Welcome to Walker & Dunlop’s First Quarter 2018 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 Kelsey Montz, Assistant Vice President of Investor Relations. Today’s call is being recorded and will be made 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 opened for your questions following the presentation. [Operator Instructions] And it is now my pleasure to turn the floor over to Kelsey Montz. Please go ahead, ma’am.

Thank you, Erica. Good morning, everyone. Thank you for joining the Walker & Dunlop’s first quarter 2018 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 website provide details on accessing the archived webcast. 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 reports filed with the SEC. I will now turn the call over to Willy.

Thank you, Kelsey, and good morning, everyone. Thank you for joining us today to discuss another strong quarter of Walker & Dunlop. Q1 2018 results are emblematic of the investments we have made to scale and diversify Walker & Dunlop since going public in 2010. I’d like to immediately turn your attention to Slide 3, which shows the growth in Walker & Dunlop offices from one office in 2008 to 29 offices today. As you can see on the slide, as we’ve grown the platform we’ve acquired a number of companies that have allowed us to scale our operations and also diversify the services we provide. If you turn to Slide 4, you can see that in 2010 Fannie Mae and HUD accounted for 69% of our transaction volume. While over the last 12 months those two capital sources have only accounted for 32% of total transaction volume as we have grown volumes in our other product offerings. And this is an extremely important point, for Fannie Mae had a very slow start to 2018, with multi-family lending volumes off 35%. Yet Walker & Dunlop grew origination volumes in every other product line to generate the second highest Q1 origination volume in our history of $4.8 billion as shown on Slide 5. And Slide 5 also shows in a quarter where Fannie Mae originations, which are shown in light blue, were down dramatically, we grew volumes everywhere else, which produced $1.16 of diluted earnings per share and over $52 million of adjusted EBITDA. These financial results demonstrate the diversification and growth we have achieved in our Freddie Mac, HUD, capital markets and investment sales businesses as we continue to scale Walker & Dunlop. And they also show the value of the long-term prepayment protected revenue streams that are $76 billion…

Thanks, Willy, and good morning, everyone. We’re very pleased with how the year has started and what is typically a slow quarter for the business. Our results in the quarter benefited from solid transaction volumes of $4.8 billion, strong adjusted EBITDA of over $52 million and reduced corporate tax rate from the recently enacted Tax Cuts and Jobs Act. We are in $1.16 per diluted share in the first quarter of 2018, compared to $1.35 in last year’s first quarter. As you may recall last year’s Q1 results included a benefit of $0.27 from reduced tax expense associated with the vesting of employee stock awards. This compares to a smaller benefit for $0.13 in this year’s first quarter from a combination of fewer shares vesting and a lower overall tax rate this year versus last. Including the stock vesting benefit, our effective tax rate in the first quarter was 16.4%. Going forward, I would expect our effective tax rate to be in the range of 25% to 27% for the remainder of this year. We had a very strong first quarter with Freddie Mac with 14% growth in volume over Q1 2017. Our Fannie Mae volumes were down from last year as we originated two large portfolios totally $800 million in Q1 2017. The relatively low volume of Fannie Mae originations is the reason our net mortgage servicing rights declined slightly during the quarter. Brokered originations topped $1.5 billion, an increase of 18% from the prior year as we continue to benefit from the growth in our capital markets team. HUD volumes were $352 million compared to $207 million in 2017, an increase of 70%. With construction loans comprising 47% of this quarter’s volume and that remains as an important source of multi-family construction lending in the market. Investment sales…

Thanks, Steve. I’d like to spend some time discussing Walker & Dunlop’s business model and what we believe differentiates W&D from our competitors in the commercial real estate services and financing space. If I can get you to turn to Slide 8, since 2013 we have grown our employee base by roughly 190 employees and over that time revenues per employee have increased from $740,000 in 2013 to $1.1 million in 2018. When you look at this metric compared to our industry competitors, Walker & Dunlop generates 2 times to 5 times the amount of revenue per employee, a difference that is a direct result of our business model and operational efficiency. I want to remain on Slide 8 for a moment, where it tells a great story about W&D’s growth and financial performance. As we’ve integrated employees on to the platform and increased the company’s overall productivity, we have also consistently grown revenues at a faster rate than expenses, allowing us to expand our operating margin from 21% in 2013 to 32% in 2018 on a trailing 12-month basis. So, let me summarize this slide for a moment. We’ve added 190 employees and grow revenue per employee from $740,000 to $1.1 million while increasing operating margins from 21% to 32%. We’ve been able to deliver these enhanced operating metrics by remaining disciplined about who we hire, and how we integrate them into our business. It is our intention to continue expanding W&D’s platform to drive both top and bottom line growth, while maintaining the best-in-class service that has allowed us to expand our client base so dramatically. Beyond our tried and tested growth model and our durable business model, our core business is underpinned by strong demographic and macroeconomic trends in the multi-family market that should continue to drive…

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Jade Rahmani from KBW. Please go ahead.

