Good morning, I’m Ginna Semmes, Senior Analyst for Investor Relations at Walker & Dunlop and I would like to welcome you to Walker & Dunlop’s Second Quarter 2022 Earnings Conference Call and Webcast. Hosting the call today is Willy Walker, Walker & Dunlop Chairman and CEO. He is joined by Greg Florkowski, Executive Vice President and CFO. Today’s webcast is being recorded and a replay will be available via webcast on the Investor Relations section of our website. [Operator Instructions] 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 Greg will touch on during the call. Please also note that we will reference the non-GAAP financial metrics, adjusted EBITDA, adjusted EBITDA margin, and adjusted diluted earnings per share during the course of this call. Please refer to the appendix of the earnings presentation for a reconciliation of these 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, maybe 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, Ginna and good morning everyone. Walker & Dunlop had an extremely strong second quarter with record Q2 origination volume, revenues and adjusted EBITDA, demonstrating the return on investment we have made in our people, brand and technology over the past several years. This fantastic growth and performance was done in a rapidly transforming macroeconomic environment with the second quarter beginning with a 10-year treasury rate of 2.39% and increasing by 110 basis points to reach a high of 3.49% in June. Within this fluctuating interest rate environment, our team continued to execute exceedingly well on behalf of our clients, closing total transaction volume of $23 billion, up 67% from the second quarter of 2021 and generating total revenues of $341 million, up 21% year-over-year. Our strong top line results drove diluted earnings per share of $1.61 and dramatic growth in adjusted EBITDA to $95 million, up 43% year-over-year. We have underscored this transformation from non-cash revenues and earnings to cash revenues and dramatic growth in EBITDA over the past year and Q2 2022 continued this trend as our business transitions from a lending-centric mortgage bank to a broader technology-enabled financial services company. We introduced an adjusted EPS metric in Q4 of 2021 to strip out non-cash mortgage servicing rights and underscore W&D’s cash earnings. And in Q2 2022, adjusted EPS was up 42% year-over-year to $2.04 a share. 67% growth in total transaction volume was led by strong growth in debt and property brokerage services, which were up 47% and 136% respectively from Q2 2021. The robust supply of capital from debt funds, life insurance companies and banks throughout 2021 and the first half of 2022 drove the growth in our debt brokerage volumes, while the dramatic amount of equity capital looking to be deployed into multifamily real…

Thank you, Willy, and Good morning, everyone. As Willy just described, the first half of 2022 reflected the diversity of our company from a mortgage-centric lender to a broader technology-enabled commercial real estate financial services firm and our ability to not only execute, but also grow during challenging market conditions. Second quarter transaction volumes grew 67% year-over-year to $23 billion, generating 21% growth in total revenues to $341 million and diluted EPS of $1.61. The trend of our debt brokerage and property sales businesses, fueling our growth in total transaction volumes continued in the second quarter. And those volumes, combined with growth in our servicing and asset management businesses drove exceptional growth in adjusted EBITDA to $95 million, up 43% year-over-year. Our debt brokerage volumes grew 47% to $9.3 billion this quarter on the strength of capital markets executions throughout much of the second quarter and illustrating the benefits of the investments made in growing this team over the last several years. Our property sales team navigated a challenging market and not only grew volumes 136% to $7.9 billion, but delivered the second strongest quarter of property sales volume in our company’s history. Our GSE volume also grew 74% to $5 billion this quarter. And as Willy just mentioned, we closed a $1.9 billion transaction with Fannie Mae during the quarter that boosted Fannie Mae volume to $3.9 billion. Our HUD volume this quarter was $201 million, a year-over-year decrease of 70%, leading to a decrease in related revenue. The decline in volume and revenue is due to 2 primary factors. First, HUD offers a streamlined refinance product that over the last several years enabled our borrowers to lock in historically low interest rates without changing any other terms of the loan. As interest rates have risen, streamlined refinance volumes…

