Walker & Dunlop, Inc. (NYSE:WD) Q2 2020 Earnings Conference Call August 5, 2020 8:30 AM ET

Company Participants

Kelsey Duffey – Vice President, Investor Relations

Willy Walker – Chairman and Chief Executive Officer

Steve Theobald – Chief Financial Officer

Conference Call Participants

Henry Coffey – Wedbush

Steve Delaney – JMP

Jade Rahmani – KBW

Kelsey Duffey

Good morning. I’m Kelsey Duffey, Vice President of Investor Relations at Walker & Dunlop, and I would like to welcome you to Walker & Dunlop’s Second Quarter 2020 Earnings Conference Call and Webcast. Hosting the call today is Willy Walker, Walker & Dunlop’s Chairman and CEO. He is joined by Steve Theobald, Chief Financial Officer. Today’s call is being recorded and a replay will be available via webcast on the Investor Relations section of our website. At this time, all participants have been placed in a listen-only mode and the floor will be open for analyst questions following the presentation. [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 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 definition of our risk factors can be found in our annual and quarterly reports filed with the SEC.

I will now turn the call over to Willy.

Willy Walker

Thank you, Kelsey, and good morning, everyone. Since the pandemic began – when I begin a webcast on Wednesday, I usually say, it’s Wednesday, it’s the Walker webcast, but today, we aren’t doing Walker webcast that we can present to investors our absolutely fantastic second quarter results. But before I dive into comments about the second quarter of Walker & Dunlop, I want to reiterate our condolences to those who have lost loved ones due to the COVID-19 virus and express our concern and support for the millions of Americans, who have been adversely affected by the economic downturn.

While Walker & Dunlop’s Q2 financial results are exceptional, many individuals and businesses have been hit extremely hard. And there is our great hope and wish that we can control the virus so that jobs and businesses can be restored. As we have seen since the advent of the pandemic, certain businesses have benefited from the forced changes to the way we live and work, and others have been badly damaged.

For Walker & Dunlop, we have benefited and generated record revenues of $253 million during the quarter on the back of exceedingly strong loan origination and property sales volume of $7.1 billion. Our quarterly origination volume of $6.7 billion, coupled with our Q1 lending volume of $9.6 billion catapulted Walker & Dunlop’s market share with total commercial real estate lending in the United States for the first half of 2020 to 13.2%, nearly tripling our market share from last year. This dramatic growth in market share is due to the success we’ve had in attracting and retaining the very best bankers and brokers in the industry, investing in integrated technology solution and proprietary databases to better understand and meet our clients’ borrowing needs and the development of an entirely new digital marketing strategy, thanks to the widely popular Walker webcast.

All these investments in people, technology and branding came together in Q2 2020 to generate 26% year-over-year growth in revenues, and 47% year-over-year growth in diluted earnings per share to $1.95 in the midst of the global pandemic, when our entire team is working remotely. And at record revenue growth and explosive earnings were not enough we added a record net $5.2 billion of servicing from loan originations to our portfolio during the quarter, pushing our servicing portfolio over $100 billion at the end of July and officially achieving the first pillar of our highly ambitious 5-year strategic growth plan entitled Vision 2020.

Revenue growth of 26% during the quarter in our debt brokerage and property brokerage businesses were significantly curtailed, highlights the volume of lending we did with the GSEs and HUD. We originated $4.5 billion of financing with Fannie Mae and Freddie Mac in the second quarter, increasing our market share with the GSEs from 10% last year up to 14% through the first half of 2020. Our partnership with Fannie Mae, which dates back to 1988, has had an incredible year with Walker & Dunlop representing 20% of Fannie Mae’s total multifamily lending volume for the first half of the year.

We have been Fannie Mae’s largest lending partner for 4 of the last 7 years. And our performance this year leaves little doubt that we are not only Fannie Mae’s largest partner, but their very best. $5.2 billion of new loans into our servicing portfolio, during the quarter, when we originated $6.7 billion in total financing, means we were not simply refinancing loans that already existed in our servicing portfolio, but rather taking business from our competition and bringing in new clients into Walker & Dunlop. These new mortgage servicing rights and client relationships provide huge long-term value to Walker & Dunlop.

As Slide 6 shows, we had strong growth in our Fannie and Freddie origination volumes in Q2. And as the middle column shows, we had explosive growth with HUD this quarter, growing from $190 million of loan originations in Q2 of 2019 to $640 million loan origination this quarter, by far our largest HUD quarter ever. There are several items of note in our HUD origination numbers. First, Sheri Thompson joined Walker & Dunlop 18 months ago to lead our HUD business, and has done an absolutely magnificent job taking our team from being a market leader to being the leader in HUD financing. Second, as anyone who has ever done a HUD financing will tell you, HUD business takes a long time to originate the process and nothing ever happens in the quarter. So our fantastic Q2 was due to our team’s incredible work over the past year, not due to the rates dropping and HUD becoming wildly more competitive in Q2. But that has happened, and rates in HUD’s countercyclical world should benefit our HUD volumes in the future quarters.

