Walker & Dunlop, Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Kelsey Duffey:]

Good morning, everyone. I'm Kelsey Duffey, Vice President of Investor Relations at Walker & Dunlop. And I would like to welcome you to Walker & Dunlop's Fourth Quarter and Full Year 2020 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 call is being recorded, and a replay will be available via webcast on the Investor Relations section of our website. . 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, and 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.

[Willy Walker:]

Thank you, Kelsey, and good morning, everyone. Across almost every measure, 2020 was a year of record performance for Walker & Dunlop during a tremendously challenging year for our country and the world. The COVID pandemic, and it's far-reaching impact on jobs, the global economy and the health of colleagues and loved ones was felt by all Americans. And the issues of racial justice and a tumultuous political season left enduring impacts on our society. Yet despite the many challenges that 2020 presented, the W&D team continued to step-up for our clients, our communities and for one another every day. We remain focused on building the premier commercial real estate finance company in the United States, while completing our ambitious 5-year growth plan, Vision 2020, and established even more ambitious targets for the next 5 years, that I will outline during this call. After an exceedingly strong Q1 followed by the transition to remote work in Q2, the W&D team adapted to selling, underwriting and closing financings and property sales in Q3 and Q4 to generate record total transaction volume of $41.1 billion for the year, up 29% from 2019. We closed out 2020 with record Q4 revenues of $350 million, up 61% over -- year-over-year pushing our annual total revenues to $1.1 billion. As long-term investors in Walker & Dunlop know, we have established bold, highly ambitious 5-year growth plans for our company. And in 2015, established the goal of more than doubling our revenues to $1 billion by 2020. As you can see on this slide, we grew total revenues an impressive 18% compound annual growth rate over the 5-year period and grew debt financing volumes by a 17% compound annual growth rate to end 2020 at $35 billion. And our servicing portfolio more than doubled over the 5-year period to $107 billion, a 16% compound annual growth rate. Finally, we grew our property sales business at a compound annual growth rate of 32%. And even with the pandemic-induced shutdown of property sales for most of Q2 and Q3, we increased our volume to $6.1 billion in 2020, a truly spectacular 14% growth rate over 2019. All of this growth and record transaction volume generated 2020 diluted earnings per share of $7.69, up 41% over 2019. As you can see on this slide, we have grown EPS at an impressive compound annual growth rate of 24% over the past 5 years, while maintaining our weighted average diluted share count at around 31 million shares with less than 1% increase in diluted shares over the period due to prudent management of our share count.

[Steve Theobald:]

Thank you, Willy, and good morning, everyone. We ended 2020 with fantastic fourth quarter financial results, including record total transaction volume of $14.2 billion, up 45% year-over-year and record earnings of $2.59 per share, up an astounding 93% over Q4 of 2019. Our full year transaction volume of $41.1 billion is 29% higher than 2019, while record full year earnings per share of $7.69, increased 41% over the prior year. The fact that these incredible results came in the midst of a pandemic, are a true testament to the resiliency of our business model and the hard work and dedication of our team. Our strong performance in the quarter and year shined through in our key metrics. Operating margin in Q4 was 34%, well above our target range of 27% to 30%, leading to full year operating margin of 30% for 2020. Return on equity was 29% for the quarter and 23% for the full year, well above our annual goal of 18% to 20%. Personnel expense for the quarter was 45% of revenue in line with Q4 of last year and was 43% for the full year, just slightly higher than 2019's 42% due to growth in commission and bonus expense resulting from our phenomenal performance in 2020.

[Willy Walker:]

