Good morning, and welcome to Walker & Dunlop's Second Quarter 2019 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 Duffey, Vice President of Investor Relations. [Operator Instructions] It is now my pleasure to turn the floor over to Kelsey Duffey. Please go ahead.

Thank you, Keith. Good morning, everyone. Thank you for joining the Walker & Dunlop's Second Quarter 2019 Earnings Call. I have with me this morning are 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 during the call. 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 filings with the SEC. I will now turn the call over to Willy.

Thank you, Kelsey, and good morning, everyone. Q2 was another exceptional quarter for Walker & Dunlop, as our team, brand and strategic initiatives continue to drive growth across our business. We grew Q2 total transaction volume to $7.3 billion, an increase of 18% from Q2 2018 and a record for the second quarter of the year. Strong banking and brokerage volumes generated Q2 revenue of $200 million, a second quarter record of 12% over 2018. Our continued mortgage banking growth has steadily increased our servicing portfolio to $90 billion at the end of Q2, only $10 billion shy of our 2020 goal of $100 billion. Servicing fees, escrow income and interest income from our balance sheet lending, along with significant growth in cash origination fees, were key drivers of our exceptional second quarter adjusted EBITDA of $63 million, up 25% from $50 million in Q2 2018. The macro environment from our business remains very strong. If you look back four years for the summer of 2015, many characteristics of that economy nearer what we are seeing today. The Dow Jones Industrial Average is at $18,000, an all-time high. The economy had out of a robust 223,000 jobs in the month of June, and the 10-year treasury was at 2.32%. Many investors began questioning how much longer the cycle would last, and specifically projected that interest rates would rise and asset values would fall. What many investors forgot is that in a slow growth, low interest rate environment, wage earner stand still, while asset owners search forward. Four years later, the Dow is hovering around an all-time high of 26,000 to 27,000, almost the exact same number of job additions were reported in the month of June of 224,000. And the 10-year Treasury has been hovering around 2% for the last…

Thank you, Willy, and good morning, everyone. Second quarter of 2019 represents another period of strong financial performance by our company. During this quarter, we grew both the top and bottom lines, achieved exceptional adjusted EBITDA and continue to make the investments necessary to drive our continued growth and success into the future. Previous investments in the platform, coupled with consistent execution by our team, fueled our strong financial results over the first 6 months of 2019, driving Q2 total transaction volume to $7.3 billion, an increase of 18% over the second quarter of 2018, and total year-to-date transaction volume to $13.2 billion. The strong growth in agency and broker debt volumes as well as the dramatic increase in multifamily property sales contributed to the 12% year-over-year increase in total revenues for the quarter to $200 million. Year-to-date, revenues have increased an impressive 19% to $388 million. Q2 diluted earnings per share was $1.33, a 6% increase over last year, with pre-tax operating income up 8% over the same period. Our effective tax rate increased from 23% in Q2 last year to 26% this year, due to excess tax benefits recognized last year from the exercise of employee stock options and adjustments this year to the deductibility of executive compensation under the new tax laws. We believe that our effective tax rate for the remainder of 2019 will stay around this 26% rate. Year-to-date income from operations was up 17% from the first half of 2018, while earnings per share increased 13% to $2.72, positioning us well to meet our annual objective of double-digit EPS growth. The cash components of our revenue continued to grow rapidly, leading to a 25% increase in adjusted EBITDA to $63 million. Year-to-date, EBITDA is $129 million, up 27% from the first half of 2018…

Thank you, Steve, for your analysis and insights into our Q2 and year-to-date numbers. The growth we are currently experiencing and have experienced for the past three, five and 10 years is all due to the exceptional people at Walker & Dunlop and the continued achievement of ambitious, clearly articulated 5-year strategic plans that expand our reach, enrich our service offerings and provide our customers with exceptional service and execution. Our growth in terms of customers, transaction volumes, offices, number of employees, cash generation, market capitalization, you name it, has created a wonderful market position for our company today. We are entrepreneurial, client-focused company with the capabilities of our large competitors get the touch and feel of a family business. This combination, big company capabilities with highly personalized service is gold in the services industry. These qualities make Walker & Dunlop an extremely attractive company to work for, as noted by the 15 mortgage bankers and property sales brokers who have joined us over the past week. These professionals are now component parts of Walker & Dunlop's growth and success going forward. And as we have seen time and time again, as these bankers and brokers join our platform and exceed their clients' expectations, their personal brands, earnings and job satisfaction skyrocket. Similarly, our clients who have the ability to work with any firm they choose, pick Walker & Dunlop due to our flawless execution, focused customer service and understanding that their transaction is important to everyone at Walker & Dunlop from the receptionist in one of our offices, all the way up to our Board of Directors. These are real differentiators in a commercial real estate services and financing industry that is becoming increasingly homogenized by consolidation and big financial services firms that seem more focused on net interest…