Finally, as you can see just to the right of the HUD volumes, we brokered $1.5 billion of debt to third-parties during Q2, that number is down 23% from Q2 2019, but still very strong given the dislocation place in the markets. It is noteworthy that the New York-based debt brokerage team we added in Q1 was responsible for 26% of our total brokered volume in Q2. Current accomplishment for the team’s first quarter at Walker & Dunlop, particularly considering they are based in the epicenter of the early COVID crisis. Similar to our debt brokerage business, our multifamily property sales business slowed dramatically in Q2 due to the pandemic. We closed $447 million of sales volume in Q2, a slow quarter to our team, where we were seeing the market pick back up and we currently have 33 properties worth $1.4 billion under contract with closing in Q3 and Q4. So with very robust GSE and HUD pipelines, our debt brokerage business rebuilding nicely as capital begins to return to the broader market. And our multifamily property sales business rebounding nicely, we feel extremely well positioned to continue outperforming the market for the remainder of 2020.

Vision 2020 was established in 2016 with very ambitious 5-year goals. $30 billion of annual debt financing, $8 billion of annual investment sales, $8 billion in assets under management and $100 billion of loans in our servicing portfolio, which if achieved, would drive $1 billion in annual revenues. As the left hand side of this next slide shows, we established a debt financing goal of $30 billion after originating $16.2 billion of debt financing in 2015. And on a trailing 12-month basis, as you can see in the last column of this chart, we have achieved our Vision 2020 debt financing goal by originating $31.4 billion of loans, which is a 5-year compound annual growth rate on loan originations of 14%.

Similarly, the right side of this slide shows the growth in property sales from establishing the goal of selling $8 billion in multifamily properties after selling $1.5 billion in 2015 to selling $5.8 billion over the last 12 months. While the pandemic has clearly slowed down our property sales business, we have grown this business at a compound annual growth rate of 31% over the past 5 years and have built an absolutely incredible team. I mentioned previously the growth in our servicing portfolio to $100 billion. And as this slide, shows over the past 5 years, we have grown the portfolio from $50.2 billion in 2015 to $100 billion today, at a compound annual growth rate of 15%. The dramatic growth in loan originations, property sales and servicing have grown revenues, as you can see on the right side of this slide from $468 million in 2015 to $916 million over the past 12 months, or at a compound annual growth rate of 14%. So, all of this brings us close, but not quite to our Vision 2020 goal of $1 billion in annual revenues, which we will continue chasing for the remainder of this year.

We announced twice during the second quarter that the number of forbearance requests in our at-risk portfolio have been extremely low. As seen on this slide, for various requests from office, retail and hospitality loans in our portfolio are dramatically higher than multifamily. But we have 0 credit risk on any office, retail, industrial or hospitality loan we have originated and service today, zero. Our only credit risk is on multifamily, and that portfolio continues to perform exceedingly well. As Steve will discuss, we took a large loan loss reserve in Q1 to incorporate the expected impacts of COVID and added another $5 million to that reserve in Q2. The additional reserves added in this quarter were due entirely to growth in our servicing portfolio and not due to any specific reserves or definition in the credit quality in our at-risk portfolio. While it is still early days in the COVID-induced economic crisis, given the extremely small number of forbearance requests we have received in Q2, we feel extremely good about the long-standing reputation for outstanding credit discipline at Walker & Dunlop showing itself once again.

There are two other topics I would like to focus on before turning the call over to Steve. First, when the pandemic hit, we decided we needed to communicate with our employees and customers on a direct and consistent basis. I started showing daily videos to all Walker & Dunlop employees that helped everyone on the team know what was going on inside and outside of the company. The video has also helped maintain the exceptional corporate culture that defines Walker & Dunlop during a time when everyone was working from home. We also launched the Walker webcast, while all of W&D’s competitors were producing webinars to discuss market conditions impact rates. We designed the Walker webcast to discuss not only commercial real estate and the COVID pandemic, but also topics like health care, leadership, remote working, macroeconomics and emotional intelligence. And by bringing in world leaders on these topics, the Walker webcast differentiated itself and has continued to do so ever since.

While most webcasts I participated on with other industry leaders have a few hundred participants, the Walker webcast has consistently had over 5,000 pre-registered to watch the webcast, and the webcast replay on Walker & Dunlop’s YouTube channel have consistently received more than 5,000 views. Today, we have added just under 150,000 people view a live or recorded Walker webcast. And while 150,000 views is an incredibly impressive number, what is even more exciting is how the webcast has become a cornerstone for an entirely new digital marketing strategy for Walker & Dunlop. For example, our client e-mail database with 19,000 people prior to the COVID pandemic, today it’s over 120,000 e-mail addresses. Our media outreach has exploded. Having Walker & Dunlop mentioned in a 129 press articles in target publications during Q2, an all-time record by over 55%. It is no coincidence that W&D has gained enormous market share in Q2. And given the success of the Walker webcast, we will continue to expand our brand and digital marketing strategies going forward.

The second topic is racial justice and diversity. The Wednesday after George Floyd was brutally murdered in the streets of Minneapolis, Walker & Dunlop Board Member, John Rice, joined me on the Walker webcast, and said, the time for total acts of diversity is over, it is time for real action. On that webcast, I detailed Walker & Dunlop’s already established ambitious goals to increase gender and racial diversity in both management positions and top earning positions by 2025. Walker & Dunlop has consistently been a leader in the commercial real estate and mortgage industries with regard to racial diversity, and we will continue to do so.