Thank you, Steve. We entered 2021 with strong momentum and confidence in our ability to deliver the ambitious financial targets that Steve just ran through. Multifamily has continued to outperform other commercial real estate asset classes in the pandemic and during this economic cycle. Americans feel more tied to their homes today than ever before, and renters have gone to great lengths to continue making their rent payments and preserving their homes. On a recent Walker Webcast, Dr. Peter Linneman, when asked where he would invest $100 million today, he said, it's a golden age for multifamily. And while Walker & Dunlop's market position in multifamily financing and sales is extremely strong, we also finance places where people work, shop and play. When Owen Thomas, CEO of Boston Properties, was on the Walker Webcast in December, he was quite bullish that people will begin returning to the office in Q2 of 2021. And that while work from home will impact work schedules, it will not do away with the need for office space. Stephanie Linnartz, Group President of Marriott International, was on the Walker Webcast in mid-January and commented that hotel occupancy ended 2020 around 47%. And that while the annual projection for 2021 is in line with 2020 around 50%, leisure travel could snap back quickly once herd immunity is thought to be achieved. I would add that we believe work travel will snap back much quicker than currently anticipated. And just last week, we had John Furner, President and CEO of Walmart U.S. on the Walker Webcast to discuss the retail market. And while Walmart is working hard to compete with Amazon and online retail, John underscored the fact that in Q2 of 2020, at the height of the pandemic shutdown, only 16% of total U.S. retail sales were online, and that 84% of sales still ran through bricks-and-mortar stores. Online is growing fast, but the future of retail is clearly multichannel, not simply online. As all of these commercial asset classes evolve and recover from the pandemic, Walker & Dunlop bankers and brokers will be there to assist owners in implementing the proper financing strategy. We established the mission to become the premier commercial real estate finance company in the United States when we went public in 2010 with less than $100 million in revenues and a market capitalization of $220 million. 10 years later, we have revenues of over $1 billion, a market cap close to $3 billion, and yet the mission remains the same. We are just a heck of a lot closer to achieving it. We rolled out to W&D employees and investors in early December, our next 5-year strategic plan titled the Drive to '25. The components of the Drive to '25 are to grow revenues to $2 billion, by expanding our annual debt financing volumes to $65 billion, grow our servicing portfolio to over $160 billion, grow annual property sales volume to $25 billion, grow our fund management business to over $10 billion in assets under management and the continued development of 3 new growth businesses

[A - Kelsey Duffey:]

. Our first question comes from Jade Rahmani at KBW.

[Jade Rahmani:]

Okay. What an interesting year 2020 was and a successful year for Walker & Dunlop, really proving out the strength of the company's platform. At this point, our estimates for the company is cash earnings and apples-to-apples EBITDA with some of the SIRI brokerage firms we compare the company to. We believe Walker & Dunlop is trading at a premium to its peers. So I was wondering, Willy, if you could provide any thoughts as to whether this currency presents any interesting M&A opportunities? Or given the spotty track record that we've seen in the SIRI brokerage space with respect to M&A, whether you think investing in internal growth opportunities, strategic initiatives and other internal Walker & Dunlop capabilities is more of a priority?

[Willy Walker:]

So thanks for joining us this morning, Jade. I would say, given our growth rates, which I ran through in quite some detail, that per year used premium multiple is very much warranted. I would say, in comparison to the S&P Financial's 500, which we are part of, we're still trading at quite a significant discount to many of the financial services institutions in that index, and our growth rates are wildly greater than the index average. So I would say we still have plenty of multiple expansion to come our way, given how well we have performed. The second part to your question is, would we use our stock as currency in an M&A transaction. Look, we'll use debt, we'll use cash, and we'll use equity to the degree that we need to, depending on what the acquisition looks like and how big it is. What I would say to you is that we have watched competitor after competitor come into this space, try and bring together investment sales in banking, investment banking, big banks with big balance sheets, big brokerage firms with big brokerage volumes. And what we've seen is we've just continued to grow faster than all of them. And many, many of them had much, much bigger brands than Walker & Dunlop did when we started this charge towards trying to get to the top of the league tables and then solidify our position as one of the very largest multifamily lenders in the country. And as the slide that I showed, showed, we ended last year at number 5, we may be number 1, maybe number 2 or maybe number 3, but we're right up there with the biggest brands in the world in this line of business. So I think at the end of the day, we feel great about where things are. But I would also reiterate the point that our growth numbers are outstanding, and we will continue to drive growth at W&D to outperform and carry a multiple that is very much higher than the competition.

[Steve Theobald:]

And Willy, if you don't mind, I'll jump in, Jade. The other thing I would say is, given the cash balances that we're carrying, as you would expect, our bias is going to be to use cash from an acquisition perspective, as we have done over the last many years. And where we use stock, it's to drive alignment with the acquired company as opposed to because we need to use stock to do the transaction.

[Jade Rahmani:]

GSE volumes totaled close to $160 billion in 2020, which was up 7%, but this did include the first quarter and third quarters, which declined on a year-over-year basis by 20% to 30% and then growth surged by over 70% in the fourth quarter for Fannie Mae and Freddie Mac as a capital provider overall. What would you expect for 2021? You did mention you expect property sales, investment sales for W&D to be up meaningfully. You mentioned that brokerage volume, which is non-GSE, would be up meaningfully. What do you think the GSE volumes for W&D will be up for 2021?

