Walker & Dunlop, Inc. (WD) Q4 2016 Earnings Report, Transcript and Summary

Welcome to Walker & Dunlop's Fourth Quarter and Full Year 2016 Earnings Conference Call and Webcast. Hosting the call today from Walker & Dunlop is Willy Walker, Chairman and CEO. He is joined by Steve Theobald, Chief Financial Officer; and Claire Harvey, Vice President of Investor Relations. Today's call is being recorded and will be available for replay at 11:30 A.M. Eastern. The dial-in number for the replay is 800-688-7036. The archived call is also available via webcast on the Company's website. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Claire Harvey. Please go ahead ma'am.

Good morning. Thank you, Erica and thank you to everyone for joining us the morning. Thank you for joining the Walker & Dunlop fourth quarter and full year 2016 earnings call. I have with me this morning, our Chairman and CEO, Willy Walker and our CFO, Steve Theobald. This call is being webcast live on our website and a recording will be available later this morning. Both our earnings press release and our 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. These slides serve as a reference point for some of what Willy and Steve will touch on this morning. Please also note that we will reference the non-GAAP financial metric, adjusted EBITDA, during the course of this call. Please refer to the earnings release posted on our website for a reconciliation of this non-GAAP financial metric. 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 describe our current expectations and actual results may differ materially. 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 annual and quarterly report filed with the SEC. With that, I will turn the call over to Willy.

Thank you, Claire. And good morning, everyone. Since Q4 in 2016 financial results were so incredibly strong, I thought we'd start the call with Steve discussing our fantastic financial performance. So with that, Steve?

