Walker & Dunlop, Inc. (WD) CEO Willy Walker on Q2 2022 Results – Earnings Call Transcript

Walker & Dunlop, Inc. (NYSE:WD) Q2 2022 Earnings Conference Call August 4, 2022 8:30 AM ET

Company Participants

Ginna Semmes – Investor Relations

Willy Walker – Chairman and Chief Executive Officer

Greg Florkowski – Executive Vice President and Chief Financial Officer

Conference Call Participants

Jay McCanless – Wedbush Securities

Steve Delaney – JMP

Jade Rahmani – KBW

Ginna Semmes

Good morning, I’m Ginna Semmes, Senior Analyst for Investor Relations at Walker & Dunlop and I would like to welcome you to Walker & Dunlop’s Second Quarter 2022 Earnings Conference Call and Webcast. Hosting the call today is Willy Walker, Walker & Dunlop Chairman and CEO. He is joined by Greg Florkowski, Executive Vice President and CFO. Today’s webcast is being recorded and a replay will be available via webcast on the Investor Relations section of our website. [Operator Instructions]

This morning, we posted our earnings release and presentation to the Investor Relations section of our website, www.walkerdunlop.com. These slides serve as a reference point for some of what Willy and Greg will touch on during the call. Please also note that we will reference the non-GAAP financial metrics, adjusted EBITDA, adjusted EBITDA margin, and adjusted diluted earnings per share during the course of this call. Please refer to the appendix of the earnings presentation for a reconciliation of these non-GAAP financial metric.

Investors are urged to carefully read the forward-looking statements language in our earnings release. Statements made on this call, which are not historical facts, maybe deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe our current expectations and actual results may differ materially. Walker & Dunlop is under no obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. We expressly disclaim any obligation to do so. More detailed information about risk factors can be found in our annual and quarterly reports filed with the SEC.

I will now turn the call over to Willy.

Willy Walker

Thank you, Ginna and good morning everyone. Walker & Dunlop had an extremely strong second quarter with record Q2 origination volume, revenues and adjusted EBITDA, demonstrating the return on investment we have made in our people, brand and technology over the past several years. This fantastic growth and performance was done in a rapidly transforming macroeconomic environment with the second quarter beginning with a 10-year treasury rate of 2.39% and increasing by 110 basis points to reach a high of 3.49% in June.

Within this fluctuating interest rate environment, our team continued to execute exceedingly well on behalf of our clients, closing total transaction volume of $23 billion, up 67% from the second quarter of 2021 and generating total revenues of $341 million, up 21% year-over-year. Our strong top line results drove diluted earnings per share of $1.61 and dramatic growth in adjusted EBITDA to $95 million, up 43% year-over-year.

We have underscored this transformation from non-cash revenues and earnings to cash revenues and dramatic growth in EBITDA over the past year and Q2 2022 continued this trend as our business transitions from a lending-centric mortgage bank to a broader technology-enabled financial services company. We introduced an adjusted EPS metric in Q4 of 2021 to strip out non-cash mortgage servicing rights and underscore W&D’s cash earnings. And in Q2 2022, adjusted EPS was up 42% year-over-year to $2.04 a share. 67% growth in total transaction volume was led by strong growth in debt and property brokerage services, which were up 47% and 136% respectively from Q2 2021.

The robust supply of capital from debt funds, life insurance companies and banks throughout 2021 and the first half of 2022 drove the growth in our debt brokerage volumes, while the dramatic amount of equity capital looking to be deployed into multifamily real estate is what drove the spectacular results in our property sales business. Walker & Dunlop for much of our history was considered a niche multifamily agency lender. The growth in these two services businesses generating over $17 billion in transaction volume in Q2 alone underscores the dramatic diversification of product offerings at W&D. And once again, technology provided us with a competitive advantage in finding new loans and clients with 68% of our refinancings in Q2 being new loans to Walker & Dunlop and 25% of our total transaction volume being done with new clients to the firm.

Overall, debt financing volume was up 44% year-over-year, including a very strong quarter of lending with Fannie Mae, which was up over 100% from Q2 of last year. It is important to note, however, that most of that growth with Fannie was due to closing a $1.9 billion portfolio loan, which, while a wonderful execution for our client, was a floating rate loan, where we booked a relatively small origination fee, which is customary for large structured transactions and an insignificant mortgage servicing right due to the loan being a short-term floater with limited yield maintenance. Nonetheless, it is one of the largest transactions in our company’s history and propelled our market share with Fannie Mae to 19% for the first half of the year and 14% with the GSEs on a combined basis.