[Operator Instructions] We'll take our first question from Jade Rahmani with KBW. Please go ahead.

I was wondering if you could comment as to whether you're seeing a pickup in refi business as a result of the decline in rates?

I think it's a little early for that one, Jade. We're seeing just a lot of activity across the board.

Okay.

And as you may from our - as you can see from our investment sales volumes in the quarter, a strong acquisitions market out there still as well.

In terms of the back half for Fannie Mae, would you anticipate net growth year-on-year versus last year? I think last year's fourth quarter had a really strong performance.

So as you know, Jade, we don't give quarter-by-quarter projections as it relates to volumes or what we'll do with Fannie, Freddie brokered, whatever capital source we're working with. I would just say that the macro environment is extremely positive. There is a tremendous amount of activity going on in the market, and we are exceptionally positioned as having been Fannie's largest partner for four of the last six years to do a significant amount of business with both Fannie as well as Freddie.

Are there any large deals that you're working on in the current pipeline?

I think you know I can't give you any insight into that.

I'll keep trying. Can you quantify the growth in brokerage headcount year-on-year? And also maybe some color on the split between mortgage bankers and investment sales?

Yes, that one we can do. So as we said in the call, the teams that we just added on the investment sales side grew our investment sales team by over 40%. I think the specific number was 46% growth year-on-year in the headcount in our investment sales group. So significant growth there. As it relates to the total number of bankers and brokers, I think it's just under 180 total bankers and brokers, and in that, I think, 25 are in the investment sales side. I think I know 26, we just got - so 26 on the investment sales side of a total of 179 bankers and brokers. So as you can see, Jade, we not only have been successful at adding people to the platform, but we really believe that this environment, where - being in a company where you're really making a difference to what's going on and not one of these big global services firms where you're just a number, adds a lot of value to the bankers and brokers. And we are one of the few out there with, if you will, being a publicly traded company with the scale to do pretty much anything for our clients, yet still a relatively small company as it relates to overall headcount and focused customer attention.

Lastly, could you provide any update on technology initiatives and where you're focused on making investments in the platform?

Yes. So I ran through the investment in the no-do which is very focused on both underwriting as well as capturing data in the loan origination and loan sizing process. And we continue to look at many areas to invest in technology. I think one of the most exciting things from our perspective is, given our relatively small size, there are lots of technology applications out there that will allow us to enter new businesses with being technologically enabled, where we wouldn't be, if you will, disintermediating any existing business lines. And I think that, that is very distinct from some of our large competitors, that basically have lots and lots of people, doing lots and lots of different things. And so there are many, many verticals inside the commercial real estate finance and services industry, where, I think, we somewhat uniquely can make some investments, incorporate technology and have the ability to grow our platform and enter new areas, where we really don't have, if you will, the issue at hand of displacing any humans who are presently doing that type of work.

Our next question will come from Jason Weaver with Compass Point. Please go ahead.

Thanks for taking my question. I was wondering if you could give any comments on what you're hearing out of FHFA? Specifically, we've heard some views about potential tightening for GSE loan standards for green and affordable property?