Thanks, Willy. Good morning, everyone. Fourth quarter finished off what was an incredible year of growth and profitability for Walker & Dunlop. That momentum is carried over to the start of this year and we expect 2017 to continue our pattern of growth and record financial performance. I will touch briefly on our fourth quarter results, recap outstanding 2016 financial performance and layout our expectations for 20171. Let's start with slide 3. Fourth quarter was a strong finish to the year with total transaction volume of $6.3 billion, a record for us. Included in the total transaction volume number is over $1 billion of investment sales activity, a quarterly record for that team. We earned $1.16 per share, a 73% increase over the $0.67 earned in the fourth quarter of 2015, and a record for quarterly earnings per share. We continue to see strong origination volumes with Fannie Mae, as well as a surge in brokered volumes during the quarter, which contributed to a gain on sale margin of 224 basis points, at the high end of the range we discussed during our last call. The record volumes, strong gain on sale margin and continued growth in our servicing fees led to a 47% quarter-over -quarter increase in revenues to $178 million. Expenses for the quarter increase by 34% year-over-year with the majority of that increase coming from personnel costs driven by the growth in our platform and increases in variable compensation. Personnel cost as a percentage of revenue were 41% for Q4 of 2016, inline with the prior year quarter and our operating margin in Q4 was 34%, up from 28% in the fourth quarter of 2015. Financially 2016 was the most successful year in the company's history. We set a number of financial goals at the beginning of the year, all of which we achieved and in many cases blew away. Let me spend a few minutes going through our key metrics, how we performed relative to our expectations and why we achieved such a high level. A summary of these results is included on slide four. I'll start with gain on sale margin. At the beginning of the year, we established an expectation for gain on sale margin of between 160 and 180 basis points, which we increased in the third quarter to 170 to 190 basis points, and then finally to between 190 and 230 basis points for the fourth quarter. These ranges were based on an expected product mix which early in the year assumed our Fannie Mae and Freddie Mac originations would be roughly equal. However, as the year went on, our agency borrowers gravitated more towards fixed rate loans and Fannie was the more competitive of the two GSEs when it came to fixed rate lending. Our Fannie Mae originations were 42% of total financing volume at over $7 billion for the year, while Freddie Mac originations were 25% of the total at $4.2 billion. This mix of business propelled our gain on sale margin for the year to 219 basis points, a significant increase from the 179 basis point gain on sale margin achieved in 2015 when we did more Freddie than Fannie. Operating margin for the year was 32% well above our target of mid 20%. This outperformance is a direct result of the just mentioned growth in our gain on sale margin, as well as a 23% year-over-year increase in servicing fees, both of which helped propel revenues to $575 million for the year, 23% higher than in 2015. Expenses grew only 17% year-over-year, as the benefits of scale and the growth in our servicing portfolio continue to drive efficiencies in our overall performance. Our return on equity for the year was 21% compared to 19% for 2015, and above our target of mid to high teens. Earnings per share of $3.65 grew 38% year-on-year, the third straight year of earnings growth in excess of 30%. We have built a solid track record of delivering strong growth and above average returns since going public in 2010, by effectively deploying capital and managing the business with a disciplined and focused approach, all while maintaining our entrepreneurial spirit and culture. Adjusted EBITDA is up 5% year-over-year, which might seem low relative to our overall earnings growth. However, there are few specific reasons for this. First, as we discussed in our last call, we decided to exit the conduit business in the fourth quarter after we determined that market conditions have changed from what we expected when we decided to take over full operation of the conduit in January. Including the $2 million of severance and other wind down costs incurred in Q4, our CMBS business was $7 million in 2016. Secondly, a significant part of our revenue growth story in 2016 was a 44% increase in gains from mortgage servicing rights, which we do not include in our calculation of adjusted EBIT DA. This increase in MSRs will have a significant positive benefit on 2017 and beyond. Finally, personnel expenses were up 23% year-over-year. As we continue to recruit and acquire new originators to the platform and as our variable compensation has risen with our transaction volumes and financial performance. Now that 2016 is behind us, let me give you some color on where we think our key metrics go for 2017. I will start by reiterating what we said on our last call that we expect to grow earnings per share by double-digits again in 2017. There are a number of important drivers to how we achieve this earnings growth that are embedded in each of our other metrics. First, we expect strong market conditions again in 2017. Based on Freddie Mac's most recent estimates, the multifamily market should continue to grow in 2017 and beyond. In addition, both Fannie Mae and Freddie Mac enter the year with no change to their caps and the ability to do as much qualifying affordable lending as possible. This framework allowed the GSEs to originate over $112 billion combined in 2016 and there is no reason to believe they won't be able to do at least that much again in 2017. We also have added a significant number of new mortgage bankers and brokers to our company, through recruiting and the recent acquisitions of the teams from Elkins and Deerwood. These investments have increased a number of bankers and brokers by 36% since the middle of 2016, giving us further confidence that we will be able to grow our transaction volumes in 2017. Since the majority of new mortgage bankers are in our capital markets team, we expect that brokered volume will grow at a faster pace than our other products, even though many of our capital markets producers originate GSE and HUD loans as well. We expect to grow our GSE volumes year-over-year based on expected market conditions and because we have meaningfully added to our origination staff. In addition, we still expect to do more volume with Fannie than Freddie in 2017, but do not expect that difference to be as pronounced as it was in 2016. While we have typically seeing borrowers gravitate towards fixed rates when interest rates are rising, large institutional and private equity investors still find floating rate financing attractive for their investment needs. As a result should we do more that type of business, similar to what we did in 2015, we will see a shift in mixed to more adjustable and perhaps more Freddie Mac. Finally, we expect growth in our HUD business year-over-year based on the trends in the second half of 2016 and a robust pipeline of deals. Based upon the mix of business we expect in 2017 gain on sale margin should be in a range of 180 to 200 basis points over the course of the year. Our previous target for operating margin was mid 20%. We have meaningfully outperformed that level for two straight years, based upon the additional operating leverage we get from growing our GSE lending to an average of nearly $1 billion a month and from the growth in our servicing fees. We expect both of those trends to continue and as a result, we are raising our target for operating margin to range of 27% to 32% for 2017. Our long-term return on equity target remains in the mid to high teens. Our capital base continues to grow and at the end of 2016 stockholders equity was $610 million, up 25% from the beginning of the year. As earnings and employee stock compensation related issuance increase the overall balance, offset by the approximately $9 million of share repurchases we did earlier in the year. As mentioned in our earnings release this morning, yesterday the Walker & Dunlop Board reauthorized our share repurchase plan for up to $75 million of stock over the next 12 months. We ended the year with a $119 million of cash on the balance sheet and will continue to effectively deploy that capital into attractive opportunities to generate our targeted return. Lastly, we expect our adjusted EBIT DA to grow by double-digit percentage points in 2017, inline or perhaps even higher than earnings. As I mentioned previously, a significant amount of our revenue growth in 2016 came from mortgage servicing rights. Those mortgage servicing rights essentially coil the spring for growth in future servicing fees, as the non-cash revenue turns into cash servicing revenue in future periods. Our portfolio is now over $63 billion with a weighted average servicing fee of 26 basis points, up 2 basis points of over the last two years. That math gets you to $164 million of servicing fees on an annual basis, a 16% increase over our fees for 2016 before we've even originated a single new loan in 2017. With only $1.7 billion of scheduled maturities this year, we expect to continue growing the portfolio and increase in servicing revenues, which in turn will result in strong growth in both earnings and adjusted EBITDA. 2016 was a tremendous year for our company, continuing our track record of growth and strong returns and we expect more of the same in 2017. With that, let me turn the call over to Willy.