Thanks very much. On your 2018 guidance that you previously gave last quarter, are there any changes that you are making? You’ve previously cited 10% to 15% producer headcount growth double-digit operating income and EBITDA growth, for example.

Yes. No, no changes, Jade.

Okay. Can you characterize the current mood and tone in the market from multi-family investors? Maybe if you could give some color on, if there’s any pull forward in volumes as far as maybe lift to lock-in today’s rates, or if you’re seeing any mix shift in acquisition versus refinancings?

I guess from our prepared comments, Jade, the market commentary on investment sales was that it’s an extremely active market. I do think that rates moving as much as they did in Q1, made it so that the transaction volumes from both the financing and investment sales standpoint were a bit sporadic. I was quite interested that when rates got up close to 3% and then backed off a little bit at the end of Q1 that we didn’t get kind of a flurry of financing activity at the end of the quarter to meet that rally in rates, but we didn’t. And at the same time we’d say to you that the general outlook is very positive from an economic standpoint and from a commercial real estate, as an asset class standpoint. And if investment sales is any, if you will, general indicator of interest in the asset class and transaction volumes, things are very healthy right now.

And any color on the mortgage banking side, mix of refinancings versus acquisition financing?

I don’t have that number. Do you have it, Steve?

No, I don’t think there’s really been much change on that, Jade.

Okay. In terms of the servicing portfolio, do you have any color you could provide on what percentage of adjusted EBITDA comes from servicing? Is it well more than half? Considering the size and duration of the servicing portfolio and the prepayment protected profile, I think this information would help investors gain insight into the stability of W&D’s earnings.

Yes. Jade, as we’ve discussed in the past, we don’t provide that level of detail.

In terms of how you think about valuation, when you’re underwriting M&A transactions, in what multiple do you think that servicing EBITDA should trade at?

It really depends a lot, Jade. As you know we’ve acquired companies that are predominantly agency origination companies like Column Financial, and CW. And then we’ve also purchased fewer brokerage firms that don’t have an agency component to them today. And as we’ve discussed in the back past, the difference in the value of agency servicing versus non-agency servicing is dramatic. And as a result of that, the fact that our servicing portfolio is the majority servicing which is – whether we are at 86% or 87% prepayment protected on our servicing portfolio today, and also at an average servicing fee of 26 basis points. The asset value there is dramatically different. So as we look at acquisitions, it really depends on the composition of the servicing and we haven’t done a GSC, if you will, a GSC focused acquisition since CW, and how we value that servicing portfolio is very different from some of the brokerage firms we have acquired recently that may have hundreds of millions or billions of dollars of servicing, but if it’s general commercial servicing on CMBS loans or life insurance company loans, those not only come with a much, much lower servicing fee, but they’re also not prepayment protected to us. So as a result of that, if the loan pays off, the servicing goes away.

And just in terms of 1Q’s production headcount growth, can you give me any color on how many producers overall you hired and just the mix between the agency business and investments sales?

Yes, go ahead.

Jade, we’ve had nine production folks though today, so rather than just talking about Q1, but to-date we have nine new additions to the team.

And what’s the mix between investment sales and agency lending?

Yes, it’s about one-third, two-thirds investment sales. And then I’d say, it’s capital markets, not necessarily agency lending, but as you know our capital markets brokers do a fair amount of agency business as well.

Okay. So two-thirds is capital markets?

Two-thirds capital markets, one-third investment sales. And on the capital markets as we’ve talked through before, as Steve just said, many of those people who joined us, for instance, the team that just joined us in Philadelphia, there are on the platform today that does not have access to the agencies, they’re not coming to W&D and will have access to Fannie’s largest partner, and Freddie Mac’s their largest partner. I can guarantee you that that team that just joined us as a capital markets team will start originating agency there.

Okay, thanks for taking the questions.

Thank you, Jade.

Thank you. [Operator Instructions] We will go next to the line of Steve DeLaney from JMP Securities. Please go ahead.

Good morning, everyone. I’d like to start with JCR Capital; I know that’s a positive development on one of your important long-term goals. Can you comment on the funds available today whether they can call capital from their investors? So what do they have available to them today to deploy? And also, Willy, where do you see in the capital stack as far as borrowers, clients that are developers and owners of multi-family? Where is the greatest need in the capital stack and along with that probably the best return profile for that profit capital? Thank you.

