Walker, our Chairman, President and Chief Executive Officer; and Debbie Wilson, our Executive Vice President, Chief Financial Officer and Treasurer. This call is being webcast live on our website and a recording will be available later this morning. Both our earnings press release and website provide details on accessing the archived call. This morning, we posted our earnings release and presentation to the Investor Relations section of our website, www.walkerdunlop.com. Both documents provide additional detail on certain topics that we will refer to during our prepared remarks. Please also note that we may reference certain non-GAAP financial metrics such as adjusted net income, adjusted earnings per diluted share, adjusted operating margins, adjusted income from operations and adjusted total expenses during the course of this call this morning. Please refer to the earnings release and presentation posted on our website for reconciliations of the GAAP and non-GAAP financial metrics and related explanations. Investors are urged to carefully read the forward-looking statements language in our earnings release. Statements made on this call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, including statements regarding future financial operating results, involve risks, uncertainties and contingencies, many of which are beyond the control of Walker & Dunlop and which may cause actual results to differ materially from the anticipated results. Walker & Dunlop is under no obligation to update or alter our forward-looking statements whether as a result of new information, future events, or otherwise. We expressly disclaim any obligation to do so. More detailed information about risk factors can be found in our reports on file with the SEC. I'll now turn the call over to Willy.

Thank you, Claire. And, good morning, and thank you, all for joining us on this special day for Walker & Dunlop. Today marks the 75th anniversary of the day my grandfather and great uncle founded this company. My father has spent his entire career successfully leading and growing this enterprise, and today I have the honor of working with an outstanding group of professionals who are focused on where Walker & Dunlop goes from here to continue expanding upon this company's storied history and fantastic shareholder returns. It is particularly pleasing to be announcing such impressive quarterly results on this anniversary. The successful acquisition of CWCapital and resulting growth, both organic and due to the acquisition, of over 100% in origination volumes, revenues and adjusted net income is dramatic. This company has never been stronger with regard to market position and financial strength and our investors should know that our management team is laser focused on how to take advantage of where we stand today. I want to take a moment to reflect on the history of Walker & Dunlop before we dive into specifics on the quarter and year-to-date finances. Debbie will provide additional color on our financial performance, and I will conclude by discussing where we go from here. I won't spend much time on truly ancient history, but it is noteworthy that we have been in business for as long as the Golden Gate Bridge and Federal Reserve building have existed. We have managed through many cycles, always with a focus on meeting our clients' needs and realizing long-term capital appreciation for our shareholders. My father made the wise decision in 1988 to enter the Fannie Mae DUS business, allowing a small, thinly capitalized company to begin competing with the country's largest financial services firms. Walker &…

Thank you, Willy. Today we celebrate the company's 75th anniversary and report record Q3 performance. What an exciting and monumental time for the company. In the past, we have described our quarterly results using words such as exceptional, record-breaking and transformative. The third quarter of 2012 continued this trend. Significant amounts of time and effort were invested during the quarter to ensure the key areas of our business, originations, underwriting, rate locks, closings, deliveries, servicing and asset management could continue without interruption as we brought Walker & Dunlop and CWCapital together. And those efforts paid off. Employees rallied around the combined company and delivered strong results. I'm very proud of our team, and I would like to thank them for all of their hard work this quarter. I will focus my remarks today on the performance drivers for Q3 and how the CWCapital acquisition impacted the 3 months ended September 30. I will then provide an update on the integration of CW, including acquisition- and integration-related expenses and long-term savings. The CWCapital transaction generates both short-term and long-term changes to our financial statements. As you can see, we are providing both GAAP financial information and adjusted financial information that excludes the short-term impacts of purchase accounting and deal-related expenses. We believe the adjusted financial information provides investors with meaningful data about the ongoing operating results of the company and allows investors to benchmark performance between periods. The majority of the deal-related expenses and short-term impacts of purchase accounting are collectively defined as selected expenses and are included in our GAAP financial statements. Slides 17 and 18 of the presentation provides breakout of the selected expenses and reconciles GAAP and adjusted financial information for expenses, income from operations, operating margin, net income and diluted earnings per share. You may want to…