Thank you, Steve. We established a vision of creating the premier commercial real estate finance firm in the United States when we went public in 2010 and the financial results Steve just discussed reflect dramatic progress towards achieving that goal. We have consistently established annual financial, operational and strategic goals and executed upon them exceptionally well. As slide 5 shows, since our IPO the compound annual growth rate of all of our major financial metrics have exceeded 30%. And investors in d Walker & Dunlop's IPO have seen their stock price increase at a compound annual growth rate of 21%, which were not as dramatic as our financial performance is still exceptionally strong. What excites us the most is that the team we have built, the infrastructure we have invested in, the brand we have cultivated, and the clients we have pleased, create momentum and opportunities to continue growing Walker & Dunlop's at an impressive rate. We stated in our first earnings call of 2016 that we expected to have a slow Q1, but that we would grow earnings per share by double-digits for the year. Growing earnings-per-share 38% year on year is likely more than what most people think of as double-digit growth. But investors in W&D need to understand that we expect to grow earnings per share by over 10% every year. We have grown EPS at a 37% compound annual growth rate since going public and given the addressable market and W&Ds defendable and growing market position, there is no reason to expect anything below 10% earnings growth for this company until we see a material change in the macro economy or the team we have assembled at W%D. At the beginning of last year, we also established the following goals, exceed $0.5 billion in revenues, return mid-teens, return on equity, managed to a mid-20s operating margin and grow our sales team to 120 sales professionals. We far surpassed each of those goals generating $575 million in revenues, 21% return on equity, 32% operating margin and reaching 125 sales professionals. That growth is impressive on its own, but it is even more impressive during a year in which the commercial real estate financing market is projected to have been up by only 2% to $515 billion and the multifamily financing market is projected to have grown only 13% to $282 billion. Our recent growth has been among the highest in the industry because of our client base, team of financing professionals, business model and focus. As you can see on slide six, while we have benefited from a growing commercial real estate financing market, we have not been dependent upon it. Over the past three years, as our business has scaled, we have grown faster than the market and while macro trends are important Walker & Dunlop is a high-growth company with a defendable market position that is in no way managing its business to rise and fall with macro tides. In 2016, we originated $16.7 billion of loans, a record and nearly doubled the $8.4 billion we originated in 2013. That’s a compound annual growth rate twice that of the commercial real estate financing market over that three-year period. We continue to invest in growing our loan origination platform last year through a combination of acquisitions, recruiting and internal promotions. We finished the year with 125 sales professionals, ahead of our goal of 120 and expect to add 16 mortgage bankers through the acquisition of Deerwood real estate capital last week. Two things are noteworthy about the addition to our sales force over the past year. First, most of the bankers and brokers we added did not materially contribute to our 2016 performance. So their impact on our growth is yet to come. And second, as we have added fantastic loan originators across the country, their ability to sell our GSE and HUD loan products is dramatic, making them more effective bankers and brokers and impacting Walker & Dunlop's financial results for the better. Walker & Dunlop finished 2016 as Fannie Mae's second-largest lender, Freddie Mac's third-largest seller servicer, and a top 10 HUD originator. Our market position with the GSEs and HUD is extremely strong and only grow stronger as we continue adding loan originators and brokers to our platform. As we have grown transaction volumes and revenues, our costs have not inflated, even with the significant investments we have made in sales professionals. For context, while we have grown loan originations at twice the rate of the market over the past three years, our operating margin has expanded from 23% in 2014 to 32% this past year. Revenue growth and margin expansion have produced a 44% compound annual growth rate for EPS over that same three-year period. We will continue to grow dramatically in 2017, as slide 7 shows, Freddie Mac projects $300 billion of multifamily financing activity in 2017, up from an expected $282 billion in 2016. There is still a huge amount of dry powder sitting with private equity firms that need to be invested in commercial real estate, which according to pre-Quinn [ph] as of November 2016, there was $239 billion of total capital waiting to be invested globally, up from $210 billion in December of 2015 with $100 billion targeted towards the United States. Multifamily remains the largest, most