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We have been a major sponsor of Project Destined Management Leadership for Tomorrow, Europe and Future Housing Leaders. And we will continue to invest our capital and time to make these important programs have greater impact. We have reinforced our commitment to building a robust diversity and inclusion program, driven in large part by our Minority Employee Resource Group and our Women’s Initiative. And we have put diversity and inclusion at the center of our environmental, social and governance goals, and are in the process of tying the accomplishment of these goals to long-term executive compensation. As I wrote to all Walker & Dunlop’s clients 2 weeks ago, the commercial real estate industry is premised on the concept of community, communities to work, communities to shop and communities to live. We must, as an industry, do all we can to promote community and equality across our country during these challenging times. And most importantly, over the coming years, to ensure systemic change actually happens.

I will turn the call over to Steve now to talk through our second quarter financial results and credit portfolio in more detail, and then I’ll come back to provide some insight into what we see ahead in the coming quarters. Steve?

Steve Theobald

Thank you, Willy and good morning everyone. Our second quarter results once again demonstrated the power of our business model as we delivered exceptional top and bottom line growth and continued to strengthen our balance sheet, while operating with the fully remote workforce.

Q2 total transaction volume of $7.1 billion, included a significant year-over-year increase in our Fannie Mae loan originations, which drove the 26% year-over-year increase in total revenues to a quarterly record of $253 million. Second quarter net income of $62 million and diluted earnings per share of $1.95, were both up 47% from Q2 ‘19. Second quarter total debt financing volume of $6.7 billion was led by $2.8 billion of Fannie Mae originations. For the second consecutive quarter, Fannie Mae originations comprised over 40% of debt financing volume, which, along with our robust HUD originations, pushed gain on sale margin to 252 basis points, well above our forecast range of 170 to 200 basis points.

The first half of the year has been characterized by our dominant market share with Fannie Mae. Looking at our current pipeline of GSE business, we expect to see an increase in our Freddie Mac originations in the second half, particularly in Q3. Our HUD business is poised for a breakout year in 2020, having originated $640 million in the quarter and with a strong pipeline for the rest of the year, while debt brokerage volumes will likely continue to be constrained by the current economic environment. Anticipating the shift to more Freddie Mac originations in Q3, we expect gain on sale margin to be in the range of 190 to 210 basis points for the quarter.

Our scaled business model continues to produce healthy key financial metrics, with second quarter operating margin of 33% and return on equity of 23%, both well above the top end of our target ranges of 30% and 20%, respectively. Personnel expense as a percentage of revenue was 42% due to an increase in variable expenses for commissions and bonus, driven by the strong performance during the quarter. Variable compensation expense was 60% of our total personnel costs during the quarter. And finally, year-to-date revenue per employee has increased to over $1.1 million as revenue growth has outpaced the hiring of new employees.

Our strong debt financing volumes in the first half of the year have enabled us to grow our servicing portfolio by more than $6.5 billion in the last 6 months, and our service portfolio ended the quarter at just $12 million below the $100 billion market. As Willy mentioned, we have since crossed over $100 billion, successfully achieving an important pillar of our Vision 2020 goals. The portfolio continues to fuel strong cash revenues with record servicing fees totaling $57 million in Q2. Additionally, the record mortgage servicing rights revenues of $90 million in the quarter, which were more than double those of Q2 ‘19, will translate into higher cash servicing fees in the future.

Turning now to liquidity. We continue to strengthen the balance sheet, increasing our available cash on hand from $205 million at the end of Q1 to $275 million at the end of June. The increase in cash was driven by strong operating cash flows and continued payouts in our interim loan portfolio. Adjusted EBITDA in the quarter was $48.4 million, down from $62.6 million in the year ago quarter. The decline was driven primarily by the impact of low short-term interest rates on our escrow earnings, which declined by $12 million year-over-year. Our average escrow balances at the end of June were $2.2 billion, which will drive significant upside to earnings and adjusted EBITDA if interest rates start to rise.

During the quarter, we also finalized the servicing advance line mentioned in our last call to facilitate the advance in the principal and interest payments on our Fannie Mae portfolio. The advanced line is structured into $100 million supplement to an existing agency warehouse line and may be used to fund advances of principal and interest payments on loans that are in forbearance or are delinquent within our Fannie Mae DUS portfolio. The facility provides 90% of the principal and interest advance payment at a rate of LIBOR plus 175 and is collateralized by Fannie Mae’s commitment to repay the advances. To date, we have had very few requests for forbearance. Through the end of July, we had only 9 Fannie Mae loans totaling $261 million that took forbearance, which is less than 60 basis points of our Fannie Mae portfolio, and we’ve granted no new requests since May. In addition, the 3 loans that took forbearance in April, all made their first post forbearance period payments in July, a really good sign as the initial 3 month forbearance periods come to an end.