Thank you, Debbie. Walker & Dunlop has gained significant market share through the acquisition of CWCapital and is extremely well positioned for the anticipated growth in commercial mortgage originations over the next 5 years. We call our plan for the next 5 years Onward to 80, building off our successful Drive to 75. So what does Walker & Dunlop look like at 80 and how it will differ from Walker & Dunlop today? First, Walker & Dunlop is a market leader in the multifamily finance space and we will work tirelessly to maintain and grow that position. Fannie Mae and Freddie Mac may or may not look exactly like they do today in 2017, but Walker & Dunlop will still be one of the very largest lenders to the multifamily sector regardless. Second, Walker & Dunlop will continue to grow its Capital Markets business to originate loans on other commercial property types such as office, retail, hospitality and industrial. We have spoken previously about our desire to expand this business in the Southwest and Western United States, and within the next few years we expect to originate $3 billion to $5 billion annually in commercial mortgages through this channel. Third, we will continue to build out our proprietary capital solutions so we are underwriting and lending on all commercial real estate asset classes. Today, we are using our balance sheet and warehouse lines from commercial banks to lend on multifamily properties. We are exploring various capital solutions to lend on other asset classes such as a mortgage REIT, institutional funds and CMBS. Walker & Dunlop has the credit track record, client relationships and access to capital to be a significant lender to the entire commercial real estate industry going forward. How big does Walker & Dunlop get? It's very hard…

[Operator Instructions] We'll go first to the side of Bose George with KBW.

I have a couple of questions. First, in Debbie's prepared remarks, she noted that there was a large deal or 2 large deals where a traditional MSR wasn't booked. Could you just clarify that, just how the economics of that work?

Sure. Bose, I was going to pull out the page -- let me pull the page on the slides as it relates to average mortgage banking, which, if you look over time, has been 136 basis points. And in Q3 '12, it was 118 basis points. There were -- the 2 large transactions, one of them has a very short yield-maintenance period. And as you know, most of our loans have a 9.5-year yield-maintenance period and a 9-year estimated life. So when the large transactions have a very short life, effectively the MSRs have very little value.

Okay. And in that particular transaction, is the -- are the economics just a little lower or is there like more cash gains or is there some offset to that?

It depends. But in this particular instance, no. Large transactions vary deal by deal. But in this just the way the loan was structured, the MSR has a short yield maintenance period. It could last for a long period of time. But just given the components of yield maintenance, it's a little unnerving to put an MSR for a long period of time if the borrower can prepay in a short period of time.

Okay, great. That makes sense. And just in terms of the -- you booked your MSR this quarter, it was 134 versus 190 last year, is the difference there just the servicing fee?

MSRs are generally driven by servicing fees. The value of the MSRs are generally driven by servicing fees. Product mix can have an impact, but servicing fee is generally the biggest driver of that.

Okay, great. And then just lastly on sort of a political question. The FHFA is supposed to put out a report on the future of GSE multifamily in October. Was that expected?

It was expected, Bose. I don't know what the status of them putting out the paper is, to be honest. I haven't gotten an update on that. I think the election, as we talked about in our earnings release this morning, sort of renews the discussions on the agencies with the likely and entirely new Treasury Department in the Obama administration, some changes on the House Financial Services Committee, et cetera. I think the debate begins anew, if you will. And I would also add that with Fannie Mae and Freddie Mac, I think Freddie made $1.3 billion and Fannie made $1.6 billion in the third quarter, so we've got about $3 billion between the 2 agencies being made in the third quarter. I find it -- it will be very interesting to see how Congress looks now that they own them and are benefiting from that financial success at a time when everyone's focused on the fiscal cliff. It will be interesting to see how those revenues coming to the government change the government's outlook on what they want to do with Fannie and Freddie. And, Bose, just one quick thing on the points that Debbie made, those 2 loans, one's a 5-year loan, one's a 7-year loan and they're both adjustable-rate mortgages. And so as a result of that, you're not booking a big MSR, but they're 5 and 7 years. So they're not that short from a term standpoint. But, as Debbie said, they aren't prepayment protected, and as a result, we didn't book an MSR.