Yes. Steve, I’ll handle the first part. So with respect to what’s available, so again, a little bit of history here. There aren’t Funds 4 at the moment, Funds 1 and Fund 2 have both kind of cycled through and paid back at this point in time successfully. So Fund 3 is in the kind of recycling phase, if you will. And then Fund 4, they’ve had their first closing on Fund 4, the fund raising process is still open through probably the next few months, but they – when it’s done should have about $300 million available in Fund 4 and part of that in Fund 3 still available for investments. So, one of the things that we were excited about in terms of the acquisition was the fact that they actually did have a fair amount of dry powder available to investors. So it’s not like we bought a wholly invested firm that was starting over with the fundraising process.

Okay, got it.

Steve, on the…

Yes, Willy.

Where the market is looking for capital, I mean I would honestly say to you that given the breadth of our platform today it’s sort of all over in the sense that there’s no one specific need that I continue to hear about. Clearly, if you go back to what we put forth as far as our underwriting standards on our Q1 agency business of 68% – 66% LTV and 1.47% debt service covered. The agencies are holding very, very tight as it relates to the leverage that they’re putting on their assets, which is meaning that’s a market for really sort of established developers, owners and not one where people who are trying to stretch a $1. You can really access that capital if you will at those lower leverage levels. And so as a result, there is a significant amount need for mezz debt. There’s significant amount need for preferred equity. And the thing that’s so exciting about JCR is that we’ve done preferred equity investments in multi-family, we’ve done mezzanine loans in multi-family, and we have our Blackstone joint venture focused on multi-family bridge loans. What JCR allows us to do is to focus on providing that type of capital to the rest of the market, in office, and in industrial and hospitality. And so we did $7 billion of brokerage – debt brokerage last year at W&D. And as you saw we had very significant volume increases in Q1 and our capital markets grew. This provides all of those brokers with an additional source of capital to meet the needs of their clients. And as Steve walked you through, the greatest part about that is when we put that financing on there, we’re going to continue to make ongoing revenue streams out of that financing rather than just brokering the deal off to somebody else. So that’s the strategy we’re really excited to have them, and specifically to what the market is looking for today I would just say to you that people are going for sort of every dollar they can get.

Yes. Willy, given your comments on Blackstone joint venture and competitiveness of that market I think that’s widely understood in the marketplace with these new debt funds coming in. Is it possible that – I think you made a 15% commitment to $1 billion fund there, don’t know where that stands as far as the amount deployed exactly on your books. But would you consider allocating W&D capital more to mezz loans or preferred equities, do you think the returns there might be more attractive to W&D than the capital you have committed to the bridge loan joint venture?

So, Steve, we have two things; one, we reiterated in our comments how focused we are in growing our joint venture with Blackstone. We want to see that partnership grow and it’s a fundamental piece to our overall platform. With that said, deals that don’t size for the joint venture, we have in the joint venture agreement the ability to do them on our balance sheet, should Blackstone say this doesn’t meet our return threshold and Walker & Dunlop might say, hey, we – it’s strategic for us. It will meet our return threshold what have you. So there is sort of the ability in that partnership for deals that go to that joint venture that for whatever reason don’t go into the venture can contact and find their way to Walker & Dunlop’s balance sheet, or can find their way to another source of capital. So I would just reiterate our very clear focus on continuing to grow that joint venture and put additional capital to that joint venture. But it does not limit us in our ability to do other things that may meet our criteria that might not meet the joint ventures criteria.

Great. Thanks for clarifying that, Willy.

Yes, Steve, if I could add to that as well.

Please.

Yes. I think one of the other things to consider here is in the asset management space, and I’ll talk specifically about JCR, in future fund raising effects I would expect that we will be one of the lead investors in new funds. And so through that mechanism we actually would be allocating capital towards our preferred equity, mezz equity, JV equity through that.

Exactly. I assumed you would be, just whether your name is involved, whether it would obviously help with the fundraising if you guys are putting your own money into the deal. Sure. Steve, I noticed in the income statement in the mix of revenues, obviously, mortgage banking downed, but dramatic increase in escrow earnings and interest income, I think that’s something the investors tend to overlook in W&D. Can you give us a sense like for each 25 basis point Fed hike; do you know off top of your head what that means as far as incremental revenue either in dollar terms or for share?

Yes. So Steve, our average escrow balances have been kind of bouncing around between $1.8 billion and $2 billion over the last few months. And most of that money is tied to short-term rates whether it’s Fed funds or LIBOR. I don’t think we’re necessarily getting 100% lift every time you get a 25 basis point increase, but we’re capturing a significant portion of that increase every time it happens.