stable and most desirable commercial real estate asset class for institutional investors. Second, demand for multifamily housing continues to grow. Construction has been active over the past couple of years and that new supply will need to be absorbed in 2017 and 2018. However, there is still a housing supply shortage and with rising interest rates, the ability for average Americans to own a single-family home will only get more difficult. As well, there are 83 million millennial's, the nation's largest population cohort who will drive demand for multifamily housing over the coming decade. We expect the multifamily financing market to be extremely active between now and 2020, which presents a great opportunity for our business, given our strong market position and exceptional team of financing professionals. Our business plan for the next four years includes three major components, continued growth of our debt financing and investment sales platforms, dramatically scaling our servicing portfolio and building an asset management business. If we execute on our growth initiatives in each of these areas, we will generate over $1 billion in revenues by the end of 2020. Let me walk through each of these initiatives and how they will contribute incremental revenues to achieving $1 billion. We will continue to add bankers and brokers to our platform targeting 15 to 25 per year. They should increase our annual transaction volumes from $19 billion today to between $30 billion and $35 billion by 2020, adding an additional $100 million to $150 million of mortgage banking revenues. As transaction volume scale to that level, our servicing portfolio will grow commensurately. We only have a $11 billion of scheduled loan maturities in our servicing portfolio over the next four years. So by originating between $19 billion and $35 billion of loans over year and limited runoff in the servicing portfolio, we have a very clear path to growing the portfolio to well over $100 billion by 2020. At that size, the servicing portfolio will generate an additional $125 million to $175 million of incremental revenues on an annual basis. To achieve our goal of becoming the premier commercial real estate finance firm in the United States, we need to continue to expand our product offering to meet the increasing and evolving needs of our customers. That is why the asset management business is key to our future growth. We see a need to provide our customers with preferred equity, mezzanine debt, construction loans, and bridge loans over the coming years, as the commercial real estate industry reacts to a revolving economy. To date, we have solved for our customers financing needs by using our balance sheet or brokering the financing off to another source of capital. We want to control that capital and generate the origination fees, interest income and asset management fees that come from a scaled asset management business. We have made significant progress towards forming our first joint venture in this space and hope to have something to announce this quarter. It is likely that the original collateral to go into that joint venture or some of the interim loans sitting on our balance sheet today. We have originated over $1 billion of interim loans in the last four years without a single credit loss and this joint venture will allow us to do even more lending with similar origination and underwriting standards, but off Walker & Dunlop's off-balance sheet. This will be the perfect starting point to building an asset management business, but by the end of 2020 we'll hopefully have $8 billion to $10 billion of assets under management and generate $80 million to $100 million in revenues. To grow a business of that size in the next four years, we will certainly need to be acquisitive, similar to the growth path we have taken to date with our core business. In summary, if we execute on this business plan in the next four years, we will add $100 to $150 million in mortgage banking revenues, a $125 million to $175 million in servicing fees and $80 million to $100 million in asset management fees, which at the high end of the ranges and along with the natural growth in other areas of our business, such as interest income, and escrow earnings would get us to over $1 billion in revenues by the end of 2020 with the same outstanding bottom line performance our business model is built to generate. 2016 was an incredible year, where our scale and business model combined to produce incredible results. I cannot thank and congratulate my colleagues at Walker & Dunlop enough for producing such outstanding results. We continue to raise the bar on ourselves and I am impressed and deeply appreciative of the determination and skill by which our team continually takes our business to the next level. We have the brand, the clients and the market opportunity to continue scaling this business going forward. Our mission of building the premier commercial real estate finance company in the United States will be achieved by continuing to provide outstanding results for our clients, our investors and our employees. I'd like to thank everyone for joining us on the call this morning. And with that, I'd like to turn the call over the operator for any questions.