And we'll go next to the side of Will Marks with JMP Securities.

I wanted to start with -- I can't remember if you've given this in the past, I don't think you have, but what the combined number would have looked like for the full 9 months for the 2 companies or the quarter or both?

We haven't given that, Will. We did in our -- with the filings.

June 30.

Our June 30 filing has CW first 6 months of the year, right?

Which is approximately $2 billion.

So are you talking about origination volumes, Will, or are you talking about...

Sorry, yes. Origination volumes.

Yes, CW had done, I believe, $2 billion in the first 6 months of the year. I don't -- I can't remember specifically what they'd done in July and August. But the bulk of their Q3 originations were September. So I'll take a swag that they'd done probably $3.3 billion through the first 9 months of the year on the stand-alone basis, with $1 billion being in September that comes into the consolidated, $300 million in July and August and then $2 B before that. We can get you actual for July and August as it relates to what the originations volumes were.

Great, I'll follow up on that. And then, based on the guidance you're giving for next year, the -- can you give some underlying assumptions? Is there -- does it include some hiring or is it pretty much just the same where you are right now? Obviously, there's a benefit from owning CW for the full year.

Yes, the 2013 guidance is based upon the origination platform we have in place today. That doesn't mean that we won't continue to look to hire talented originators and continue to grow. As I said, in our comments, we're still looking to grow our Capital Markets business in the Southwest and in the Western United States and we're very focused on adding origination talent there. But I think one of the challenges for us right now, Will, to be very blunt about it, is that we've brought these 2 companies together, I think, exceedingly well. We have brought across the vast majority of origination talent at CWCapital, and everybody seems to be enjoying the W&D platform, the added scale we have. And clearly, the numbers in Q3 are reflective of a great success on a combined basis. But we're quite honestly getting our arms around the scale we have today and the market presence we have, and, quite honestly, how fast we can grow in 2013. So we feel very good with that range. And at the same time, as we noted, if you look at how we've grown origination volumes over the past 5 years, we've grown dramatically. And so we're, quite honestly, looking at our new scale, looking at the marketplace. I would add one other comment, which is just that the demand for capital only seems to be increasing. And with our new market position, we have a wonderful market to sell into and we have a much more significant market presence than we've ever had.

Okay. And one more question. On the guidance, what kind of servicing fees should we assume next year? I mean, is the current run rate pretty close to where you should be?

Well, you know we don't give guidance on servicing fees, Will. So we're not going to give you an exact number. But I think that one of the things that Q3 did show is that in doing some of these larger transactions, sometimes they will be structured adjustable-rate mortgages, where there are some borrowers today who are looking not to lock and taking adjustable-rate mortgages that they can prepay. And as a result of that, you're putting on some pretty big volume but you're not booking the full MSRs upfront. But as Debbie noted, if those loans stick around for their full term and many of them have swaps related to them, which make it so it's unlikely that people will prepay, it's wonderful servicing income over the life of the loan. So to be honest, we're right now working through the type of deal flow that the CW origination network brings in, the type of deal flow that Walker & Dunlop has gotten historically and we're doing our own modeling, but we can't give you an exact number on that right now. But Debbie -- I think Bose just pointed out, Q3 last year was at 190-something and we're at 136 this quarter. And your comment was should we just take the middle of that. I'm not sure whether you ought to go right down the middle. But I think the additional volume that we bring in and the presence that we have with Fannie and Freddie, I think, should say that agency lending will be a very significant component of our 2013 origination volumes even as we grow out our non-agency lending operations.

And we'll go next to the side of Brandon Dobell with William Blair.

A couple of things on the forward look. Within that origination guidance you provided, what's your underlying assumption for, let's call it, an organic Walker & Dunlop kind of excluding CWCapital origination number or I guess a growth rate for just the Walker & Dunlop producers you got on board?

