Good morning, everyone. I'm Kelsey Duffey, Vice President of Investor Relations at Walker & Dunlop, and I would like to welcome you to our second quarter 2021 earnings conference call and webcast. Hosting the call today is Willy Walker, Walker & Dunlop Chairman and CEO. He is joined by Steve Theobald, Chief Financial Officer. 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 Steve will touch on during the call today. Please also note that we will reference the non-GAAP financial metric adjusted EBITDA during the course of this call. Please refer to the earnings release posted on our website for a reconciliation of this non-GAAP financial metric. Investors are urged to carefully read the forward-looking statements language in our earnings release. Statements made on this call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe our current expectations, and actual results may differ materially. Walker & Dunlop is under no obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. We expressly disclaim any obligation to do so. More detailed information about risk factors can be found in our annual and quarterly reports filed with the SEC. I will now turn the call over to Willy.

Thank you, Kelsey, and good morning, everyone. Walker & Dunlop's second quarter performance reflects our continued investments in people, brand and technology to fundamentally change our competitive positioning in the commercial real estate lending and services market. We increased total transaction volume by 90% to $13.5 billion, generating total revenues of $281 million, up 11% from the second quarter of 2020, diluted earnings per share of $1.73 and adjusted EBITDA of $67 million, up 37% over Q2 2020. Those numbers directly reflect the transformation of Walker & Dunlop from a mortgage-centric specialty finance firm into a broader technology-enabled financial services company. We took Walker & Dunlop public in 2010 as one of the best agency multifamily lenders in the country. Ten years later, thanks to our investments in people, brand and technology, we are a dramatically more diversified financial services company that is more relevant to our customers every day. Q2 total transaction volume of $13.5 billion, up 90% from Q2 2020, reflects W&D's customers' desire to work with us and our team's ability to meet their needs with the appropriate capital and services. When the market dislocated in 2020 and countercyclical capital from Fannie, Freddie and HUD was needed, W&D was there to meet our clients' needs. And as the market recovered and both capital and sales transactions returned, W&D met our clients' needs in spectacular fashion. Q2 2020 and Q2 2021 could not be more distinct quarters from the depths of a pandemic to an economy roaring back. And in both quarters, Walker & Dunlop met our clients' needs and generated fantastic financial results. At the end of 2020, we announced a 5-year strategic plan called the Drive to '25, with the overreaching goal of doubling revenues from $1 billion to $2 billion by increasing annual debt financing…

Thank you, Willy, and good morning, everyone. Q2 demonstrated the breadth and diversity of our platform's capabilities as increases in overall transaction volumes generated strong cash revenues and meaningful progress towards our long-term growth plan, Drive to '25. We continued to invest in people to support future growth, expand our market and advance our technology initiatives to differentiate our execution and insights from the competition. I'm going to focus my initial remarks in the first half of the year, as that time period truly exhibits the transformation of the company that Willy just described in going through the Q2 results. During the first half of the year, we generated total revenues of $506 million, up 4% from a very strong first half of 2020. Year-to-date diluted EPS of $3.52 is up 2% over the first half of 2020. Year-to-date total transaction volume of $22.6 billion has been driven by record debt brokerage and property sales volumes, which helped increase cash origination and property sales revenues by a combined 28% year-over-year to $215 million. At the same time, the growth in our servicing portfolio, which ended the second quarter at $112 billion, with a weighted average servicing fee of 24.5 basis points, generated $135 million of cash servicing fees in the first half, up 20% over the same period last year. The strong growth in our cash revenues propelled our adjusted EBITDA to $127 million for the first half of 2021, up 13% over the same period last year, as shown on the right-hand side of this slide. What we control at Walker & Dunlop is a team we put on the field every day and their capabilities to meet our clients' needs. In 2020, our clients needed capital during uncertain times, and W&D met those client needs, primarily with the…