[Willy Walker:]

So as you saw, Jade, we came in number 1 with Fannie Mae by a very wide margin, almost double the volume of the number 2 lender. And we came in number 4 with Freddie Mac on a combined basis. We were the second largest lender with both Fannie and Freddie. We have firmly entrenched ourselves at the top of the league tables as we came in $400 million behind CBRE. CBRE did $20 billion, we did $19.6 billion. Quite honestly, when I started in this business, the idea that we would be $400 million behind CBRE in aggregate agency lending was a little more than a dream. And so I don't have a number for you, Jade. What we do know is that we have a reputation and brand in this space as one of the very, very best, if not the best agency lender in the country. And so as a result of that, we'll continue to ride that brand, and we will continue to meet our clients' expectations. As you well know, the agencies have plenty of capital to lend in 2021, and we feel very, very good that not only with agency capital but with HUD capital, with capital markets capital from CMBS and banks and life insurance companies, with capital from our joint venture with Blackstone, with capital from our balance sheet and from capital from third parties that we have raised at Walker & Dunlop Investment Partners, we have all the capital we need to meet pretty much any requirement that a multifamily borrower might have.

[Jade Rahmani:]

And when you say as investors think about modeling coming earnings for the company as we as analysts do so as well. Should we be thinking about growth accelerating in the other business lines, in the brokerage business, in investment sales? Some of these new initiatives, investment banking, single-family rental, which I believe you announced an initiative in build-to-rent and model the GSE volumes to be flattish, maybe some growth in Freddie Mac? How do you think we should be thinking about that trajectory?

[Willy Walker:]

So I would say a couple of things. First of all, our growth is outpaced. You're asking from an analyst position. Our growth has outpaced our analyst expectations for years. So I don't really know how to respond to your question specifically because analysts have thought that we would grow slower than we have, and we've grown significantly faster. The second thing is our brand, people and technology is a flywheel right now. We're seeing that accelerate. We're seeing our growth. We put up numbers today in the -- not only the financial performance, but in the breadth of our brand and then the investments in technology that have resulted in new clients to Walker & Dunlop and new loans to Walker & Dunlop that is unprecedented. So yes, I think to the point that you're asking, should we be thinking that Walker & Dunlop continues to grow. Steve put up a slide, Jade, that talked through what we're expecting as it relates to EBITDA growth, EPS growth, operating margin growth. We took all of the metrics up as it relates to ROE and operating margin. So I'm not sure what more you or other analysts need to know as far as our outlook other than our reiteration of double-digit growth in EPS and earnings and a rising in our operating metrics as it relates to operating margin and return on equity.

[Kelsey Duffey:]

Our next question comes from Henry Coffey with Wedbush.

[Henry Coffey:]

Congratulations. What a year, great results. Just an amazing transformation, both in terms of earnings and culture and stock price and it's been an amazing year. When we look outside of the GSE core, you've got a whole bunch of businesses that are going to probably add to your diversity and add to the more durable side of some of these assets. Can you talk about things like expected growth in the investment business, the servicing platform, the ability perhaps to expand the servicing business beyond what you do with the GSEs? Those more -- less -- I guess what I'm talking about is the less transactional side of the business. And I know that's been an important area of growth. But can you kind of add some commentary there for us?

[Willy Walker:]

So let me start, and I'll turn it over to Steve in a second. As it relates to the transaction side of the business because those first couple of questions were focused on that. Look, Kris Mikkelsen, who runs our investment sales platform, has done just a spectacular job of scaling that platform and bringing on the very, very best multifamily investment sales professionals. And Greg Engler, whose company we acquired back in 2015 has been a component part of all of that success. And I'm deeply thankful to both of them. And the way they've built that platform, the quality of people they brought on, allowed, as you saw, Henry, when we ran through the growth numbers, the business that grew the fastest over the last 5 years was that line of business. The second thing is on our debt brokerage business. Steve talked about it, I underscored it. You have to remember that Q1 of 2020 was our best capital markets quarter ever, and that's because we had not only expanded the platform across the country, but we brought across an exceptional team in New York that really brought a huge amount of additional volume to us in Q1. The market basically shut down in that line of businesses, life insurance companies and CMBs and banks pulled back in Q2. They started to work back into the market in Q3, and we started to see something normalizing in Q4. But as Steve said, we have great expectations that, that line of business with the team that we have on the field will be able to grow dramatically in the coming years. And then as it relates to the size and scale of the servicing portfolio and our escrow earnings, I think Steve ran through that pretty clearly. We don't service loans for third parties. But we have an incredible platform that could do that if we wanted to, but all the collateral in that servicing portfolio are loans that Walker & Dunlop has originated. And then as Steve also pointed out, escrow earnings were down very significantly in 2020. And as interest rates move back up at some time, we will pick up the benefit of those escrow earnings coming into us. Steve, do you want to talk about anything else from kind of non-transaction income?