Brandon, we're not breaking that out. But as you saw in Q3, W&D on a stand-alone grew over -- originations over 20% quarter-on-quarter. We feel very good about the W&D origination platform as well as the addition of the CW, but we're not breaking out what W&D, if you will, historic versus CW historic are going to do going forward.

Okay. And then from, I guess, a logistics perspective on the CWCapital integration, sounds you guys are still on track for the same kind of time frame around getting the servicing businesses or servicing business transferred to your outsourcing platform, office closings, things like that. Any changes from what you guys had talked about on the last conference call?

Fortunately, no. Any time you do a deal of this scale for a company of our size, you sort of think that something might present more of a challenge or not happen to plan but, great credit to our management team, things are moving along very nicely and on plan. And as Debbie outlined, many of the estimates that we gave to you all on September 13 have come in pretty much right on the top of the estimate that we had at that time. So we feel pretty good about what we projected out, as well as the time line for getting integrated.

Okay. And then final one from me. As you look at the, let's call it, average deal size trends both in the Walker production as well as the CWCapital production or producers, how do we think about the influence of those trends on the average fees for you guys? And is there any difference in what the servicing fee would look like on a large deal, let's say, a CWCapital deal going forward as opposed to the traditional Walker deal? Just trying to, I guess, get a sense of the direction on the average basis points of fees even though those deals size may be getting a lot bigger for you.

It really, Brandon, depends on the borrower. One of the big issues here is that there are some borrowers today -- so part that the asset is a large asset, $200 million financing, whatever, the real driver right now is who the borrower is and what's motivating the borrower. If it happens to be a real estate investment fund, so a private equity firm that is in the real estate investment business that has a fund life, they might be more steered towards doing an adjustable-rate mortgage because they're going to pick up the additional -- the lower interest rate and they're also going to have some more flexibility on the prepayment side. If the owner of the asset is somebody who's in the real estate business and is a long-term holder of the asset, given where rates are right now, they're more than likely to go for a fixed-rate 10-year mortgage where your -- the rate is a little bit higher than floating rate today, but you've taken any of the interest rate risk out of the loan as it goes forward. And in that case, obviously, we're booking a full MSR when we originate the deal. And so it's not so much -- I mean, it's very difficult to tell, because our origination platform today has access to some clients that, quite honestly, Walker & Dunlop had worked at for years to try and break into and couldn't. And, I think, vice versa. There are some historic Walker & Dunlop clients that CW would have loved to have had access to. So I think the bottom line is that we're blessed to have some great originators access to very, very big clients. It really is dependent on where the client's motivation is at this time in the cycle and then also where rates are. If rates start to move and people see rates moving, people are going to go to fixed much quicker than they are to an adjustable-rate mortgage. But today, given where rates have stayed, there are a lot of people looking at those 2, and some people are opting, like those 2 deals that Debbie mentioned in Q3, they're opting for adjustable-rate mortgages.

Okay. And then final one, maybe a quick one for Debbie. Any sense on kind of where capital spending and/or operating cash flow, what those 2 should look like for 2013 at this point?

We have not -- we have not done our cash flow analysis completely for '13, so we don't know that yet. We don't expect to have huge capital expenditures, though.

And we'll go next to the side of Cheryl Pate with Morgan Stanley.

I just wanted to touch on the servicing margin. And looking at the legacy Walker & Dunlop portfolio, obviously it's remained very steady. And then I guess my question is more -- when I'm looking at the CWCapital, when we had the presentation back in September, it was, I think, 18 basis points as of June 30 and then 21 basis points on August 31. Was there anything really different that sort of shifts the mix there? And I guess, how should we think about the sustainability of that increase going forward?

Cheryl, it's Debbie. Good question. What you'll notice between the 2 presentations are 2 things: One is the balances in the earlier presentation were higher and the servicing fee was lower. So the portfolio required was actually smaller, but it had a higher servicing fee. And the reason is, is because CWCapital sold about $3 plus billion of CMBS servicing with a very low servicing fee, which decreased the balance but increased the servicing fee rate. So it started to look much more like the servicing fees associated with our historic portfolio.