Steve, if I could…

Okay. We will check what we’ve got in our model there as far as rate sensitivity.

Steve, just one quick thing on that. I would keep in mind the following that as the yield curve flattens our warehouse interest income goes down. So one of the things just as you get – you continue to get a flattening of the yield curve and what would make in our warehouse interest income will go down and we’ll eat into some of the increase interest income we make off of our escrows. So it’s just that as Steve just said, it’s not a one for one as you rise by 25 basis points, you’re going to get all of that into it, but we watch those numbers very closely, we think we are maximizing the returns on those escrow deposits. And at the same time, the flattening yield curve does take out on the warehouse interest income line.

Yes, makes sense. So thanks for the comments guys.

Absolutely.

Thank you. [Operator Instructions] We will go next to the line of [indiscernible]. Please go ahead.

Good morning, and thanks for taking my question. Willy, I appreciated your opening comments about the level of competition you’re seeing in the JV. I think it’s a nice reminder that you guys get a very nice benefit from barriers to entry for your JV businesses. When I was looking through the release I had a quick question on the expenses and how we should think about those. I know that you called out increasing the fixed expenses do the hiring of support staff in recent acquisitions. And I think we’ve spoken about a natural lag time or ramp up when a new hire starts generating revenues. So is it fair to assume that as fixed expenses percent of total revenue that marginally improve in the later parts of the year as those new hires actually start generating revenue for the platform?

So, Ben, first of all, great to have you on the call and thanks for joining us this morning. The second thing is that your comment about barriers to entry on our core lending business are exactly right, and it does allow us to be extremely disciplined in what we’re doing. As it relates to overall expenses and when those people come on and the time to ramp it up, first of all, the people at W&D who are responsible for the majority of our recruiting are very clearly trying to do as much as early as possible to get the maximum benefit from those hires in 2018. So there’s very much – if you wait until November or December to do all of the annual hiring, you’re not going to get any benefit from it during the year. So there’s very much a focus on that. The second thing I’d point out is that compensation expense as a percentage of revenue in the first quarter was 38%. I looked at a number of our competitor firms and that percentage is dramatically lower in it than our competitor firms, and that is due to our business model and the amount of revenues that we make off of our servicing and if you will financial income that Steve DeLaney just asked about. And so we have managed this business to a range of compensation expenses, a percentage of revenue between a band of sort of 37% up to 43%, 44%. And it obviously will vary quarter-to-quarter depending on what origination volumes are, where our producers are in their annual splits et cetera, et cetera. But we feel very, very comfortable that the business model works for our ability to continue to grow earnings and remaining increasingly profitable; as I pointed out in that slide as it relates to the growth in revenue per employee and how we’ve driven operating margins up very steadily over the last five years. So the model’s working really well and specifically your question we want to get as many people on the platform as quickly as possible to get the benefit of their revenues in 2018.

That’s great, I appreciate that. And since we’ve just kind of touched on it, and Steve, opened up with it, on the servicing portfolio when I try to think about revenues generated from that portfolio, would it be fair to include the escrow balance income as cash servicing fees? And I only ask because maybe a year or two ago it wasn’t such a big number, but now that short-term rates are increasing and where they are, we’re starting to get a very nice contribution from that line item that feels like it’s going to be left out of the valuation approach.

Yes. I would agree with that, Ben. I think we’ve always viewed servicing fees is obviously the primary component of revenue from the portfolio, but in addition to that we also get the earnings off the escrows that we also earn fees of the processing assumptions of loans that are in our servicing portfolio. So that’s another revenue stream that comes written up.

That’s great. And then also I know in the press release that you mentioned transfer of Freddie Mac quarter in book 2018. And in your prepared remarks I think I heard your expectation at Fannie will eventually capture its historic share in the market. What now pushing or going to push that marginal borrower to Fannie? Is it just the curve tightening that’s making that fixed rate debt a little more attractive right now?