[Steve Theobald:]

Yes. I was going to just mention, Henry, so whether it's non-transaction or otherwise, the businesses that we're developing, investing in, growing right now, such as Apprise, which is our appraisal joint venture and our small balance lending businesses. Those are very important to our 5-year growth plan. I wouldn't say they're critical to the 1-year growth plan in 2021, but we are expecting to make progress in all of those areas and start to build those to the point where by the time we roll around to 2025, they're more meaningful parts of our business.

[Henry Coffey:]

And then government policy. Thoughts about how much changes with the Biden administration and how much stays the same?

[Willy Walker:]

So first of all, I think that -- look, I was a fan of Treasury Secretary, Mnuchin. I thought he did an exceptional job with a very, very difficult hand, if you will, particularly during the pandemic. And I thought that he and Fed Chairman, Powell, did a fantastic job at the onset of the pandemic to put liquidity into the market. I'm happy to see Janet Yellen in her position at Treasury, and she obviously has very significant influence over housing policy, broadly, the GSEs more specifically. And what we will wait to see, Henry, is what happens with the Supreme Court case on the FHFA Director and whether the FHFA Director has a 5-year tenure, only to be removed by cause or whether the FHFA Director is at the pleasure of the President. And if the Supreme Court rules on that, as they did on the CFPB director, it would be our assumption that there's a new FHFA director sometime during 2021, and what he or she decides to do with FHFA, we shall see. But that's about as far as I want to get out there right now. It's nice, quite honestly, to see the discussions going on in Capital Hill about the stimulus bill. And I will tell you, I'm very, very surprised that our portfolio has held up as strong as it has during the pandemic, given the lack of stimulus into the market since August of last year. And as Steve went through in our credit stats, we are back to 6.9% unemployment in America, which many people challenged saying there are 4 million workers furloughed. They are people who have exited the workforce and the 6.9% is not an actual number. It's actually higher than that. But I remind people often that Barak Obama was reelected President of the United States in 2012 with 7.9% unemployment. And at that time, we weren't looking for stimulus bills. At that time, the economy was actually functioning quite well. Many people would have criticized it not growing fast enough, but the bottom line is we weren't looking for $1 trillion stimulus bills back in 2012 when we had 1 percentage point higher in unemployment in the United States. That statement is not to say that people aren't suffering. That statement is not to say that the stimulus bill isn't needed. And I would say that if a stimulus bill is passed and direct checks go out to Americans, that will only help rent rolls across the country and make it so that we get through this pandemic in the similar shape that we are in today.

[Kelsey Duffey:]

The next question will come from Steve Delaney at JMP.

[Steve Delaney:]

Willy, it's been said by Jade and Henry, but I must also extend my congratulations on a truly outstanding year, great job. First, on the caps. FHFA came out, I think, November 17 and clarified $70 billion. And then a couple of weeks ago, I think -- well, before Mnuchin left, there was a change to the PSPA agreements. And Kelsey let us know that there was -- that change indicated that the cap maybe $80 billion. Could you just give us clarity on what is in effect today and what else might need to happen for the $80 billion to become the actual number?

[Willy Walker:]

Yes, Steve. So here's what I know from discussions with the Mortgage Bankers Association and the National Multifamily Housing Council have had with FHFA. The adjustment to the PSPA was to establish a limit on per GSE lending on multifamily in a 12-month period. And so that $80 billion is essentially a cap that says that they can expand out beyond $80 billion. And then they reiterated that for 2021, the caps are at $70 billion per GSE. And so essentially, what they were saying was, we don't want them to expand out beyond that. I would put forth to you that, that is a reasonably dramatic change from the view that FHFA and the Federal Government with large has had as it relates to the role that Fannie and Freddie play in both the single-family and the multifamily markets, where they've always viewed the GSEs as countercyclical capital to be able to expand out in times of stress. And so going back to my response to Henry, if the Supreme Court rules that the FHFA Director is at the pleasure of the President, and if we have a new FHFA Director in 2021 or at the end of Dr. Calabria's term in 2023, it would be my assumption that the new FHFA Director with Secretary Yellen, will sit down and look at those amendments with PSPA and potentially either reverse them or amend them. So we shall see on that. But for right now, with $70 billion per GSE, both GSEs have plenty of capital for 2021.