[Operator Instructions] We'll go next to the side of Mike Widner with Stifel, Nicolaus.

I guess 2 questions, thinking more broadly and looking really at the Slide 4 of the slide presentation. You mentioned down at the bottom in the strategic outlook $3 billion to $5 million annually through other capital markets channels. I guess the first simple question is, is that in addition to the $8 billion to $10 billion you kind of referenced for 2013 above or is that -- I know it's kind of just rough guidance, but I mean is that included in that number or would that be potentially in addition to that number? And how are you thinking about kind of what the biggest opportunities there are?

Yes, it's in the number, Mike. Good morning, by the way. It's in the number. And as I said, we're looking to originate $3 billion to $5 billion over the next couple of years. So we're still executing on our plan to build that up. As you know, we added teams in Wisconsin and Florida in Q2 of this year. They've hit the ground running and are doing fantastic origination work right now. But the capital markets growth is built into '13, $8 billion to $10 billion guidance.

Got you. And so when you say other commercial property types, the other geographic locations, I get. But the other property types, I mean, what -- I guess just so we can get a sense of kind of what markets you might be expanding into, I mean, where do you see the greatest opportunity and where do you see the greatest traction kind of in the near term?

So to try and lend on a low leverage Class A office building in Washington D.C. or New York is not a space that Walker & Dunlop will be able to lend on because that is dominated by life insurance companies and CMBS, and, in some instances, banks, where it's either a short-term loan or it's a construction loan. And so just given our cost of capital and the competitive set, those are not assets that likely you'll see us lending on. What you will -- the opportunity for us is on assets that are either transitional, where they are in lease-up, whether it be a suburban office building, whether it be a retail center. The other opportunities will be potentially in hospitality. The hotel market has been one that banks and life insurance companies have steered away from because it's really more of an operating business than it is a real estate lending operation, if you will. And if you can underwrite it and understand the asset and understand the operator, hospitality is a great space to put money out. And then finally, in the multifamily space, there are plenty of places in the capital stack, if you will, where Walker & Dunlop presently does not lend. And so we are typically doing, as you know, first trust mortgages, generally speaking, low-leverage deals and on very stabilized properties. And so as we have discussed before in what we are doing with our interim loan fund is taking deals that are either in lease-up or an acquisition and then a rehabilitation to then go and lease them up again. We're making loans there. And then as well, we can also move up the capital stack and potentially look at either higher leverage or mezzanine opportunities. So given the access to deal flow, given our relationships with borrowers, particularly in the multifamily space, we feel very good heading in that direction in the future.

Great, appreciate that. I'm going to come back to that in a second. Let me ask sort of the second broad one, though. Last bullet point on that page, you mentioned identifying capital solutions, mortgage REITs, institutional funds, et cetera. Just wondering if you can elaborate a little bit on sort of what you mean by that and how that would potentially fit in with Walker & Dunlop from an earnings standpoint or structure standpoint or how should we think about the opportunities there?

So, Mike, we've talked previously about the fact that we are out marketing to raise a debt fund and that's what I call sticky capital, going out to institutional investors, investing large slugs, if you will, $10 million, $20 million into a $100 million fund, which will have moderate leverage on it and you use that fund to lend on commercial properties. That's, as you know, takes a lot of time to raise that capital. But once you've raised it, it's around for the fund life, which may be 7 to 10 years. And the nice part about it is that it's sticky capital, it stays. The next that we've discussed before is a mortgage REIT and that would be a remotely managed mortgage REIT, where Walker & Dunlop would be the manager of the REIT. We would raise probably $100 million to $200 million out of the gate likely by securities with that and then potentially have the ability to put whole loans into the mortgage REIT at any time we want to. We could then potentially securitize loans out of the REIT if we see the opportunity to do so. As you know very well because you cover a number of them, mortgage REITs recently have not exactly been investors' top choice. The bottom line there is that regardless of what the market conditions are, I think from a strategic standpoint, it might be very valuable to Walker & Dunlop to have a remotely managed mortgage REIT. The other thing, though, is that mortgage REITs, when you really want the capital to be able to do great deals, the capital isn't there. So it's not, if you will, sticky money. And so it has obviously pros and cons to going down that path. The final is CMBS. The…