Before I turn the call back to Willy, I want to spend some time talking about credit. During the quarter, we took an additional $5 million provision expense to increase our allowance for credit obligations related to our at-risk Fannie Mae portfolio. The provision expense was driven by the growth in our portfolio during the quarter and was not related to any change in our forecast for future losses. Since we established our loss forecast in the first quarter, our portfolio has continued to perform very well as demonstrated by the de minimis number of forbearance request to date and with those who requested forbearance in April all making the required post forbearance payment in July. Unemployment rates are at the levels we expected, and it seems likely that additional government stimulus will be provided, while the economy remains burdened by COVID-19. Our allowance now stands at just over $69 million or 17 basis points of our at-risk portfolio. We fully expect that there will be defaults in the portfolio over the next year, but that is baked into our forecast.

With respect to our interim loan portfolio, we reduced our allowance by $200,000 during the quarter due to the overall decrease in the size of the portfolio, which declined from $458 million at March 31 to $408 million at the end of June. So far this year, we’ve reduced the portfolio by 25%. Inclusive of the interim loans in the Blackstone JV, we’ve had 12 loans totaling $240 million, either rate lock or pay off so far this year, reducing the risk profile significantly and of those 12 loans at rate lock to paid off, we refinanced 10 of them with third-party capital, mostly Fannie and Freddie, for over $290 million in permanent loan financing, achieving exactly the objective we have always had for the interim lending program. We expect to restart our interim lending in Q3, consciously at first, given the opportunities we see in the market to originate high-quality loans from our very best sponsors. Overall, we feel really good about the performance of our entire portfolio to date, and the strong performance of the multifamily market through this crisis.

Last quarter, in light of the massive uncertainty we faced at the time, we backed off of our goal for double-digit earnings per share growth in 2020. Our strong financial results for the first half of the year and the pipeline of business we see for Q3 have put us back on track to achieving our annual operating margin and return on equity goals of 28% to 30% and 18% to 20%, respectively, and we believe double-digit EPS growth for 2020 is now achievable. In addition, a robust capital and liquidity position give us great confidence in maintaining our dividend as the Board approved a $0.36 dividend per share for the quarter payable to shareholders of record as of August 21. We had an amazing first half of 2020 on the face of uncertain economic environment. This is all due to our resilient business model, an exceptional team, which continues to deliver for clients, shareholders and each other quarter after quarter and year after year.

Thank you for being with us this morning and for your continued support. I will now turn the call back over to Willy.

Willy Walker

Thank you, Steve. As my opening remarks and the financial details Steve just provided show, Walker & Dunlop’s year-to-date performance has been exceptional. Prior to the COVID pandemic, our strategic focus and new high barriers contributed to fantastic growth in the first quarter. And when the pandemic set in, thanks to the team, culture, systems and processes, we have implemented over many, many years, we transitioned to a distributed work model without skipping a beat. We have been using Zoom to conduct our weekly executive sales calls long before the COVID pandemic hit as well as Salesforce and Box to manage our client outreach and collaboration. And our team of 900 employees took upon themselves, to figure out how to inspect properties, receive appraisals, close loans and continue providing the exceptional service to our customers that is expected of Walker & Dunlop each and everyday. The seamless transition to remote working, low interest rates and tight investor spreads on agency-backed commercial mortgage debt has created a terrific environment for refinancing activity in the multifamily sector.

And as I mentioned previously, W&D has been refinancing in new loans on our own portfolio, which has dramatically expanded our market share. And with multifamily comprising close to 80% of total commercial real estate financing volumes so far this year, we are extremely well positioned to be one of the largest providers of capital to the commercial real estate industry over the coming years. A strong macroeconomic environment coming out of the pandemic should drive continued financing volumes in our core multifamily business. And as the multifamily property sales business rebounds, so should our capital markets business as non-multi-family asset classes, such as office, retail and hospitality stabilize.

As I ran through Vision 2020 on a trailing 12-month basis, I did not discuss our asset management business, which as we started at the end of – as we stated at the end of 2019 is not going to achieve the 2020 vision goal of $8 billion of AUM. There are, however, several noteworthy accomplishments during the quarter that I would like to underscore. First, our AUM of $1.9 billion comprises 3 components: equity capital invested in a broad array of commercial property types by JCR Capital, debt capital we lend on behalf of life insurance companies through separate accounts, and multifamily bridge loans we originate into our joint venture with Blackstone Mortgage Trust.

During Q2, we reached an agreement with a large Canadian pension fund to provide up to $250 million of preferred equity capital on multifamily deals where we are originating first trust mortgage financing with Fannie Mae or Freddie Mac. We also rebranded JCR Capital to Walker & Dunlop Investment Partners and reorganized the business going forward. Finally, during the quarter, we began efforts to raise our Sixth Fund, an opportunity fund. So while our asset management business has not grown as rapidly as Vision 2020 had outlined, we are extremely pleased with the progress we made during the quarter and it’s outlook going forward. Steve made a point during his comments that I would like to underscore, as we think about the new business we are originating today and how it will play out in future quarters. The loans we are currently originating carry with them significant servicing fees, demonstrated by our 252 basis point gain on sale margin in Q2.