Ben, it’s just – it’s sort of a historic – it’s a historic pattern, where the agencies both are very competitive against one and another on a day-to-day basis. But at certain times during the year, one is more competitive on a certain product that the market really wants and then lumber whole [ph] that agency is sort of filled up and they slow down a little bit, the other one steps in. And you can see it quite honestly and it happens. So Fannie Mae comes out of her first quarter, where their volumes were off 35%. And they come into Q2 saying, okay, we’ve got work to do. And guess what, they get to work and we get to work with them. So it’s – and in that – but the one thing that is I think very important to keep in mind is A, both Fannie and Freddie have the opportunity to do a huge amount of lending in 2018. And the second thing to all that is Freddie has traditionally been better on floating rate debt and Fannie has traditionally been better on fixed rate debt. They’re both really good at both, but typically that’s where it’s been. You’ve got to borrow on floating rate; chances are that Freddie probably is going to have a more competitive bid due to their securitization model. You want fixed rate loan, on the margin Freddie might be a little bit better. So one of the things there is that as rates start to move, you would think that many people want to lock-in rates and go with fixed rates. Except for the fact that there is so much private equity out there, in funds waiting to be deployed, and those borrowers are almost always floating rate borrowers because they want the flexibility that floating rate debt gives them to be able to trade the assets. So you could be sitting there in a rapidly increasing rate environment and still have a huge amount of capital deployed in floating rate debt because the big sponsor groups are the big buyers at that time in the market and they want the flexibility that floating rate debt will bring them. So it’s very difficult to look at any sort of macro drivers to determine specifically who’s going to be most competitive at that time because it really gets back to the financing needs of the acquirer of the asset.

I think that makes a lot of sense. It’s not as easy as I think it excels rates on the macro trend which is who has the dry powder and he’s looking to deploy it. Well, I appreciate your comments guys and congratulations on your recent hiring efforts and definitely excited to hear more about this Freddie Mac SFR program in the future.

Thanks, Ben.

Thank you. And we will go next to the line of Fred Small from Compass Point. Please go ahead.

Hey, good morning, thanks for taking my question. Just on market share, what do you estimate your market share was? Sorry, if I missed it earlier between – with Fannie and Freddie each in the first quarter.

We have that. What was it?

It’s about 11% combined, Fred, so pretty much in line and combined.

And that’s on originated volume or securitized volume?

Securitized – delivered volumes, right, what we’ve delivered to agencies because that’s what their number is based on as you know.

Right, when they report there or not. Do you know how it was on origination?

No, there’s no way to know that.

Okay, great thanks a lot.

Thank you. And we have our next follow-up from Jade Rahmani. Please go ahead.

Thanks very much. In terms of Fannie Mae, do you attribute the 1Q decline to a tough year-over-year comparison since they took delayed deliveries in 1Q 2017? And I guess anything you could provide on, say, April volumes or what gives you confidence that the volumes are going to pick up?

So on Q1 year-on-year and there 35% fall off in overall volumes. I don’t – Jade, you maybe correct, they carried business over from, what was that, that would be 2016 to 2017.

Some element of that in the number, that doesn’t explain all of it.

Right. As it relates to HUD, if you look at our flow business with Fannie Mae, it was actually up on a quarter-to-quarter basis. The real delta in our numbers is that in – as Steve said, in Q1 of 2017 we did two large portfolios for $800 million. And as investors in Walker & Dunlop know we don’t do a big deal every quarter, we’re very lucky to be one of the few lenders who the big deals come to, but they – you don’t build your business based off of next quarter, we’re going to do a mega transaction, or in the next quarter we’re constantly looking for them and we get phone calls from time-to-time to focus on very, very large transactions, but we did not have a large transaction in Q1. As it relates to the confidence on Fannie coming back into the market, as I said in our – in my prepared remarks, we are seeing Fannie back in the market. And what gives us confidence about it, just looking at their track record, they’ve got huge amounts of dry powder, they’ve got the ability to deploy massive amounts of capital and we’ve been their largest partner for over the last six years. So chances are that they’ll put their money, chances are that Walker & Dunlop will get us commensurate share of that capital.

Yes, and I just add to that. I think just look back historically since they’ve had caps base, we’re pretty hard to get to the max on the caps each year, plus do as much business outside of that and Fannie did over 60% of their Q1 business outside the cap, so certainly our expectation that history will continue on that front.

Okay. On the JCR deal, what level of annual accretion do you expect there? Previously estimated around $0.13 a share, around $0.03 to $0.04 a quarter. Is that reasonable? And also do you anticipate any 2Q impact that are positive or negative from transaction expenses?

So, Jade, I think we incurred a fair amount of legal expense in Q1 associated with the transaction itself, I wouldn’t expect a significant impact in Q2 from that. Going forward I think your number is probably a little high certainly with respect to the first year as we do work to integrate and bring them fully into Walker & Dunlop from an infrastructure standpoint.

Thanks very much,

Thank you.

Thank you. And at this time we have no further questions. So I would like to turn it back over to Willy Walker for any additional or closing comments.

Great, thanks everyone for joining us today and have a terrific day.

Thank you. This does conclude today’s conference call. Please disconnect your line and have a wonderful day.