Jason, I met with both Fannie and Freddie on Monday of this week. I'm headed down to meet with people at the regulator later this week. It's always a reasonably fluid discussion. At the end of the day, if the regulator would like to get Fannie and Freddie out of conservatorship and attract private capital, FHFA really can't shrink the footprint that much if they want to attract private capital to it, and I believe that, that is the overreaching goal of both FHFA, and more specifically, Director Calabria. And so I'm certain that they're looking at things. They mentioned to us that they're looking at exactly the types of things that you're talking about. I think this quarter shows a couple of things. One, our strength with both Fannie and Freddie in the aggregate volumes we did, but also the fact that we've diversified our platform dramatically that our brokered volumes have grown significantly, that our investment sales business has grown, our balance sheet lending has grown, our joint venture with Blackstone has grown. And so as much as Fannie and Freddie may both wax and wane, people have invested in Walker & Dunlop for some period of time know. Our volumes with both Fannie and Freddie go up, they go down. Lots of people try and track it on a quarter-to-quarter basis. If you look at it on an annual basis, we always end up at the top of the league tables. We have been Fannie's largest partner for four of the last six years. And we will do our, if you will, market share. And as Steve pointed out in his comments, our market share with Fannie through the first six months of the year is at 14.1%, that's higher than our historic average, which has been between 12% and 13%. So we are gaining market share. And quite honestly, that's our real focus. Continue to bring on great bankers and brokers to the platform, continue to do more for our clients, and we'll pick up our commensurate share of the market. And then when Fannie and Freddie can't take a deal as we did many, many times in Q2, we'll take that deal flow to another source of capital.

And then on servicing fees, the press release mentions intense competition. And also, you mentioned a big Fannie loan came through that dragged the fee down for the quarter. Can you tell me what averaging servicing fees look like for new loans originated currently?

Yes, we don't really give that, Jason. I think the point is a couple of things. One, yes, we started to see compression in the Fannie servicing fees, and we talked about this last year. That hasn't really changed. It's not getting more compressed, if you will. So the competition has always been fairly fierce, credit spreads were tight, and that's had an impact on servicing fees for the last year plus at this point in time. The one particular deal we did was, as I mentioned, a $540 million Fannie deal. As we've pointed out historically, large transactions because of the negotiated nature of them and the size of them typically have lower gain on sale margin and $540 million on our $2.4 billion of Fannie production was a pretty sizable number. The other thing that's going on within the servicing portfolio as far as average fee goes, is just the overall change in the mix. So obviously we're still doing a fair amount of Fannie, which is all great. But we're also doing - we've increased the amount of life company servicing that's in our book, which comes at much lower servicing fees; and more Freddie, which also come at much lower servicing fees. And the combination of all that is what's really driving the decline in the overall portfolio, average servicing fee, but it's not something that we're concerned by at all.

And then finally, given how the shares have performed, it wouldn't seem like so big of a concern. But I wondered, holistically, how do you think internally about the priority of share repurchase as use of capital?

It's a relatively low priority, Jason. First and foremost, we want to use our cash to continue to grow the business. We want to use our cash to support customer transactions. As we've put out there, we've had the opportunity to do a few, we think, interesting and somewhat unique transactions that have benefited. Our clients have deepened those relationships have allowed us to pick up incrementally more business from those clients as a result, and that continues to be a relatively high priority for us as well.

Our next question will come from Steve Delaney with JMP Securities. Please go ahead.

What I would like to start on the Anoto acquisition. And Steve, is there any way you can impact or comment on what the impact to second quarter EPS was from that acquisition and the additional expenses?

It's not material, Steve, individually. If it was $0.01 I'd be surprised. Maybe $0.01.

Okay, that tells me what I needed to do. So we're just a few cents high, and I was trying to whittle it down. I think we'll - I think we'll probably find it in the comp. And then as far as your recruiting, which props for an amazing job and Willy I appreciate your comments that consolidation has helped because we've noticed where some of those folks have come from. But just going back to the end of May, I'm counting '18, I'm sure I missed some press releases, but as you said, 15. Last earnings call, you said that you were looking for 10% growth on what at that point was 168. My question is, the second half of this year, do you still have the appetite to continue to recruit given the 6-month or so earnings drag from those new hires, then should our expectations be a bit more modest for further headcount growth over the 179 that you have today?