Thank you, Steve. As you just heard, our business model, financial results and extremely strong cash flow and cash position of nearly $330 million are allowing us to continue investing in people, brand and technology to make Walker & Dunlop the most technologically sophisticated financial services company in the commercial real estate industry. We know our action and technology is the best in the industry, not only from the financial proof points of new clients and new loan refinancings, which I mentioned previously, but from talking to bankers and brokers we recruited from competitor firms. "You are well ahead of the competition," is a direct quote from a multifamily property sales broker who decided to join Walker & Dunlop after being actively recruited by and seeing the technology of 5 of our large competitor firms. And while it is nice to know that we have superior technology to our large-scale banking and real estate services competitors, we must do more. In CoStar's recent earnings call, CEO, Andy Florance, spoke of a refinancing tool that CoStar is developing for their clients. We built that tool at Walker & Dunlop 4 years ago, have done $16 billion in financing volume over the past 6 quarters as a result of that tool and are improving upon it every day to make it more insightful for our clients, bankers and brokers. CoStar also pointed out the volume they are doing on their 10x sales platform and highlighted 3 large deals that ran through the platform to make the case that stabilized properties and not just distressed properties can be sold on 10x. We have the people and technology at Walker & Dunlop to sell $4.7 billion of multifamily assets in the first half of 2021 and don't need to wait for a distressed market…

[Operator Instructions] Our first question is coming from Steve Delaney of JMP.

Obviously, we were maybe a little too aggressive on bottom line EPS at $2.05, but I do note that on a 6-month basis, your $114 million still works out to an annualized 19%, which is at the bottom end of the range you had in your 2021 goals. I think just looking at our model this morning, we were too light on personnel expense. And it's a saying that growth comes at a cost, and I think it appeared to me anyway that the near-term cost of your growth and your hiring has likely been in that personnel line. We were at 44% of revenues and your $141 million was 49%. Steve, you made some comments on which I appreciated. I think you indicated that you would expect that percentage to trend down in the second half. We're currently at 47% in our model for what that is worth. Could you just, when you say trend down, give us some idea relative to the 49%, what you might expect or what you would suggest to us that we consider using?

Sure, Steve. Thanks for the question, and I appreciate you being on the call this morning.

Sure.

Yes. I think in terms of the overall trend, it's really a function of expectation that we're going to be booking more mortgage servicing rights in the second half of the year. And as you know, we don't pay commissions on the mortgage servicing rights directly, so that is what we're expecting to happen that will drive that overall percentage down. So I think it could turn a full percentage point or 2 over the next 2 quarters.

Okay. Great. That's very helpful. And then on Slide 13, Willy, it's pretty dramatic. We've been tracking the delivery volumes month-to-month. And it seemed like things were -- they were trying to be cautious and stay not get ahead of a $70 billion annual run rate. But can you just talk a little more about what this acceleration in May, June and July? Is this all driven by internal -- sort of internal policy practice at the GSEs? Or is there any borrower behavior reflected here that there's a pick up in just acquisition activity? Just I guess what I'm pointing to is on the GSE volume. Was that more internally dictated by the GSEs themselves? Or was it market-driven based on borrower demand?

Sure, Steve. A couple of things. First of all, as you do and as many other analysts do, the monthly GSE volumes are all public information, and so I would say, as you were talking about your model and your model update, I would just posit that a lot of models should have probably been updated seeing what the slow delivery levels were that the agencies were publishing May and June. And I'm expecting a number of models would have been adjusted accordingly, had people have been tracking what the agencies were getting as deliveries and saying, Walker & Dunlop is good for 11% or 12% of this, looked at where Fannie is, looked at where Freddie is, that means that my model is now out of line as it relates to what they're going to do in Q2. As it relates to the pick up in activity, all a function of pricing. It's Fannie and Freddie -- if you look at the $6.3 billion of brokerage that we did in Q2, the biggest outliers it relates to where we place that debt was with debt funds. Debt funds were extremely active in the market in Q2. They priced underneath life insurance companies. They priced underneath CMBS, and they won a tremendous amount of business. And what was so rewarding for us to see is that as debt funds came into the market and had the most competitive bid, we were able to match up the financing for the client with the most competitive source of capital. And as you well know, when the agencies want to be in the market, they win. And as you also know, the agencies have an annual cap that they've been very good at getting to. So that slide that Steve showed, as it…

Our next question is coming from Jade Rahmani at KBW.