As you can see in our net income and EBITDA numbers, we are generating a huge amount of non-cash revenue in mortgage servicing rights that will convert into cash revenues over the next 7, 10 and even 40 years, depending on the life of the loan, so non-cash revenues today convert to cash tomorrow. We also expect our debt and property brokerage volumes to be significantly higher in Q3 and going forward in the next year, which will add cash origination fees. And finally, at some point, interest rates will begin to rise and we will generate substantial cash interest income of our $2.2 billion in escrow deposits. So while we have had an exceedingly successful quarter by any measure, it is truly exciting to think about the future cash generation of the platform we have built. Walker & Dunlop went public in Q4 of 2010, just as the economy was emerging from the great financial crisis. That quarter and our IPO were several moments in our company’s long history and set us up for dramatic growth we have generated over the past decade.

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Q2 2020 is another seminal quarter for our company, where the team, scale, brand and culture we have built immediately differentiated us from the competition. Walker & Dunlop has proven time and again that we can weather commercial real estate cycles and emerge as the very best in the industry. And during times of market uncertainty, borrowers want to work with the very best. By dramatically increasing our brand through the Walker webcast, working collaboratively as a team using Zoom and having insights into our clients’ total debt holding through our proprietary data analytics, we were able to grow our market share to 13% of all commercial real estate financing in the United States for the first half of 2020. We used the momentum gained during the quarter to add property sales talent in Los Angeles and Nashville, acquire a debt and equity placement team in New York and bring on a HUD team in Dallas. We just became a Freddie Mac small balance lender, which gives our team the ability to originate small loans for both Fannie Mae and Freddie Mac. And we hired one of the top small balance loan originators in the industry to help us grow this area of our business.

Finally, we continue to invest heavily in our appraisal joint venture, Apprise and other technology initiatives. Even during the period of market stress, our strong market position and financial stability have allowed us to remain focused on our long-term growth strategy initiatives and continue to invest in our people and platform to drive growth in future years. I have been proud of our team since the day I joined Walker & Dunlop, but never in my 17 years at the company have I seen how good we truly are demonstrated so dramatically. We transitioned to a distressed work model seamlessly, generated record revenues and the strongest operating income in the company’s history, had no credit defaults in the quarter and a very low number of forbearance requests, and fundamentally transformed the brand and market presence of the company through the Walker webcast and ancillary digital marketing strategies, all while continuing doing that in future growth. There are plenty of challenges that we will face in the coming months and years, but as we have shown time and again, Walker & Dunlop is not only up for the challenge, but will emerge the winner. I want to congratulate and thank all of my colleagues at W&D for a truly outstanding Q2. I know working remotely has its challenges and its benefits, but we are blessed to have an incredible company, with an outstanding corporate culture. And if our performance in Q2 is any indicator, we have plenty of exciting times ahead.

Thank you for joining us today. And I will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Henry Coffey of Wedbush.

Henry Coffey

Yes. Good morning. I hope you can hear me.

Willy Walker

Hi, Henry. Good morning.

Henry Coffey

So the obvious – the open question on multifamily credit quality is, what’s in the estimate? And right now, unemployment rates are high, but we have a lot of supplemental payments out there. Multifamily delinquencies are actually about where they usually are. What sort of numbers are you thinking about as you look forward in terms of likely multifamily delinquencies, unemployment levels and then one of the open topics, which, of course, is student housing?

Willy Walker

Good morning, Henry. Thanks for joining us. Look, if you look at the data right now Henry, we got zero to worry about. I mean the data tells you right now, zero. But at the same time, you got to sit there and sort of say, okay, there are likely – as Steve said, there are likely defaults that will come into the portfolio. But as Steve also outlined, we are extremely well provisioned given the $22 million provision we took in Q1 and the $5 million provision we took in Q2, which was not a specific reserve for any one asset or any asset that we are concerned about, but do 100% to the growth in the loan portfolio due to the new CECL standard. So look, we went through the great financial crisis with de minimis losses in our portfolio. We had a much smaller portfolio back then. We feel extremely good. If you listen to Squat Box this morning, plenty of Republican senators are saying we are going to see some extension of the unemployment benefits. And you heard Speaker McConnell talk about yesterday, the White House said they want to go a stepped-up level of $400 or $600 that he likely will break from the more conservative members of his caucus, and support that type of stepped up unemployment payments. And I would say to you that if you get any extension of the unemployment benefits, then rent roll should hold very strong. And you have to also keep in mind, there is a huge amount of equity capital that has been accumulated in all of the assets that we have loans on over the last 10 years. And so while rent rolls may degrade somewhat, the concept that owners would default on their loans and throw us back the keys with the amount of equity capital in those assets, I think this time around is a much higher bar than during the great financial crisis. And as you know, during the great financial crisis, multifamily, the agencies and Walker & Dunlop had de minimis loan losses.

Let me just quickly go to your second question about student housing, and then allow you to follow-up if you have anything else. On student housing, as you know, Henry, we have $2.6 billion of at-risk loans on student housing properties across the United States. What has been extremely good to see is that many students, whether the school is going back live, virtual or some hybrid have headed back to that off-campus housing. Universities transforming their on-campus housing have de-densified, if you will. They made triples into doubles, doubles into singles. And they have also taken on-campus housing and turned it into quarantine areas. As a result of that, the demand for off-campus housing has spiked. And those operators who have good off-campus housing have seen pre-leasing numbers that are extremely strong. And I will give you one other data point, which is that one of our largest student housing borrowers at Walker & Dunlop, we, just yesterday, approved a 55% LTV, $190 million loan on a student housing property that they are acquiring right now that is 95% pre-leased for this upcoming fall. So there is, a, the preleasing looks really good; and b, there are many investors right now, who are stepping into that space and not away from that space.