It's great question, Steve. And no, we will not slow down one iota. The opportunity for us to bring in talented bankers and brokers has never been more apparent, given the scale of the platform and the brand we've created and some of the disruptions taking place in the marketplace. We are still relatively small in the investment sales business. We put out there, the goal of growing that to $8 billion to $10 billion. And you having been someone that's watched our company and our growth know that there were plenty of people when we put that goal out there, that sort of said, good luck, trying to get to that goal. We'll achieve that goal. And we have an incredible team that has got a lot of momentum behind them. And as I said in my comments, Steve, when we entered that business, the ability to both create a whole new business and commensurate revenues that come off of that has been fantastic, but it also brings along the ability to add on ancillary financing fees. And so our relevance to our clients has gone up dramatically by growing that business, and we'll continue to invest in that business as well as our mortgage banking business. And as I noted, we added a number of teams over the last week, including the team I highlighted in Houston. And when teams like that join our firm, that goes out to the industry, that says, why did they leave that company and go to Walker & Dunlop? There's something that's going on there. And it has to do with the strength of the platform, it has to do that we only are 750 people. And every one of these teams that's joining us immediately becomes part of the Walker & Dunlop story our growth. And quite honestly, people want to be part of something. They don't just want to be a number in a big global services firm just doing their business. And so we've seen that. And I can guarantee you, we will continue to take advantage of it.

Somehow that response - reply does not surprise me one bit Willy. Steve, a couple more, just real quick things. Second half personnel costs, I understood you said 42% would be a good estimate. Just looking at the model, last year 3Q was a little over 43%, and then I think picked up a little bit later in the year. So I'm just - are you clearly saying to us that if we go with approximately 42% for the personnel component of total expenses in 3Q and 4Q that you think that's a good level for us?

Yes. So Steve, I think what I mentioned was, it was 42% in the second quarter. I actually didn't put any numbers out there with respect to the second half of the year. But historically, as you know, given the way our commission schedules work, as our mortgage bankers and brokers do more business, they take home a higher percentage of fees through commissions. So as the year goes on, and their volumes go up, typically we see that increase in compensation costs over the course of the back half of the year.

Yes, sorry to misquote you. That's why I asked the question because we would expect sequential increases, which is what we have. And then lastly, Willy, it's great that you have a dividend, you can help shareholders either through the buybacks of $51. That was a good buy. The $1.20 annual rate looks like about a little over 20%. I'm just curious, when if the Board at year-end, at some point will reconsider that? And do you think that looking out, if there is potential for the dividend to move slightly higher?

Yes, Steve, as you can imagine, we talk about it on a quarterly basis, just had a long discussion about it yesterday with the Board. I think the long-term objective here, when we established the dividend last year was to establish the dividend and continue to raise it on an annual basis going forward based on the continued growth of the company. We are still very much a growth company. We still have lots of places to invest our capital. We love the dividend. I, as a very significant shareholder, love the dividend. And at the same time, we also want to make sure that, as Steve mentioned, not only are we returning capital to shareholders through the dividend, not only are we buying back stock, but we also have a very significant cash position to not only pay for new talent to come across, be acquisitive in buying new companies. And as you know, we've bought now 8 companies since 2009. And then the other piece to it is to have capital on our balance sheet to be able to do things for our customers, that other competitors either can't or won't do. Our entrepreneurial nature, our ability to underwrite risk and our ability to move quickly has consistently shown itself to be a competitive differentiator in the market. There are plenty of financial services firms that have lots more capital than we do, but they can't move as quickly as we can. So we can beat them because we can move quickly, make credit decisions quickly and deploy that capital. And there are lots of services firms out there that we compete against, who don't have the capital that we have, to even contemplate doing what we do. So we want capital on our balance sheet to be able to step in and take advantage of client situations when clients call us and say, "Hey, I have a bank that wants to pay down on a bridge loan, and I can't pay them down today and their holding my feet to the fire. Can you step in and help us out?" We did that at the end of last year, and it earned us a brand-new, very large client relationship. "Hey, I had a preferred equity investor, who just backed out of this deal at the very last moment. I think we're going to have to walk away from this deal." We stepped in with the preferred equity investment that has been a home run of a deal. So it's those types of situations where having capital on the balance sheet and being able to move quickly, has been a real competitive differentiator, and we want to maintain that flexibility.

[Operator Instructions] We'll go next to Henry Coffey with Wedbush Securities. Please go ahead.

You have one trophy deal, the $540 million Fannie deal. Can you give us any - where there are others sort of notable size or was really that just it?