As the company's revenue sources diversify and Walker & Dunlop reduces its share of earnings that historically have come from the GSEs since the other business lines are growing faster, the right way to look at earnings might be on a cash earnings basis, backing out the net MSR gains. And so if you did it that way, I assume that cash earnings is going to grow double digits this year because that would be in line with the double-digit growth expectation you have for adjusted EBITDA. Is that a correct assumption?

Yes, Jay, that's absolutely correct.

Okay. Thank you very much. It's clear that W&D is gaining market share and that these initiatives in investment sales and the broker business are really gaining a lot of traction. You mentioned that the debt funds were the biggest growth driver in the broker business, do you view that as sustainable?

Well, as I just said, Jade, I think that the debt funds -- look, they all have tons of capital, right? The issue with it is, do they stick focused on multifamily as the agencies reenter or do they move to other asset classes? At the end of the day, they're going to want to deploy capital, and we have the team to be able to deploy that capital. So in our world, a great scenario is that the agencies come back in and we place a lot of debt with the agencies. And at the same time, the debt funds remain competitive on other asset classes, and we place a lot of financing on other asset classes with the debt funds. And so I think that the most noteworthy thing is the growth in that broker volume. We've made investments, as you well know, over the last several years to add bankers and brokers to Walker & Dunlop. And Q2 was emblematic of those investments really paying off, and the growth -- we tried to go back and show not only growth off of Q2 2020, which, as you well know, was a very unique quarter as we headed into the pandemic, but we backed up to Q2 2019 to show the explosive growth off of a very normalized quarter from 2 years ago. And as you could see, going from -- I can't remember the number, I think it was $1.3 billion or $1.6 billion 2 years ago to over $6 billion this quarter, that shows the return on those investments that we've made and the value of that team to meeting their clients' needs.

And looking at that business as well as the investment sales business, do you feel that these business lines have hit sort of a new baseline in production that could be sustainable? Or should we model some conservatism in those areas?

So I always appreciate conservatism. We've tried to give people -- obviously, the numbers are the numbers, right? And we did give you a view into our investment sales pipeline. One of the things I think that's super important to keep in mind right now is that this market is being driven by investment sales. We think we have the very best finance team in the market, but if you talk to our big clients what is driving their decisions as it relates to where they're financing assets, it's where they're getting Fed assets. So if you have the investment sale and you're working on the investment sale, chances are you're going to finance that transaction. And so as Kris Mikkelsen has gone and built what I think is the very, very best multifamily investment sales team in the country, and we've seen our volumes really grow dramatically, and as I said, I think -- I can't remember exactly the number, but we've got over $6 billion of listing agreements and deals we've already done in Q3 and Q4, that drives financing decisions. And so I think one of the biggest changes to how I feel from our competitive positioning is, in the past, we were always viewed as a finance company that was really the best at just financing. And now that we've got real scale in our investment sales business, how our clients view us is far more strategic. It's less of great, you're really good at financing, go do that. Many people view that product as a commodity, to be honest with you, even though our bankers are every day making huge difference in the way that properties are financed. But they view that side of it a little bit more as a commodity, whereas if you have access to deal flow, if you have the product, they focus on you and they focus on the firm much more. And I think that has a lot to do with the 22% growth in our transaction volume in Q2 is that clients are looking to W&D to do more and more.

And then just lastly related to Steve Delaney's question. In terms of the margin outlook, as some of these other business areas take hold, do you anticipate any diminution in the way -- the range in which margins have been running? The 2Q adjusted EBITDA margin was 30.3%, which was in line with 30% that we were modeling, and the operating margin was also fairly close. Do you think that there is operating leverage in the business that could allow for margins to sustain themselves or even potentially expand?