Thank you. [Operator Instructions] Thank you. Our first question is coming from Steve DeLaney with JMP Securities. Please go ahead.

Good morning. Thanks for taking the question. Congratulations on a great quarter and a record year. Willy, obviously, in the financial markets everybody is focused on the increase in long-term rates that we've seen since election, not to mention, you know, the Fed in play [ph]. So I guess we're up 50 to 60 basis points on the 10 year treasury yield. I'm just curious if GSE you know, quoted 10 year fixed rates, have they tracked the move higher in treasuries or they reflecting maybe any credit spread tightening that we are also seeing? Thank you.

Good morning, Steve.

Good morning.

I guess, two things there, first of all spreads have come in a little bit, but not a whole lot, but a little bit, because there has been a lot of investor demand for GSE taper. And then as it relates to sort of -if you will, tracking the move north, I think you saw at the end of 2016, right after the presidential election, a lot of people run to finance deals and that had a - that had an impact of getting a lot of activity in the financing pipeline towards the end of 2016. We entered '17 where the tenure as you know, got up right around 216, is backed off in the mid-240s. I think it is settled into a range where the normal course of financing activity is happening today. The real question that still sits in many people's minds is what happens on the investment sales side of the equation. We didn't have any deals fall out on the investment sales side at the end of 2016 and now – and most of those deals had money up on them. And so for a buyer to wait for cap rates to adjust was - would be a very costly thing. And what we're waiting to see is whether investment sales activity picks back up to where it was in 2016, or whether investors wait to see cap rates adjust to the new interest-rate environment. And to be honest with you, it's a little early in the year to make any real - if you will projection on that, I would say from having been out at the national multifamily housing conference a week before last, that there is a huge amount of activity in the multifamily space and that owners of multifamily properties are extremely active right now looking for places to deploy capital.

Got it. That’s helpful. And then Willy on page 7 of the deck, you show the forecast for modest growth for the MBA in Freddie Mac. I'm just curious that 6.4% year-over-year increases from $282 billion to $300 billion, do you know the timing of that increase and whether that was done before the election or in the month of December?

Yes. Their projections, those were revealed at the Freddie Mac conference, which was down in Miami. I want to believe right after the presidential election if my memory serves me right, Steve.

Okay.

The real driver there and I spoke into their economist about this, is they believe that financing activity would slow somewhat and they don't have a actual number on it. Once you get over a 3% 10 year. And so in the current levels, there is no modification to their projections. But they have talked about over a three-year - 3% 10 year and there may be some shift to their projections. I would also Steve just put forth that we tried to underscore in our comments, both Steve's and mine, that we have been growing far faster than the market and many people who have been investing in commercial real estate services firms seem to have an opinion that because volumes in the overall market might slow down. If that is going to slow down companies like Walker & Dunlop, what we have shown over the last three years is it the scale we have achieved and our defendable market position that we are positioned to grow faster than the market. And I don't want to say regardless of what happens in the market, because the market always has an impact on one's business. But we feel very confident that given our relative size today that I don't want to say regardless of the market again, but we feel very good of our ability to continue to grow in almost any market conditions that are presented to us right now, given the overall macro economy.

Great. And then, you know, obviously in the second half of this year of in the last six months or so you picked up Elkins and then just last week Deerwood which appear to be one of the larger acquisitions that you’ve made of a platform. Are there - do you see in your future, you know, do you see other similar opportunities for W&D to grow through rolling up other platforms and is that - sort of are they the operators ore the smaller independent operations do you sense - a sense of urgency to maybe find a more permanent place for them to attach to?

So, I got an email this morning from one of Deerwood's competitors in the New York region, saying congratulations, great acquisition. And I'm not sure whether I was reading into that, that this owner, operator would like to talk to us about Walker & Dunlop potentially acquiring them or whether he was just truly complementing us on a great acquisition. But I do think that as we continue to gain scale, that smaller operators see the ability to compete with ourselves, as well as the other large financing platforms as increasingly difficult. And as you know several competitors of ours in the agency space have exited over the past couple of years because the big have truly gotten a lot bigger and it is been increasingly difficult to compete with the large-scale platforms. So I would put forth to you that, when we find opportunities like an Elkins or Deerwood, we focus on them very quickly and I think we have a great deal team to underwrite them and acquire them and then integrate them seamlessly into Walker & Dunlop. With that said, as Steve mentioned, we have a significant amount of cash on our balance sheet. We have very little debt on the company and our acquisition targets likely will be larger going forward rather than of the same size or smaller. We like these, what I would call tuck-in acquisitions and the Elkins and Deerwood platforms are fantastic. With that said, we also have the opportunity now to look at some larger companies they could move revenues and bottom line performance even more materially.