[Steve Delaney:]

Great. You mentioned small balance, both in your remarks and also in your handout today. I'm hearing that more and more as a targeted area from you as to where you can expand the W&D platform. Now we know about that business from other lenders. And it strikes me that you will need some new structure within W&D in order to access the type of local market loan brokers who are probably in between that deal with the end market borrower and your balance -- your origination platform. Can you just simply kind of clarify exactly how you envision what are the pieces within W&D that has to be there for you to do a significant amount of small balance multifamily?

[Willy Walker:]

Sure. So I'm not going to give you the whole playbook, Steve. As much as I know, you'd like it, and I'm certain that there are other 400 people on this call and a number of them are competitors of ours. So we're not going to give it all away here. But I would say this, if we wanted to enter the small balance lending business, like many of our competitors operate in that business today, we would have already likely gone out and acquired an SBL lending platform. And you know the names, I don't need to mention them, but there are several. They are great companies, and they have great businesses. So if we wanted to go about doing that business the same way they all do it, we would have probably just gone and bought it. We haven't. And the reason we haven't is because to exactly your question, we think there's the opportunity here to use a new origination model, a new marketing model to gain access to clients and a new technology solution to truly change the way that SBL lending is done. And so to say, we are very much, if you will, in the laboratory right now. And where we are focused is not on origination platforms that we do it the same way, we're focused on technology platforms that would help us revolutionize the way that we underwrite loans, the way that we market our capabilities and the way we basically step in between the current borrowers and their current...

[Steve Delaney:]

You can. Sure.

[Willy Walker:]

So -- and , you're off mute. And so that's the way we're thinking about doing it. And obviously, as we have things to reveal as we pull that strategy together and start to implement it, we will keep you updated.

[Steve Delaney:]

That's helpful. And I love the forward-looking approach there. There are certainly some good case studies in the residential mortgage business where technology, direct-to-consumer, direct to local market broker have really bolted some companies to the -- up into the top 3, top 5. So it sounds like you're thinking something along those lines. And look, just 1 last quick thing. We noticed about a week ago in HousingWire that an old friend of yours, I assume a friend, David Brickman is getting back in the multifamily game. I think we know that the group he is buying was probably the shop at Todd Schuster bought 6 or 7 years ago for ACRE. It looks like those dots connected on who the company was. My real question is not about David or the fact that there's new management in an existing competitor. But generally, Willy, multifamily is an amazing business, okay, especially the agency program. Are you seeing any other signs of private equity starting to come into the space to get behind some of these underutilized licenses and trying to just basically to the point where people will try to come in and get their place or the part? That's my last question.

[Willy Walker:]

So Steve, first of all, David is a dear friend. I've worked with David for all 17 years I've been in this industry, and he is not only one of the most talented executives I know, he's also a very, very close friend. And so I wish him great luck, and he is a very talented CEO. David has a huge lift, and I mean a huge lift. Of all the places I would have liked to have seen, David end up, this is a great place from a competitive standpoint because he has the challenge of pulling together 2 firms. You mentioned the fact that the platform that he is now taking on from an agency standpoint is the old Shuster, ARES platform. You can run through a very long list of very talented, private equity and investment banks, including ARES and Guggenheim and Goldman Sachs and Crédit Suisse, and I can keep on going down, who thought that they could enter this business and make a go a bit. And all walked out by selling licenses and saying, that was a lot harder than we thought it was going to be. That's not to say that David and the combination of Meridian and Barings, will not have long-term success, but it will take a long time for him to get that platform to any semblance of a real competitive force in the market. The second thing I would say is that sort of to your point, you look at the competitive forces in this space and all the people who have focused on it because I just mentioned 4 really great investment banks and private equity firms. You can then go to the banks, take a look at what happened to Wells Fargo and their agency lending business in 2020. They fell from number 2 to number 7 in the Fannie Mae league tables, and I think they fell from number 3 to number 8 with Freddie Mac. Take a look at the combination of BB&T, which was Grandbridge and SunTrust. Many people said, oh, they're going to use the balance sheet and they're going to get really, really competitive there. I do not think that Truist was in the top 10 with either Fannie or Freddie in 2020. Take a look at Cap One, take a look at Newmark, taking ARA and Berkeley Point and bringing those 2 together and talking about how the combination of investment sales and banking was going to launch them to the top of the league cables. None of that's happened. So what I would say to you is it's always a competitive market. We go every single day and compete with some of the largest and most sophisticated and most talented bankers and brokers on other platforms that exist. And at the same time, when I hear about a great private equity firm of Stone Point, coming together with a great CEO of David Brickman on a platform of Meridian and Barings, I say, great people, good luck.