Henry Coffey

That’s helpful. And then on just a real big picture issue, the FHFA has put up capital guidelines for comment. I did note with a certain amount of irony that the risk weighting on multifamily was essentially twice that on single, even though multifamily is the area where you don’t see the losses. Do you have any thoughts on what’s going on with the GSEs? And whether we will see a recapitalization? Whether we will really change the market? I mean there were a lot of thoughts floating out there last fall, and now we have at least a capital proposal to react to.

Willy Walker

I would put forth that, a, as you know, Henry, there’s a lot of activity in Washington right now [indiscernible]. And the issue of the FHFA plan privatization with Fannie and Freddie, I think is heavily dependent on the outcome of the November election. As it relates specifically to the capital standards, as you can imagine, we have read through the proposals. We have worked with the industry associations to comment on those proposals. And I would say from just Walker & Dunlop’s position, there are things we are commenting on, but there’s nothing in the proposed capital standards that we are overly concerned about at this point. And then the second thing I would just say is that depending on the outcome of the election, I think that if you have President Trump being reelected, Mark Calabria will stay in as FHFA Director, and I think that the administration of FHFA will continue to push to privatizing Fannie and Freddie. I think that if Vice President Biden is elected, former Vice President Biden is elected President, that those efforts will likely be solved that there will likely be a new FHFA director put in by newly elected President Biden and that there will be a new strategy for the agencies. And as I have said multiple times, from Walker & Dunlop’s perspective, Henry, it’s sort of heads we win and tails you lose. If they continue as parts of the federal government, they are going to continue to provide capital to multifamily and we are going to continue to be one of their largest partners. If they get privatized, there are clearly benefits to that in the sense that they are now outside of the federal government. They can pay their senior managers on a more, if you will, market-pay scale. And they can become increasingly innovative. Although I would say, within the confines of conservatorship, both Fannie and Freddie, they’ve been wildly creative in trying to create new products and to lead the multifamily financing market.

Henry Coffey

Super. Listen and congratulations on a solid quarter and a pretty tough period. So, thank you.

Willy Walker

Solid, that’s – is that an understatement, Henry?

Henry Coffey

Very, very solid.

Willy Walker

Appreciate it.

Steve Theobald

Thanks, Henry.

Henry Coffey

Extra special solid.

Operator

Our next question will come from Steve Delaney of JMP.

Willy Walker

Steve, we can’t hear you yet, you might be on mute.

Steve Delaney

Can you hear me now?

Willy Walker

Yes, we can.

Steve Delaney

I’ll just say congrats on an excellent quarter, how about that? I mean we can put that aside. Willy, you made it very clear that your – the new loans are not just churning your own book, but they’re new loans, new – in some cases, new clients to WD. So my question is, where are the loans coming from? What types of institutions are seeing these loans being paid off? And if you could, we’ve obviously had a huge drop in rates. Can you quantify with the rate benefit is kind of a range of the rate benefit that these borrowers are realizing when they go out of their current loan into their new 10-year fixed loan or so that you’re putting them with Freddie and Fannie? Thank you.

Willy Walker

Sure, Steve. First of all, thanks for joining us this morning. First is well over 100 basis points is typically what we are seeing as it relates to the pickup on the new rates. We are right now new debt out at between 2 50 and 3 depending on leverage levels, sponsorship, asset, etcetera, etcetera. Some loans are dipping below 2 50 and getting into the 2 30s and 2 40s. Some loans are around the 3 coupon, but that’s just generally speaking, the range and most of the paper that we’re refinancing right now had a four handle on it previous us redoing it. So there’s a very significant step-up there. I would also say, we did a financing on an investment sale that we actually brokered during – at the end of the quarter. And one of the interesting news there was there was only a 4% price difference in the sale price of the asset from pre-COVID pricing to when we transacted at the end of June, 4%. And you sit there and you say, wow, wouldn’t there be more of a discount between pre-COVID pricing and a deal that went off at the end of Q2. And the issue with it is their underwriting on the financing at pre-crisis was 100 basis points higher as far as their coupon rate than it was when they actually closed on it. And so they can afford to only take a 4% discount on the sale price because they picked up so much in their cost of capital and what the return was going to be on buying at that level. To your question as it relates to clients and the expanding of our market share. I’d say, look, you have to keep in mind that out of the $5.2 billion of loans that we added to the servicing portfolio or net new servicing rights in the quarter, $2.4 billion of it was the southern management portfolio, which we essentially won from one of our large competitor firms. We bid against them and 2 other of our biggest competitors, we won that financing and that $2.4 billion is in that $5.2 billion. But at the same time, there’s $2.8 billion of incremental loans that – what is unbelievable about it, Henry, is that they were almost all one-off deals and smaller loans, $20 million, $30 million loans. There’s no other portfolio there. There’s no other $300 million loan in there that says, oh, well, that’s what got – they won one big new client. All that other $2.8 billion was basically singles and doubles. It was an $18 million deal, a $32 million deal. And what’s so exciting about it is just the breadth of the platform, the bankers that we put on the front lines and then the support that we’ve given them by, quite honestly, the explosion of our brand, which has brought new borrowers to Walker & Dunlop. I won’t bore you on this call, but the number of new clients that I personally have interfaced with through the Walker webcast of people saying, I listen to it every week. Walker & Depot is being insightful. We follow-up on every single e-mail inquiry we get off the webcast with direct one-to-one marketing with someone who’s put a question in on the webcast direct one-to-one marketing. Well, immediately, that might be someone who in the past has been borrowing from one of our competitors. And now we have a one to one relationship with them. And that has transformed the brand and it’s transformed the reach of our bankers and brokers into a whole new client base that previously we weren’t touching.