Great. And we should assume that your preferred structure in an acquisition is maybe something up front and then I – earn out or some sort of residual handcuff?

That's a good assumption.

Okay. Thanks for the comments, Willy.

Thank you, Steve.

[Operator Instructions] Next we will go to Jade Rahmani with KBW. Please go ahead.

Good morning. Thank you. The seasonally pattern in originations in 2016 was kind of unusual because of the spread widening we saw a year ago and in 2015 there were sort of a steady flow. What do you think plays out this year given your comments about sort of rise discovery in the market?

So Jade, good morning. Hope you are doing well. As you well know, we said last year that Q1 would be slow and it didn't seem as if many people listen to us say that and kept expectations for us in Q1 quite high. We see a normal Q1 evolving, which is that Q1 and Q3 are typically our lighter volume quarters and Q2 and Q4 are stronger quarters, and I would reiterate what Steve said and what I said, which is that we're looking at our business on an annual basis, not on a quarterly basis and we expect to have double-digits EPS growth in 2017. And so the market looks very healthy for the entire year, but I would reiterate the typical cyclicality of the business, which we reiterated last year in this call which is Q1 and Q3 being slower than Q2 and Q4.

And in terms of the brokered loan volume, do you expect it to grow this year by the same magnitude as the mortgage banker headcount that you cited?

So you're asking whether you can take 36% additional headcount and take our mortgage banking volumes and grown by 36%?

Sure.

If that's your direct question, the direct response to that is no. I would put forth to you as Steve said, many of those people joined us throughout the year. The Deerwood team joined us last week. So I think it is unrealistic to expect that we would see that kind of growth in just our core brokerage volumes. I think one of things that both Steve and I talked to is that as we bring in mortgage bankers, the real if you will, I guess, incremental value we get is from bringing in people who typically have brokered loans off to third-party capital and join the Walker & Dunlop platform and see how compelling and quite honestly I don't want say easy, but the fact that we have such scale with the agencies and with HUD, those products are much, much easier for them to sell, and as a result of it, it is not only good for their business, its good for our business. And so bringing in what we call capital markets originators were typically just broker deals off and getting them to do incremental volumes of GSE and HUD origination is wildly creative to our model.

In terms of the brokered loan business, what percentage of servicing do you typically end up retaining?

Jade, I think that’s – its Steve, it's usually in the kind of current 25% range.

Okay. And in terms of the Fannie Mae numbers this quarter were - which were exceptional, were there any large loan originations that drove the outsized mix?

No, they weren’t and that’s one of the very interesting things is other than a large deal we did in Q1 of 2016, all of our other business was what we would call flow business. There was one other…

That was Q2, we did a large deal.

Yes, was Q2, sorry, in the Q2. But other than that large transaction we did in Q2 of last year, Jade, everything else was what we would call flow business and obviously that is very beneficial to us as it relates to overall fees that come off of those deals versus the larger portfolios, which as you know typically will have a smaller origination fee and also smaller servicing fees, because at a certain point we get capped out on the mortgage servicing rights that we get on the deals over certain size of Fannie Mae.

And in terms of the mix this year towards Fannie driven by fixed rate, was there anything else that would explain slightly lower market share on the Freddie Mac side?

I'd say the large deal point is really the driver of that Jade. I think if you look at what got delivered to Freddie Mac in 2016, there were a couple of very large deals that got done, rate locked if you will, by some of our competitors in 2015, they got delivered in 2016.

Yeah, I would just reiterate what Steve said in his comments. The large institutional investors, the big private equity firms because their average fund life is seven years, because they're not holding these assets for if you will generations, like many of our other borrowers do, they typically opt for short-term, floating-rate financing, because it gives them great flexibility. And so the large deals that have been done by the Blackstone's and the Starwood and others over the past couple of years have typically had floating-rate debt on them and Freddie Mac has being the stronger bid on those types of deals. And so as you know, in 2015, we did two large deals one with holiday and the other one was new seniors and those were both done with Freddie Mac and the rest of our Freddie Mac business in 2016 was much more if you will flow business, not large pools with sponsors.