Thank you, Greg. As Greg just outlined, we have an exceptional business model that has allowed us to transform Walker & Dunlop into a broader services firm, while maintaining the highly profitable recurring revenue streams that are servicing and asset management businesses produce. We are currently generating a huge amount of cash, and we will use that cash to continue investing in existing and new businesses and returning capital to shareholders in the form of share buybacks and dividends. The multifamily market continues to perform exceptionally well, with operating statistics such as occupancy and rent growth at historic levels. The credit quality of our $119 billion servicing portfolio has never been this good on a scale basis. And while there has clearly been a pullback in both debt and equity capital inflows to the commercial real estate market due to inflation rates and the fear of recession, we have the benefit of being one of the largest countercyclical multifamily lenders in the country due to our partnerships with Fannie Mae, Freddie Mac and HUD. Should the markets continue to dislocate and Fannie and Freddie used their full $156 billion of lending capacity for 2022. Our historic 12% market share, which we have significantly beaten year-to-date, would imply total GSE volume of $19 billion for the full year, up 23% from 2021 and almost to a record high of $21 billion in 2020. 1.5 years into our 5-year growth plan titled to Drive to ‘25, we are well ahead of schedule. We set a goal to grow our debt financing volumes to $65 billion by 2025. We need to grow annual volumes by 7% to achieve this goal, and we grew our debt financing volumes by 33% in the first half of 2022. In property sales, we set a goal to…

[Operator Instructions] Our first question is coming from Jay McCanless with Wedbush Securities.

Hi, good morning, everyone. So I guess the first question I had, with the declining HUD volumes, I mean, is that business, I would assume more refi in greenfield construction, and what – as we look at the back half of the year, we’ve seen commercial construction numbers starting to move back up. What are you hearing from clients in terms of getting back out there and starting to build again?

Yes, Jay, it’s a good question. Our HUD pipeline is extremely robust right now. The real question is are people pulling the trigger. Your question about construction, as construction costs were going up and rates were going up, there was clearly a pullback I would say to you that if you had to wait the back half of the year, it’s more construction oriented as many construction costs have come in and some of the inflationary pressures and things like lumber and other component parts have eased. And the HUD product is a great product, as I think you know, because it’s a construction perm product. And so rather than having the, if you will, take out financing risk on the construction loan that it comes with most commercial bank construction loans on the HUD product, you go straight into your permanent loan and roll into it. And so I would think that we have a lot of interest in that. We already have a lot of interest, how much of that deal flow gets done is a question mark. As Greg said, the IRR refi business is basically off the table as rates have moved up so dramatically. And then there is just a typical A7 refi volume, and we’re actually seeing quite a bit of that as well.

Okay. And then if I think about the EPS guidance moving down a little bit, I guess, what’s weighing on that more? Is it the head count expenses that you talked about or is it having to tighten up the spreads to drive more business?

I think it’s a combination of things. I think if you look at the servicing fee on the GSE business that we’ve done year-to-date, if you exclude the Greystar transaction, which was that large deal we did in Q2. Average servicing fees have been good, but not great. And we’re sort of at this inflection point in the market right now, Jade, where because rates were rising to win deal flow, spreads came down significantly. As the market is dislocated in June into July, we’ve seen the opportunity to start pricing back in there, but there is a lag effect to that. And so what we’re seeing right now is some of those more compressed fee deals right now coming through. It is our very clear hope and expectation that we have the ability to price in better margin in the back half of the year. But I think that, that conservative stance that Greg talked through was just basically saying if we run volume numbers at the tighter margins, it will keep us in that lower range. But as Greg said, if we get to the higher volume number and we get any kind of spread widening, we have the very real opportunity to get back to that double-digit earnings growth number.

Great. And then with the stock repurchase, glad to see that happening, is there any cadence or pace you won’t go out on a quarterly basis that we could build in?

I would say the simple answer to that is no, Jay. But I think as we look at our cash position and sort of where the market trades going forward will certainly be active when we think it’s more undervalued and less active when it’s higher. So we don’t have a specific thought process in mind as to how quickly or what pace we would buy back at, but just expect to be in the market going forward.

Okay. Great, that’s all I have. Thank you.

Thanks, Jay.

Thanks. Our next question will come from Steve Delaney with JMP.

Good morning, everyone. Can you hear me?

We can.

Yes.