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Steve Delaney

You mentioned the new leadership in the HUD program in Ginnie Mae loans, and that was obviously a big contributor. Could you give us a sense of what percentage of total volume going forward, a range of what you would expect HUD to grow to? And remind us, I know it’s the highest margin business that you have, but kind of embedded in your new – Steve’s new gain on sale margin, what are you specifically assuming on HUD loans? That’s my final.

Willy Walker

Right. So I’d say this, Steve, first of all, I mentioned Sheri and Stephanie Wiggins, who is our Chief Production Officer, who is also new to Dunlop, has done an amazing job of our HUD business. And to process that much business in Q2, when the federal government shut down for a lengthy period of time, and I’m not trying to poke at HUD, but they are not exactly the most technologically savvy lender in the world, able to process that amount of business in Q2 is just a Herculean effort and an incredible accomplishment for our team. I am going to demure on giving you a forward look on – I’ll tell you one thing. First of all, our Q3 pipeline is fantastic, and that will carry into Q4. So as it relates to what we’re working on today, the team has got a pipeline that is, as I said in my comments, extremely full, and I feel very good about our Q3 HUD volumes. And at the same time, I will also say that we’ve been in the HUD business for a long time. It’s a very difficult business to project volumes because of the commitment time frame, you’re working on a deal, you expect it to be a Q2 deal, and for whatever reason something has come up where you got to go redo something, and lo and behold, it becomes Q3. And so I would only say that, we feel very good about the Q3 pipeline on our HUD book. I’d love to see us do a redo in Q3 of what we did in Q2. We clearly have visibility to doing something like that. But quite honestly, I can’t tell you that we are going to get there, or not right now, just with the amount of work [indiscernible] now during the quarter.

Steve Delaney

Yes. Well, apart from volumes, which I understand, can you quantify the gain on sale opportunity on HUD, when and if those loans come? When you’re looking at your third quarter of 190 to 210, sort of what is the rough range at which you would expect HUD loans to contribute to that margin on a basis point?

Willy Walker

A lot of that depends on whether we’re doing, a lot of 223, which are refinancings or whether we’re doing E4s, which are construction loans and how we account for that, but Steve, do you want to – we haven’t broken out ranges on various lines of business in the gain on sale margin. Do you want to give Henry some color on that? I mean, sorry, Steve, some color on that?

Steve Theobald

Yes. And look, part of it, too, Steve, is a function of how much debt brokerage volume we do as well, right? So that was a suppressed number in Q2, which also helped to elevate the gain on sale margin of it…

Steve Delaney

Understood. Yes.

Steve Theobald

On that level. So if get a pick-up in debt brokerage in Q3 and HUD was about 10% of the overall volume in Q2. I’d love to see it stick around at that level going forward. But to Willy’s point, it’s hard to predict that. The pipeline certainly looks good, and that’s factored into the estimate we’ve given.

Steve Delaney

Got it. Well thank you most of the comments and again, congratulations on the progress you’ve made in 2020.

Willy Walker

Thanks, Steve.

Operator

Our next question will come from Jade Rahmani of KBW.

Jade Rahmani

Hi, can you hear me?

Willy Walker

Yes, Jade.

Jade Rahmani

Okay, thanks very much. Just wanted to find out on the pipeline for Fannie Mae and Freddie Mac, how is that looking for the third quarter? And in the second quarter specifically, were there any outsized originations that occurred?

Willy Walker

Yes. So Jade good morning, and thanks for joining us. As I said in my remarks, our pipeline for Fannie and Freddie in Q3 is extremely strong. We have great visibility on our Fannie and Freddie business in Q3, and it looks great. As it relates to Q2, one of the big things to keep in mind is as much as – in responding to Henry’s question on the – or actually, it was Steve’s question on the net addition to the servicing portfolio, and I mentioned the southern Management deal. The Southern Management deal was not in our Q2 origination numbers. We recognized $2.1 billion of the $2.4 billion on the Southern management deal in Q1 so all of the originations in Q2 were those 1s in 2s, if you will, that I mentioned. And so the loan count was significantly up. There was no portfolio in there and there was no big loan in there. And so I mean, quite honestly, that’s where we get not only new clients, but we also get a lot of margin. Because when you do large structured transactions, origination fees come down, servicing fees come down. And so when we’re doing those one-off transactions, you’re typically getting full origination fees and full servicing fees. And that was a big driver in Q2 of our economic performance.