[Kelsey Duffey:]

We now have a follow-up question from Jade Rahmani.

[Jade Rahmani:]

I wanted to ask a few other questions. I think you mentioned that credit performance in the multifamily servicing portfolio was tracking a lot better than what you had expected. And Freddie Mac puts out this nice forbearance report in which they show that about $7.6 billion of loans, about 1,200 loans as of December 28, totaling 2.8% of securitized UPB and about 5% of loan population was in forbearance. Looking at W&D's results, it's clear that the credit and the at-risk servicing portfolio, which is the Fannie Mae portfolio is, I think, defaulted loans are 0.11%, something like that. So it seems that Fannie Mae's credit performance as indicated by at least W&D's portfolio is outperforming Freddie Mac, and I was wondering if you have a view as to why that is.

[Willy Walker:]

So I would say 1 key issue there, Jade, is small balance and Freddie has been a larger small balance lender than Fannie Mae over the past several years. And I do believe that the -- a disproportionate number of those forbearance requests have been on small loans. But I would also say that if you look at Arbor's latest credit stats, they haven't published their Q4 numbers yet, so I haven't looked at them. But through Q3, a firm like Arbor that has exceptional credit in the SBL lending space has done very, very well, and their credit stats haven't sort of followed that trend that you just outlined. And so I would say that with great underwriting, like Arbor does in small balance, you can have a very successful SBL program. But I think the majority of those forbearance requests that you're citing in the Freddie book, Jade, are on SBL properties, and it makes perfect sense. You don't have economies of scale there. If you've got a 4-unit multifamily property and 1 person loses their job, you're now at 75% occupancy or 25% economic vacancy. And so the bottom line is SBL just doesn't have a lot of buffer as it relates to people who aren't paying their rent whereas larger properties because they can have 10, 20, 30 people not pay their rents and still be able to make their mortgage payments. That's what you get across the broader spectrum.

[Jade Rahmani:]

And a follow-on question to that would be, to what extent do you think that the Fannie Mae risk-sharing model, which provides -- requires a seller servicers such as Walker & Dunlop to be responsible for the first up to 5% of loss versus a securitization model, which could be a fund that may not have skin in the game in terms of its own capital, it's outside the capital they're managing. To what extent do you think that, that structural feature has any difference on credit performance?

[Willy Walker:]

Look, they both work and both models, I think, are needed. When markets are perfect, and pricing is extremely tight, the Freddie Mac model of having a larger pool of assets to be securitized with private capital taking the B piece risk is a model that has shown over time to be very, very price effective and a very, very good business model. The flip side to it is that when times are bad and people want to look through to who's originating the loan and securitizing the loan and who's holding the risk, the Fannie Mae DUS model has proven to be extremely helpful and good. I'm a big believer in the originator retaining the risk on loans. I think it aligns interest exceptionally well. And as you have seen over our 30-plus years as a Fannie Mae DUS lender, we love that business model. We like taking the risk. We like holding the risk. I'm a big fan of that. But at the same time, I would also say that it's very clear that since Freddie Mac launched the K model back in 2009 that, that has functioned exceptionally well as well.

[Jade Rahmani:]

A couple of specific W&D questions. Do you know what producer headcount was up? I think you gave the total headcount, and you said it's eclipsed 1,000, and I think the average headcount for the fourth quarter was 900. But do you know what the producer headcount was up either in the fourth quarter or maybe where it is now on a year-over-year basis?

[Willy Walker:]

I think over the year, we added 13, Kelsey?

[Kelsey Duffey:]

That's correct.

[Willy Walker:]

13 adds to the producer ranks in 2020, Jade.

[Jade Rahmani:]

And so what's the total? Just so I have the number correct total producers?

[Willy Walker:]

200 and what Kelsey?

[Kelsey Duffey:]

Jade, I'll get to you, but it's like 203-ish.