Okay, that's helpful. And just finally on investment sales, you know, in the last three quarters - three quarters there is been a meaningful uptick in sort of the range of volumes that you are now running in it. Is it reasonable to anticipate something in the 500 to $1 billion range on a quarterly basis for that business?

From an annual perspective, Jade, that's probably – I mean, it’s a fairly wide range and I think were pretty – we'd be comfortable with that. I think you got to realize first quarter is always slow for investment sales.

But I would add to Steve's comment Jade, that we are extremely pleased with the growth we have seen on our investment sales platform since acquiring Engler in the spring of 2015, to have the type of 2016 we had in our first full year in the investment sales business is nothing less than fantastic and we have seen the value of it not only in the investment sales business, but then also in our financing business.

Thanks very much for taking my questions.

Thank you.

Yes.

Thank you. We'll next go to Charles Nabhan from Wells Fargo. Please go ahead.

Hi. Good morning, guys. I wanted to get some color around the operating margin this quarter, which was up 300 basis points sequentially and is little above your guided range for next year. Just trying to understand you know, specifically what led to that - that outsized result this quarter?

Yes. Chuck, this is Steve. The – I mean, [indiscernible] is the amount of Fannie Mae business we did in the quarter. As I mentioned in my remarks at the end of the day, our 219 basis point gain of sale margin for the year was driven by the fact that we did 43% of our volumes with Fannie in 2016, because the gain on sale margin on Fannie is substantially higher than the gain on sale margin on Freddie, that just has a disproportionate impact on the overall.

Okay. That makes sense. And you know, you alluded to the operating leverage within the servicing business and I was wondering if there's a threshold within that book where you would need to add you know, additional fixed costs, whether it's facilities or significant investments in personnel.

Not really, it kind of works is a step function if you will, that at some point you build enough additional workload that you need to hire another person or two. But in our time horizon, you know, looking out Chuck, there is no reason for us to be building another facility or taking on any additional fixed costs. And the team we've got right now is pretty efficient.

Chuck, if I can jump in behind Steve on that. I think one of the things you're focusing on as far as operating margin is a very important one and I would only say that to keep personnel expense as a percentage of revenue is at 41% on the year, given the number of originators and brokers we added to the platform during 2016 really shows the scale and the leverage we've gotten off the model right now. Because that's - that is if you will, as it relates to overall cost, although all of them were on variable compensation plans, bringing on that many people and maintaining compensation expense as a percent of revenues at 41% and then given the growth in revenue is allowed us to produce the operating margin that we produced in 2016. So it's - those combinations and as I mentioned in my comments growing operating margin from 28% three years ago to 31% this past year really shows the leverage we've been able to create in the model.

Okay, great. And if I could sneak one more. And as you add more personnel and you know origination capabilities, I am curious if you're seeing if the new - the incremental business is coming from new relationships, deeper penetration in your existing relationships or you know, new geographies. I'm sure it's a bit of all the above. But wanted to get some color around you know, the driving factors behind the incremental business?

So Chuck, when you asked that question Steve and I both smiled at each other, because we just went back and looked at our 10 largest clients over the last three years and interesting to us as we looked at it, fully half of our 10 largest clients over the last three years were new to Walker & Dunlop. So 50% of our 10 largest clients were new to Walker & Dunlop over the last three years. So we had very clearly been able, as we've broaden this platform and brought new people on, we've also been able to bring on not only new clients, but new huge clients and that has been just wildly valuable to us as we grown the platform and grown our client base.

And I'd say Chuck, it’s also frame this up as, why we're so bullish about our opportunities to grow here. When we look at - first we brought on to the platform, whether it be you know, recruiting or acquisition, we've had very little client overlap, which tells us there's still a huge addressable market out there that we are not touching today that as we continue to expand the number of originators on our platform were getting access to more and more clients. And while you know, lot of those clients will end up in our top 10 customer list, they are all adding incremental value to the company.

Okay, great. Thanks for the color.

Thank you.

And at this time, we have no further questions. So I'd like to turn the call back over to Mr. Walker for any closing comments.

Great. I'd reiterate my thanks to the W&D team for such a fantastic Q4 and 2016. I thank everyone for participating in the call this morning and wish all of you a great day. Thank you very much.

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