I appreciate all those comments and it sounds like you've got a lot of options out there. Let me ask one more, if I could, just sort of super big picture level. If you step back and look at Walker & Dunlop post-IPO, one of the allures to investors for getting your stock was the growth opportunity. And historically, they can look back at kind of 15% to 20% growth in originations, earnings, et cetera. The allure was there's not a whole lot of places in financial services these days to get a growth company that had a runway for a lot of that type of growth ahead as well as a track record of that behind. With the CW acquisition, you substantially grew and then once you've got a much greater and much larger base, obviously, it's hard to grow the core business and sustain a 15% to 20% kind of growth rate on top of that. So from the standpoint of a shareholder thinking about where the growth opportunity is here, particularly from an earnings perspective, on the one hand, doubling your size makes it a lot harder. On the other hand, you're a much larger platform and now you're talking about a lot of things that were -- sort of seemed very distant possibilities in the future, but now seem like they might be closer. So with that sort of thing in mind, how do you feel about the 15% to 20% kind of growth or the overall ability to grow the company now relative to when you IPO-ed and before you did CW? I mean, you're more excited today, less -- I mean, obviously, you're more excited today, right? I mean, in terms of the growth, I mean, should investors still consider you guys to be, obviously, still a growth company. But with the 15% to 20% kind of threshold in mind, I think the question a lot of people wrestle with is, is that a more difficult hurdle now or is that actually an easier hurdle now? And because of the possibilities this opens up to you versus just being harder to grow on a larger base?

Mike, it's -- I think it gets easier. But given that I haven't run this company from, if you will, $250 million of revenues to $1 billion of revenues, but have run it from $50 million of revenues to $250 million of revenues, the, I think that as we gain scale, it actually becomes easier. And the reason is that you sort of get to a tipping point where originators want to join a fast-growing platform. And as we pick up more and more market share, they understand the benefits of that. The brand gets far more widely understood and known. As you know, if I showed -- if you went home and showed someone in your household a list of the top 20 commercial real estate lenders in the United States, I'm pretty sure that 15 to 19 of the names on that list are sort of household brand names and then there's Walker & Dunlop, which unless you are in our space, you probably don't know the brand. And so I think as we continue to grow our geographic footprint, as we continue to grow as it relates to our market presence and as we expand in other real estate asset classes, that the growth can actually accelerate upon itself. I think the other thing is that now that we are the #1 Fannie Mae DUS lender and the #3 Freddie Mac Seller/Servicer, to be sort of 1A at Fannie Mae, we clearly want to continue to grow that business. But what we have looked at as a management team is that if you just take what we do today and sort of grow it exactly as it looks today over the next 5 years, our market share with Fannie and Freddie and HUD is so huge that…

There are no further questions at this time. I'll turn the floor back over to Mr. Walker for any closing remarks.

Yes. Will Marks asked earlier about the CWCapital volumes through August and that number is $2.3 billion. Willy?

I love it when I'm right. So thank you for that clarification, Debbie. As I said at the top, it is a special day for our company. There aren't too many firms that have been around for 75 years and we are thrilled to be one of them. And I would just say that it's an honor to work with the team that we have at W&D today. And it's also been a true pleasure to welcome everyone from CWCapital into Walker & Dunlop and have these 2 firms come together as, I guess seamlessly is probably the proper term or as quickly as they have. And so to all of you on the call this morning, thank you for your interest in Walker & Dunlop and your coverage of us. And have a great day.

Thank you. This does conclude today's conference call. Please disconnect your lines at this time, and have a wonderful day.