Congrats on a strong performance in an incredibly volatile period in second quarter, for sure. Willy, on the GSEs, obviously, Fannie Mae in particular, held up really well. The 59% of capacity, with Freddie lagging a little bit, do you have any – well, do you see any chance that this year that they don’t fully utilize their $156 billion in authority?

I do, Steve. Unfortunately, I think Fannie has the team and the leadership and the focus to use their entire $78 billion. As you know, Freddie has had a leadership change from Debbie leaving and Kevin stepping in. Kevin has stepped in and is on it, he is an incredible leader, and I think will be a fantastic leader of Freddie Mac’s multifamily business unit. But with the changes that have gone on at Freddie Mac with some of the personnel departures that they have had and also Freddie being a non-delegated business. As you know, Steve, on the Fannie side, it’s delegated to us as a DUS lender, and we do the underwriting and we take the risk on the loans with Freddie Mac, it’s non-delegated, which means that we work with Freddie Mac on underwriting alone. But at the end of the day, it’s Freddie Mac employees who are working with us shoulder-to-shoulder to get those deals done. Given that it is un-delegated and they have had some personnel departures, I think there is a chance they don’t hit the $78 billion. Do they have the ability to do it as it relates to opportunity in the market, no doubt. And if Kevin has his way, I would assume that he is going to get the team focused on lending every single one of the dollars that they have. And at the same time, we are also realistic to the fact that there have been some challenges at Freddie Mac this year. Thankfully, Kevin is a seat. Thankfully, Kevin is a great leader, and we plan to do as much with them as we can.

Yes. Thanks. That’s good color for the second half. I mean looking – assuming that Freddie Mac gets fully staffed and back rolling, given the overall strength of the multifamily sector, the amount of capital that is looking to be deployed there, both equity and debt, would you expect that we would see an increase in the caps in 2023?

Great question. There are two things. One, let’s see what happens to capital flows, generally speaking about whether there is a need for an adjustment to the caps in the back half of 2022. We shall see, but the regulator has been very straightforward in saying that if there is a need to adjust the caps up, they very clearly can and will do that. I would put forth that the annual scorecard process kind of – it’s well underway at FHFA, but as it relates to discussions with them really kicks in sort of in September. And the timing could be very appropriate to talk to them about the fact that, right, in September, Fannie and Freddie are doing a significant amount of business in the market that many of the lenders that were there in 2021, such as debt funds are no longer active participants in the market and that Fannie and Freddie’s cap should go up in 2023.

Final thing for me, it’s part question, part observation. Acquisitions are great long-term. You have had tremendous track record there, and that’s how you built the company that you are today. They do create short-term noise for investors and for analysts, and you have bitten off quite a bit this year in terms of especially Alliant, etcetera. Would you expect there might be some period of time before you take on another large acquisition and possibly that if one were to occur, then it would be 2023 rather than second half of this year?

So, as you know, Steve, we have acquired now, I think it’s 16 or 17 companies. I think we are pretty expert at identifying companies not participating in auctions for companies, buying those companies and making the human capital at those companies feel like they are part of a larger enterprise and creating fantastic value. I will tell you I am wildly both surprised and overjoyed at the performance we have seen from our 2021 and early 2022 acquisitions. The performance that Greg and I both outlined in the call and the over-performance from a revenue standpoint at both Alliant and Zelman and then GeoPhy coming in only in February of this year and starting to have a real impact on our technologically enabled businesses of small balance lending and appraisals. It’s been a fantastic performance. So, I will tell you that our Board sat around at the beginning of the year and said you all have deployed almost $1 billion of capital as it relates to both purchase price and earn-outs. And we want you to really focus on integration. I will tell you two quarters into it we are well ahead of plan. We feel extremely good about what we have done from an M&A standpoint over the last year. And so I would not rule out further acquisitions. And at the same time, the markets being the way they are present us with a great opportunity. I think a lot of our competitors will peel it back in as they typically do. If you go back to 2020, when most of our competitors were hobbled and sitting on their hands, we had a fantastic year, and we made investments and we continue to look for opportunities. You can roll the clock all the way back to the great financial crisis when we bought Column Financial from Credit Suisse in the depths of the crisis. We have a track record of doing things when others are standing still. And so while we don’t – I can tell you right now we don’t have any major acquisition sitting on the frontier right now. We are very active in looking at opportunities, and I am assuming that some will present themselves to us, and we will underwrite them as thoroughly as we always do.