So I'll kick that to Steve after I just give you some quick thoughts on it. Ever since we went public, one of the big conundrums at Walker & Dunlop is that our business model and businesses are so profitable that anything we did to expand the platform and invest in other businesses would look dilutive to earnings because the core agency business was so profitable. And I think that investors and the market and we got to use to just generating these outsized returns. And to be honest with you, Jade, I don't think we got a lot of credit for it. If you look at us and comp us to the services firms, as you well know, almost on every metric, whether it's EBITDA margin, net income margin, return on equity margin, all that stuff, we far outperformed. And so I think one of the things that you're seeing here is that we're investing in these other businesses to continue to diversify the platform, and those are going to be dilutive to those margins, but it's going to make us a far more scaled diversified company. And so you're seeing 2 things happen right now: a, just the direct impact of doing so much cash and carry brokered business and less mortgage servicing right income in the quarter; and the other thing is you're seeing us invest. We have 52 people in our appraisal business today. And guess what, our appraisal business is not generating earnings for us right now. So that's wildly dilutive to earnings. We have put a huge amount of our small balance lending effort because that's half the multifamily market, and it's a market that we've never attacked. And I think one of the interesting things that investors have to keep in mind on that is, if we wanted to go out and acquire one of the existing small balance lenders out there, and there are a couple that are private and there are a couple that are public, we could clearly go and focus on that. But that's doing business the old-fashioned way. That's hiring a lot of bankers and brokers. That's going and meeting with clients face to face in getting business the old-fashioned way. What we have consciously decided to do is not go make some big acquisition in that space, but build the team from scratch and put a lot of technology to it. And that takes time, it takes investment, but we truly, truly believe that what we are going to end up with is a far more competitive offering to the market and to be able to take market share, not only from those smaller competitors that we could potentially go acquire today, but the big competitors like JPMorgan Chase and Wells Fargo.

Yes. And I'd just add to what Willy said, Jade, that if you go back to the Investor Day presentation in December when we rolled out our Drive to '25 strategy, we are anticipating over the course of time that we should be able to get some margin expansion out of the business as the investments that we're making in the areas that Willy just mentioned start to grow and get to scale and contribute to the bottom line that, all else equal, you should see some margin expansion as a whole company over time.

Our next question is coming from Henry Coffey of Wedbush Securities.

So if we kind of digest what you've been talking about with my 2 colleagues, the -- there was a big mix issue on volume, which affects -- which -- or limits the MSR component of revenue. Overhead was high for lots of reasons, one of which is, is that because of the cash component, you're paying more commissions, and also, as you discussed, you're investing in these businesses. But it was kind of a 50-50 split in terms of the miss or the -- however you want to talk about it. When we go to the last page of your press release and we look at EBITDA, we see a whole different story. We see a business that's putting up significant year-over-year growth, up 10% sequentially, et cetera. I mean, this last page is where all your investors focus. This last page is how we value the stock. Is it fair to not dismiss the EPS decline, but just sort of say there are a lot of moving parts, this was part of the equation and the EBITDA is growing like a weed?

So a couple of things, and Steve can dive into your question in more detail, Henry, and I appreciate it. We take EPS very seriously. We told investors at the beginning of the year that we're going to have double-digit EPS growth. And as Steve said, we have line of sight to 0 to 5, and I can guarantee you we're working every hour of every day to get to double-digit EPS growth. And the pipeline right now looks really encouraging. But what we don't want to do is disappoint investors and have expectations outsize what we actually produce. So we're trying to be as straightforward and transparent as we possibly can be, but I don't want to, in any way, say, we are sort of forgetting about EPS and focusing only on EBITDA. But as you are underscoring, this business when -- at scale, which we have in a $110 billion servicing portfolio and big businesses generating billions of dollars of cash transactions volume to generate cash origination fees, is a cash cap. And we built it up that way. I will tell you that as we sat there at the beginning of the year and thought about a normal year with the agencies, we said we can both invest in these new businesses and also generate double-digit earnings growth because we're going to book a lot of mortgage servicing rights and keep moving forward. And unfortunately, the agency has decided to back off in the first half of the year. But as Steve pointed out, our market share is still right up there, and we're 30% ahead of #2, with Fannie Mae, year-to-date. So it's not like our team has left us or we're less competitive with the agencies, it's that the agencies weren't pricing competitively and you…

Yes. And Henry, I'd just add to what Willy said. To me, the exciting part of all this is we did $13.4 billion of transaction volume in Q2, which demonstrates that we have become the go-to business and company to meet our clients' capital and financing needs. Whether the agencies are aggressive in a particular quarter or not, we did $13.4 billion of transaction volume, and that's the exciting part of it.