Jade Rahmani

Okay. In terms of the financial outlook, I just wanted to make sure I got the that the guidance that was provided was basically the third quarter gain on sale margin of 190 to 210 basis points, which I believe is driven by increased mix of brokered business and non-Fannie Mae business. And secondly, you still expect double-digit EPS growth in 2020 is there any comments that you could add with respect to adjusted EBITDA for the year?

Willy Walker

Steve, do you want take that?

Jade Rahmani

Do you expect that to grow or?

Steve Theobald

Yes. Look, I think, Jade, as I alluded to in my comments, one of the primary drivers of the quarter-over-quarter decline in adjusted EBITDA was the low interest rate environment and the impact that, that has on our escrow earnings. I think we are, obviously, long term, very bullish about that asset for us. But in the short run, I don’t see any impetus that rates going back up on that. So I think we’re going to continue to see escrow earnings at a more muted level than what we we’ve seen over the last couple of years, just where interest rates are. And all things equal, that’s going to put pressure on the year-over-year comps on EBITDA. I think at the end of the day, we still feel really good about the cash generation of the business and the operating cash flows that we’re generating. And as the services portfolio continues to grow and as we put more business into the portfolio at a higher servicing rates, that’s going to bode well for our cash generation in the future, as Willy mentioned.

Jade Rahmani

Okay. Bigger picture question regarding the outlook for multifamily. Tracking homebuilders and single-family rental REITs, they are both – both sectors are noting an uptick in move-outs from multifamily and from denser environments into the single-family housing space. At the same time, it seems that collections in multifamily have been strong in performance, strong and clearly, very, very low forbearance levels as evidenced by the strong results in WD servicing portfolio. So how would you square those two tensions as it relates to the outlook for multifamily credit and the potential for an increase in suburbanization and an increase in single-family housing demand?

Willy Walker

Yes. Jade, we’ve discussed this before. I’m not as convinced as you are that this great suburban migration is underway. And there’s an economic reality that sit behind all of this. If you’re an associate at Goldman Sachs and living downtown in Manhattan and you decide you want to stop renting your apartment from related move out to Greenwich, Connecticut, you could have done that a year ago, you can do that tomorrow and likely you are doing that. But that’s not the core of our business. We’re not – and first of all, we don’t have a loan on a related asset in downtown New York to start with. And the second thing is that we’re focused on the middle market. We’re focused on workforce housing. We’re focused on affordable housing. And the economic reality is that we have over 20 million people unemployed in the United States today. If they couldn’t go and buy a single-family home previously, they can’t go buy it today. Diana Olick was on CNBC this morning talking about the fact that there’s no supply of entry-level, single-family housing. I’ve said that to you, Jay, for 5 years running that until there is a new supply of affordable entry-level single-family housing, people will continue to be renters of multifamily. And for the last 5 years, that is exactly what has happened. Occupancy levels have held up. Is there marginal people who say, I don’t want to live in a building with 300 other people because there’s a pandemic going on, and I’d like to move out into single-family home? Yes. Is there a great opportunity for SFR, single-family rental? Yes. But as you also know, the SFR stock that’s out there today is full. So yes, there are billions of dollars being put out there to build single-family homes for SFR, but they’re not going to be out there between now and when the pandemic is hopefully over. And then they’re going to have a competitive price point of staying in multi or moving to SFR. So look, we are in uncharted times. There are plenty of people out there who are voting with their feet to move from an urban location to a suburban location, if they can afford it. But at the end of the day, the majority of people who would be first-time homebuyers can’t afford a new single-family entry-level home, and the homebuilders having built that product to make it available, which is just pushing the cost of that entry-level housing up, which is making it increasingly unaffordable to the average American.

Jade Rahmani

Okay, Yes. And I think in terms of these trends, it’s too early to tell what will become a long-term change behaviorally in the market. And I think it’s highly uncertain at this point. In terms of the volume strength, how much of it was refi activity? And how long do you expect this current refi wave to last?

Willy Walker

We have got 90-10 in the quarter as it relates to refi versus acquisition. But as you also saw in the numbers, we made $460 million of investment sales in Q2. And I told you we already have a pipeline for Q3 of closing with $1.3 billion or $1.4 billion of acquisition activity. And I also made reference in our call to a deal that we sold at the end of Q2, where we brokered it and we also financed it. We’re seeing more and more deals, where we are both listing the property and financing the property, showing the power of the platform and the investment sales team that we’ve got at Walker & Dunlop. So as investment sales comes back, we can see the volume of acquisition financing go up. But as I also said, as it relates to the overall outlook for Fannie and Freddie on a just pure refinancing basis, you’ve got an extremely healthy pipeline for Q3.

Jade Rahmani

Thanks very much. Congratulations on a great quarter. And thanks for taking the questions.

Willy Walker

Thanks, Jade.

Steve Theobald

Thanks, Jade.

Operator

Thank you. There are no further questions, so I will now turn the floor back over to Willy for closing remarks.

Willy Walker

I reiterate my thanks to everyone, who joined us this morning for the call. And I’d also reiterate my congratulations to the W&D team for a truly outstanding Q2. It has transformed our company, and we got a lot of exciting times ahead of us. So thank you, everyone, for joining us today and have a great day.



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