Thanks for the comments Willy.

Thank you, Steve.

Thank you. Our next question comes from Jade Rahmani with KBW.

Thank you very much. CBRE on its earnings call this morning said that their baseline scenario is for a recession beginning in the fourth quarter and playing itself out through 2023. Is that what you all are currently projecting?

They have got a lot of economists over there, Jade. I am not going to try and challenge the economists over at CBRE. As I hope we articulated pretty well in the call, we have a business model that can do well in both up-markets as well as down-markets. As you may recall, when we went public, way back in 2010, everyone said, oh, you are a really good niche agency lender, but at the moment the market started to expand and private capital comes back, you are going to be left behind. And all we did when market – private capital came back was grow faster than everybody else. And then we hit the pandemic of 2020, our countercyclical capital stepped in, and we had a fantastic year when all the competition was hobbled. And so we feel – and then 2021 comes up, and we put up record origination volumes and all the businesses that we have invested in show incredible growth. So, we feel very good about the way that we have built the business model to both grow dramatically in up-market as well as have a fantastic cash-generating business in down-markets. And so that scenario doesn’t concern me, and I am certainly not going to project whether they are right or wrong as it relates to when a recession may arrive or how long it sticks around for.

Is there anything that you are doing differently in light of the macro uncertain environment? Have you slowed the pace of recruitment? Are you being more selective? Are you emphasizing cash retention, expense management, any defensive actions we should understand that you are all taking?

Yes. Jade, as Greg underscored in his comments, we have slowed down our hiring. We had a very ambitious hiring plan for 2022 to continue expanding a number of businesses. We have slowed that down. We have integrated the three major acquisitions that we made in 2021 and into 2022 into the company. And it’s really that integration and then using what we have today to take advantage of these markets. And so feeling very good about where we are from a personnel standpoint. I would also underscore that one of the big – and Greg made this comment as it relates to Q2 one of the big cost increases in the quarter was just the fact that we had massive volume, and we are paying out high commissions. That’s all a variable pay. You have any degradation as it relates to transaction volumes and the commissions come down on a commensurate basis. And so the business model is set up that if people aren’t producing new loans and aren’t selling properties, they are not getting paid. And so it’s a fantastic business model that is quite variable. We are watching our costs. And given that we are so big with Fannie, Freddie and HUD, and they are countercyclical sources of capital, as those businesses grow, our financials should perform quite well.

Jade, I will also just sort of layer on to what Willy said, I think hopefully, you are getting the flavor we are aware of the markets and what’s going on, we are being opportunistic and thoughtful at the same time if that makes sense. And the benefit of having large cash, recurring cash revenues and the escrows that I tried to allude to in the remarks means we can both conserve capital and invest at the same time. We are trying to do that smartly. So, we still expect to recruit and grow the business during this cycle, whatever it ends up being, while at the same time, positioning our company for strength in the long-term.

Can you remind us what the EPS drag currently is from Apprise and GeoPhy and if you continue to expect those two businesses to at least be neutral next year?

Yes. So, in Q1, when we closed the acquisition of GeoPhy, the cost structure of that acquisition alone was forecasted around $0.30 to $0.40 of dilution for this year. As Willy and I outlined in our remarks, the businesses that are supported by GeoPhy are not dilutive to EPS in Q2. They are dilutive to it from an operating margin perspective on a combined basis. And as they get to scale, we expect them to become accretive, but we are not forecasting that until 2023 at this point.

And on Apprise, could you make similar commentary there?

We don’t provide disclosure at that level right now, Jade, so I would prefer not to.

Okay. So, at a minimum, the $0.30 to $0.40 dilution from GeoPhy should hopefully go away in 2023?

That’s what we are expecting, yes.

Okay. And then sorry for all the questions and I apologize if this was asked already. But for the back half of this year, could you make any commentary as to what you are expecting for year-on-year, either growth or decline in GSE production and brokered loan business and investment sales?