I think that was pretty much it, Henry. I mean, we...

Can you - can you give us some sort of insight into what sort of transaction it was, some of it was multiple properties or...

It's multiple properties, mostly California assets. And it's a big REIT whom we worked with plenty of times before. But I think to underscore this issue, as Steve said previously, Henry, it was $540 million on $2.1 billion or $2.2 billion of Fannie, $2.4 million of Fannie origination. So 25 - 20% to 22% of our total Fannie volume, and still our gain on sale margin on the quarter was over 170 basis points. So I think it's reflective of the fact that we did do a large transaction in the quarter. It did put downward pressure on the overall servicing gain and MSR calculation on that one deal, which was over 20% of our Fannie volume on the quarter, and we still - when you add it all together, had a gain on sale margin that was above our established range of 150 to 170 basis points. So we'll continue to be in the market for those types of transactions. I would say this, that I think it is going to be challenging for either Fannie or Freddie to finance a mega transaction in the back half of the year. I think they're much more focused on flow business. And so if any mega transactions come across, and I don't call a $500 million transaction a mega transaction. I'm talking about multi billions of dollars, I think both Fannie and Freddie would have a difficult time doing it this year, given where they are on caps and overall volumes. Potentially, for delivery in 2020 if the proper deal came across that would size for both of them.

Would the private market be able to absorb that large a deal comfortably?

Yes, it probably have to be clubbed. It'd be very, very difficult for any one source of financing to do it unless you did a single issue or securitization in the CMBS pool, and that hasn't been done for a while. Blackstone did one a couple of years ago, but that hasn't been done in a while.

Moving on to technology. And I'm a bit of a luddite here. So you're doing your own servicing, or you're in that process. These are large bulky loans that you're putting together. How does technology play in? Is it just make it a little bit easier to put the package together? Does it - it's not like you're doing thousands of loans every day, and you just want to replicate the process over and over? I mean, so what role does technology play in terms of really changing the process for you?

It changes the process significantly in the sense of how we pull together market data, how we spread numbers on deals and comp those deals to other deals that we have lent on. How we do background information on both the property and the borrower. All of those, if you will, data feeds and the compilation of all that data to then make a decision on our average deal size, I think, right now is about $18 million, $19 million. All of that automation of that process makes it, so that our underwriters can do their work faster, more efficiently and then also more insightfully. And so that's really where we're focused right now. And then in doing all of that, we will then automate all of that data capture, so that as we continue forward, we're getting smarter and smarter. The technology is getting smarter and smarter. And so rather than pulling all those disparate data sources together and then creating a picture, that picture, quite honestly, will already be created. And so it will make us much more efficient, much more quick to respond to our clients' needs and make us more insightful into the markets that we're lending in.

And then finally, there has been kind of an order to these questions. It looks like using Steve's notes, Steve's numbers, puts you at about a 20% payout ratio, given where your ROE is, that's a capital generation rate of 12 to 13 or higher percent. As you contemplate the dividend/buyback, obviously I prefer dividends in case people want to know. Would you be upping that payout ratio or where do you have to be in terms of CapGen and cash accumulation to be comfortable with the business?

So I think our Board is very comfortable with the business. As I said, to Steve's question on that, we had a long discussion on this yesterday with our Board of Directors. I think the 18% ROE in Q2 and 19% ROE year-to-date are extremely healthy returns on equity for investors and particularly for a financial services company. And we constantly are looking at what are we buying back as far as stock, what are we declaring as a dividend and what are we using our capital for to continue to invest in the business and continue to grow it. As you well know, our growth rates across any metric over a 3, 5 and 10-year period are stunning. And we will continue to use our capital for this business, both top line and bottom line over the coming years.

In case you're wondering, we think more is better. So thank you very much.

You're very welcome Henry.

And it appears we have no further questions. I'd like to turn the floor back over to Willy Walker for additional or closing remarks.

Thanks very much. I would reiterate my thanks and congratulations to the W&D team on a fantastic quarter, and also reiterate our outlook on both the overall market and our company's positioning in that market. We are running on all cylinders right now and very excited about the opportunities ahead of us. And I thank everyone for joining us this morning. Have a great day.

This will conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.