[Jade Rahmani:]

Okay. Okay. Great. In terms of capital deployment priorities, clearly, the dividend was materially increased. You also increased the size of the stock repurchase authorization. How do you expect to prioritize capital deployment between the dividend, between stock repurchase and setting aside some pool of capital that could be used opportunistically?

[Willy Walker:]

Well, you can do the math on the dividend, right? And so that you then know what's left over. The buyback authorization is nothing other than a authorization. And as you have seen during Walker & Dunlop's history, Steve has stepped into the market at very opportune times and bought back stock. And so it's nice to have that authorization. Don't know if we'll use it in 2021. And then we had a board meeting yesterday where our Board went through a very extensive business development pipeline of all the things that we're focused on putting capital into, which is along the lines of everything that we underscored in the earnings call, continuing to attract the very best people to Walker & Dunlop, continuing to build our brand. And most importantly, continue to invest in technology, both in our own technology solutions that we've developed as well as buying new technology solutions that can help catapult certain business lines forward, just like I just spoke to Steve about on small loans.

[Jade Rahmani:]

On the decision to remain with the existing service provider and the $6 million charge, I'm not really concerned about the charge. But curious about what it says about the company's technology efforts and the risks and benefits to moving 100% in-house and how you evaluated that decision. Can you provide any comment on that?

[Steve Theobald:]

Yes. Jade, I'll jump in on that one. So look, I think at the end of the day, what we've done was, I think, de-risked the technology platform a little bit by remaining with our existing provider, and I think it's fair to say that the existing provider, since we told them that we were planning to leave, has invested a significant amount in their own technology platform and brought it to a much better place than it was 3 years ago. And so I think that from our perspective, it's going to give us the benefits that we were seeking. In the meantime, we have brought in-house most of the activities over the course of this year, which should allow us to control the cost structure much better going forward as well.

[Jade Rahmani:]

Okay. I'm somewhat surprised that there's a potential improvement in margins on the servicing business as we currently estimate that the margins there are somewhere in the, I don't know, 60% to 70% range. So -- but good to hear that you were able to get some concessions on that potential change. I have gotten a couple of questions from investors. And since this is a webinar, I think I should ask. One investor has asked whether you're providing any guidance as the gain on sale margins for 2021?

[Steve Theobald:]

We have not, Jade. At the end of the day, for us, it's all about operating margin because that's ultimately what leads to the bottom line in earnings per share. And the gain on sale margin is an output of the mix of our business. So we're not really focused on what that is right now.

[Jade Rahmani:]

Well, just in terms of, mathematically speaking, if we were to model growth in brokerage and investment sales to exceed that of Fannie Mae and Freddie Mac, there should be a diminution and gain on sale margins?

[Steve Theobald:]

Mathematically speaking, that's correct.

[Willy Walker:]

And that has had zero impact on our operating margin or our earnings over time. So if you go run your models, Jade, and go back and take a look at what is done, the gain on sale margin moving up or down has had zero correlation to our operating margin as well as our earnings. So it's just -- so people can track it. You can do it. As you just said, it's a mathematical computation. It has not impacted Walker & Dunlop's earnings growth or our ability to continue to expand the platform.

[Jade Rahmani:]

Okay. Great. And then last question is on adjusted EBITDA. So I was wondering if you expect adjusted EBITDA in 2021 to exceed what you generated, what W&D generated in 2019, it totaled $248 million in 2019. For full year 2020, it came in at $216 million. Clearly, there's an increase in personnel expense in advance of future volume growth. We realize that. There was also the -- there were some other items, including the write-offs with respect to the servicing business. You're talking about double-digit growth in 2021. And so if we just assume the low end 10% growth in 2021, then you would still be somewhere about 5% below what you achieved in 2019. And given how bullish you are on volumes, I was wondering if you could opine as to whether you expect 2021 adjusted EBITDA to exceed what occurred in 2019?

[Willy Walker:]

I would just reiterate what Steve said in our prepared comments, Jade, we're looking at double-digit EPS growth and double-digit EBITDA growth. And your model will tell you what your model is going to tell you. But we're very bullish about our company and about our growth opportunities. I think Steve gave great specifics on where we think we get uplift in EBITDA as it relates to transaction volumes on brokerage, on debt and brokerage on properties. And that's what we're providing to the market. Kelsey, we have anything else?

[Kelsey Duffey:]

Yes, we actually have 1 final question from Matt Howlett at Wolfe Research.