So, I gave some bracketing on the GSE side of things, Jade. It really does depend if they get to their full caps. And also, as you saw year-to-date in the first half of the year, we are at 14% market share with Fannie and Freddie combined, we are at 19% market share with Fannie on a standalone basis. Last year, we were at 12% on a combined basis. And so at that 12% number, where we would project doing $19 billion of agency originations. And I think one of the big issues there is if we exceed that like we have year-to-date, we can get ourselves back to that double-digit growth number, which would be an incredible result for 2022, given all the movements in the market. And at the same time, as Greg said, we are right now on a more conservative basis, looking at flat to 10% EPS growth year-on-year. And as it relates to other volumes on investment sales as well as on our capital markets business, we don’t give estimates as it relates to the growth that we are going to see in those businesses. But as you can see from our Q2 numbers and year-to-date numbers, both of those teams have incredible teams, if you will, on the field the pipelines are fantastic right now. And the real question is, do sellers and buyers have conviction to move forward with deals and do borrowers have conviction to move forward with re-financings and acquisitions. I will tell you that we have seen in the past couple of weeks a significant uptick in activity from what I would call kind of the doldrums at the end of June and the beginning of July. But that’s anecdotal to the degree that we are in a time right now where I think the 75-basis point increase by the Fed was projected. And people feel like there is some confidence in the market today, that will remain. What we do know is there is just a tremendous amount of capital waiting to be deployed and many of it is in a fund format. And when the capital is sitting in a fund format, those professionals are very incented to deploy that capital.

And on the multifamily side, in terms of underwriting of new deals, do you think that investors, the majority of investors are willing to take initial negative leverage because the rent growth outlook is so strong or do you think that what we are in right now is a period of a correction in values so that there is positive going in leverage?

Both.

So, okay.

No, you are spot on, Jade. The deals that we are transacting on the sales side are either exactly what you just detailed, which is they are buying it at a 3.75% cap. By the way, we did – we have done, I just looked at four deals we have done this week, our out of 403 coupon on it. Another one had a 405 coupon on it and then two had a 422 or 426 coupon on it. So, the bottom line is, you might have bought that actually at a 4 cap rate, not a 3.75. But to your point, that’s a negative leverage deal at the beginning. But they are also running that cap rate analysis at 3% rent growth that many are expecting to get 6% and 9% rent growth. So, to exactly your point, that’s the bet that many investors are making. The other side to it is many are buying all cash. So, a number of the private REITs as well as funds have been buying all cash and then we will look to put leverage on the assets later on. And so we are seeing a huge deployment of capital as it relates to those types of buyers. And then the other side to it is there are clearly those buyers who say, I can’t make sense of these numbers right now. I am just going to wait to see cap rates adjust and then I will come back in when I can get positive leverage. The other thing I would say, Jade, is, as you know, we finance other asset classes. So, we are seeing plenty of financing on hospitality. We did over $700 million loan in Q2 on the Aman Resort in New York City. Hospitality well located is getting plenty of capital to it. Retail, well located in strip – retail is doing really well. And as David Simon said to me when I saw him in June, most retail is trading at 7.5%, 7% to 8% cap rates, and you can put 5% debt on them. We have got positive leverage all over the place in the retail industry. And then the one – and then industrial and then the final one I would put a question mark around is office. But as you probably saw, the Boston Properties earnings were extremely strong. There is still plenty of demand for A-class office. The real question is B and C class office, particularly CBD B and C class office. It’s tough to get a bid on B and C class CBD office right now. It’s just an asset class that everyone has huge question marks about.

Well, thanks very much for taking the questions and great job on the surging transaction volumes in the quarter.

Thanks, Jade. I thought you would like the growth in the adjusted EPS number since you have been tracking that for a long period of time. So thanks.

Thank you.

Thank you. There are no further questions at this time. So, I will now turn it back over to Willy for closing remarks.

Thanks Ginna. Thank you, Greg and thank you everyone for joining us today. Great quarter by the W&D team and thanks everyone for taking the time to tune in. Have a great one.

Take care.