Yes. No. I mean, because of that MSR capitalization issue, it's -- I mean, this has happened before. This happened -- the last time this happened, the stock was at $35, and we've almost broken $112 a couple of times since then. Moving on to other topics. As with the change in director of leadership at the FHFA, you're most likely going to get more focus on duty to serve and more focus on affordable housing. That's my guess. It's an educated guess. That's all it is. That then takes you into areas potentially like single-family rental, single-family build to rent, manufactured housing. These are all -- these other products are all the cornerstones of putting people into affordable housing. Are you seeing a shift in that to areas like manufactured housing, build to rent, et cetera, et cetera, in terms of the opportunities in the marketplace yet? Or how is that playing out?

Yes. So your educated guess is a very educated guess, and so I would underscore educated there. I had a -- I spoke to FHFA last week, and they're still focused on duty to serve and affordability. I did underscore the need for their green lending programs to get back outside of the caps and said that if you think about the Mountain West basically on fire this summer and the fact that water levels are at historic lows, the Fannie and Freddie green lending programs over the 5 years that they tracked the amount of conservation that they were able to achieve, they saved 8 billion gallons of water. Eight billion gallons of water. And so I said to FHFA, at a time when everyone's focused on the environment, getting Fannie and Freddie back focused on it and pulling green lending out of the caps would be very healthy for 2022. We'll see whether that ends up happening, Henry. They said to me, "We want to stay focused on affordable." And I said, "Well, you can do both." So I do think that -- and we've done $17 billion of affordable lending over the last 3 years. We have a terrific affordable team. Our team here in Denver just got an SFR listing to sell an SFR development, so your point about single-family rental, we're very much in that space. We just published and gave away our own proprietary data on SFR and BFR and published that 3 weeks ago. And we've gotten a huge amount of increase in inbounds from clients for having published that report and having a team that's focused on SFR and BFR. And then I would also say to you that in the affordable space, we're also very focused on what could we potentially do in the tax credit syndication space? Because that affordable space -- and I mentioned it in my script, not only lending on affordable properties, but also syndicating tax credits is a great business and something that would be wildly accretive to what we're doing and focusing in that part of the market. So you're spot on. We've got the people. We've got the, if you will, brand in the affordable space, and we'll continue to expand upon it.

And then finally, you mentioned pricing. Every one of us gets the same question. How can we track Fannie, Freddie pricing? You said Freddie had raised their bid 20 basis points. Is there any public benchmark that we can turn to as outsiders to get a handle on that? I know we can watch the volume figures. The volume figures weren't that bad, but you're right, they weren't encouraging. Is there any benchmark we can use to say, "Oh, pricing is up." We can do that with residential mortgage. The challenge is doing it with multifamily.

Yes. I would say, honestly, Henry, make friends with the CFO at one of the big institutional investors in multifamily, and call him or her on a consistent basis and say, "What are you seeing in the market?" It's very evident when the agencies lean back into business. Everyone knows it. But it's not published. It's not like we'll sit there and say to you, "Woah, spreads have come down to X." But if you do call Michael Lascher at Blackstone and say, "Hey, Michael, who's the most competitive source of capital in the market right now?" when the agencies are in it, he'll know exactly that answer. And when the agencies are out of it, he'll also know it.

I'll leave him a voice mail. I'm sure he'll call me back right away. Some little guy in Nashville wants to talk to you. Maybe Steve will talk to them. He's more charming than I am. Great. Thank you. Look, this happened before stock tripled since then. I'm sure everybody will digest this well, but I do agree and appreciate your comments, your questions and your folks.

At this time, we have no further questions. I will turn it back over to Willy for closing remarks.

So it's a beautiful morning here in Denver. It's great having Steve across the office from me here in Denver. You're getting the north and the south view of Downtown Denver. As I said at the top of -- at the end of my prepared remarks, congrats to the W&D team for a fantastic Q2. And as the numbers that Steve and I put out to everyone today, Q3 is looking very healthy. And appreciate everyone participating today in the call, and I hope everyone has a great day. Thanks very much.

Thanks, everyone.