[Matt Howlett:]

Great job outlining the excess capital you have, where you expect to deploy it and you got a lot of opportunities out there. My question is, the balance sheet is in a position where you could obviously access to debt markets. It seems like the next evolution of the company's unsecured debt, investment grade, walk us through -- walk me through what the plans are, when you'd access that market? What do you think key levels are?

[Willy Walker:]

Yes, Matt. So if you think about it, first of all, as Steve said, we're carrying a lot of cash on our balance sheet today from a historic standpoint, the most cash we've ever had at Walker & Dunlop. And that obviously adds somewhat of a drag on our ROE, except we had a 29% ROE in Q4. So I'm not sure how much of a drag that really is. We don't need more capital right now. I think that what you'd see is that if we go do a significant transaction, where it's an acquisition of north of $300 million, $500 million, what have you, we'd take a look at how are we going to -- as I said previously, how are we going to pay for that? We're going to use how much cash, how much debt the term loan B market is wide open to us. We have a term loan B today. Steve has done a great job of bringing that borrowing cost down as we've increased the size and scale and financial performance of Walker & Dunlop. And so we could go back and do it. The real issue right now is we're -- the types of checks from a business development standpoint that we're writing right now are $30 million, $50 million, $75 million checks for smaller companies that are tuck-in acquisitions, as I would call them, for technology, for teams across the country, a mortgage banking platform, an investment sales platform, things of that nature. And so if it's that size, we don't need to go access the capital markets. But as you rightly say, given $321 million of cash on the balance sheet, a debt-to-equity ratio that is extremely healthy and a currency in our stock that has done very well, particularly versus the competition over the past couple of years, we have a lot of, if you will, tools at our disposal when and if we want to get ambitious on something.

[Matt Howlett:]

Got you. Okay. I appreciate it. And just 1 last thing on the team on the single-family residential side. It's obviously an interesting asset class. I don't know if you addressed it or not, but would 1 day, W&D consider being a lender in that space? We've seen names like Corvesco offer these huge multiples. What do you think of that asset class from a financing perspective?

[Willy Walker:]

I got to be careful here because I got a lot of friends in the single-family space. Look, never say never. And the single-family rental and built for rent, kind of brings the multifamily market and the single-family market together in a way that you've got single-family developers, single-family owners, homebuilders moving into the SFR and BFR space, and you have big operators and owners of multifamily moving into the SFR/BFR space. So the 2 markets, where typically, you didn't have big names playing in both are somewhat colliding in the SFR/BFR space. So that means that given our relationships on the multi-side, we're moving into that, and you rightly point out the team that we have, very focused on being a big supplier of capital and financing to the BFR and SFR space. The 1 thing I would say, though, as it relates to the single-family mortgage space is that all these incredible numbers that we're seeing for 2020 in the single-family space, they're going to go away. They're redoing their entire books right now. Everybody who can refinance is refinancing because there's no prepayment penalty on refinancing your loan. And so as a result of it, all the single-family financing companies are going to run through their books, refinance their books, and then new originations are going to go down precipitously. As you well know, in the commercial space, 89% of our servicing portfolio is prepayment protected. And so as a result of it, if you look at the refinancing volumes that are coming up in '21, '22, '23, '24, '25, particularly in the agency portfolios, there's a huge refinancing opportunity coming up for us in our existing book. And then you add on top of that, the technology solutions we have to go find loans in other people's books and there's a huge, huge financing opportunity over the coming years in the commercial space that will not exist in the single-family space because everyone's run out and put a $250,000 mortgage on their home. So while, yes, they are great volumes, and believe me, some of the numbers that some of the single-family lenders are putting up right now are eye popping. But I think investors and analysts know that they've got their, if you will, onetime shot to do all this, and then people are going to sit on their 30-year fixed rate mortgage. For quite some time before rates get back down to a lower level where they might go and refinance them again. And so we feel pretty good being on the commercial side. Let's just put it that way.

[Kelsey Duffey:]

At this time, we have no further questions.

[Willy Walker:]

So I would finish where I started off, which is thanking everyone for joining us today. Congratulating all of my colleagues at Walker & Dunlop for an absolutely incredible 2020 and the most exciting part is that given all the investments we've made and all the people we have on the platform the best is yet to come. So thank you, everyone, for joining us. Thank you, Steve, and Kelsey, for all of your work and putting together today's earnings call, and I wish everyone a very happy and healthy Thursday going forward.

[Steve Theobald:]

Thanks, everyone.