With a dramatic amount of capital in the debt capital markets over the past 1.5 years, both Fannie and Freddie have struggled to compete, yet its rates have risen and recessionary fears have grown. Capital flows have diminished, leaving a good portion of the market to Fannie Mae and Freddie Mac, with 59% of their annual lending capacity still intact as we enter the back half of the year, Fannie and Freddie have the very real opportunity to lend the entire $92 billion of lending capacity they still had as of July 1.

We saw the agency step back into the market in a meaningful way in July. And due to our leadership position with Fannie and Freddie, we expect strong GSE origination volumes for the rest of the year. All of the new businesses we’ve invested in over the past 2 years, affordable housing, research, small balance lending and appraisals, produced significant growth and strong financial results in Q2. Alliant, the large affordable housing owner investor we acquired at the end of 2021, had an extremely strong quarter with $30 million in revenues, up from $19 million in the first quarter.

Zelman, our housing research arm saw a significant growth in its core research product, likely due to investor demand for insight during turbulent times and the marketing reach of Walker & Dunlop. Small loan originations totaled $259 million for the quarter, up an eye-popping 171% year-over-year and Apprise our appraisal company completed 734 appraisals, up 97% over Q2 of last year. Both small balance lending and appraisals are being assisted by GeoPhy, the data science company we acquired in February to accelerate growth in these technology-enabled businesses.

The acquisitions of Alliant, Zelman and GeoPhy added $18 million in personnel expense in Q2 ‘22 over Q2 ‘21. And while that put downward pressure on earnings this quarter, we love these investments. Alliant and Zelman are growing faster than pro forma, and GeoPhy has the ability to not only transform our emerging businesses of small balance lending and appraisals, but also our legacy banking and property sales businesses. The continued evolution and diversification of Walker & Dunlop from a lending-centric mortgage bank into a broader financial services company has taken us from competing predominantly with the likes of JPMorgan and Wells Fargo to now going head-to-head with CBRE and JLL as well. It is the unique combination of our people, brand and technology that has driven our growth. And while financial services is at the core of all we do, it is our investments in innovative technology similar to CoStar and Rocket that allow us to successfully compete against these much larger firms.

Looking at W&D’s growth versus CoStar as well as CB and JLL is instructive. As this slide shows over the past 5 and 10 years, W&D and CoStar have grown revenues and EBITDA at essentially the same compound annual growth rate. Yet CoStar trades at around 30x EBITDA to Walker & Dunlop’s under 10x. There is plenty of multiple expansion available to W&D if we continue to execute on our goals. In terms of CB and JLL, as W&D has replaced non-cash mortgage servicing rights revenue with cash services fees, W&D’s EBITDA has grown faster than CB and JLL over the past 5 years.

And as you can see on the right side of this slide, we have not only grown faster, but at a higher margin. This is exceptional performance by our team to generate financial results that compared so well against the most technologically sophisticated and largest brands in our industry. And given our scale and investments, we should be able to maintain this exemplary growth and performance going forward.

One final note on our market positioning before I turn the call over to Greg, the dollar remains exceptionally strong. And while global markets deal with a war in Europe and the lingering impacts of the pandemic in Asia, Walker & Dunlop’s U.S.-centric business feels very well-positioned. And while commercial real estate remains an attractive asset class for inflationary-adjusted returns, multifamily, where W&D is exceedingly strong, continues to outperform and be the most favored asset class. Finally, W&D’s access to countercyclical capital and demonstrated growth in up markets make us feel very good about our future results regardless of the macroeconomic environment.

I will now turn the call over to Greg to discuss our second quarter and year-to-date financial results in more detail, and then I’ll be back with some further thoughts on what we see ahead. Greg?

Greg Florkowski

Thank you, Willy, and Good morning, everyone. As Willy just described, the first half of 2022 reflected the diversity of our company from a mortgage-centric lender to a broader technology-enabled commercial real estate financial services firm and our ability to not only execute, but also grow during challenging market conditions.

Second quarter transaction volumes grew 67% year-over-year to $23 billion, generating 21% growth in total revenues to $341 million and diluted EPS of $1.61. The trend of our debt brokerage and property sales businesses, fueling our growth in total transaction volumes continued in the second quarter. And those volumes, combined with growth in our servicing and asset management businesses drove exceptional growth in adjusted EBITDA to $95 million, up 43% year-over-year.

Our debt brokerage volumes grew 47% to $9.3 billion this quarter on the strength of capital markets executions throughout much of the second quarter and illustrating the benefits of the investments made in growing this team over the last several years. Our property sales team navigated a challenging market and not only grew volumes 136% to $7.9 billion, but delivered the second strongest quarter of property sales volume in our company’s history. Our GSE volume also grew 74% to $5 billion this quarter. And as Willy just mentioned, we closed a $1.9 billion transaction with Fannie Mae during the quarter that boosted Fannie Mae volume to $3.9 billion.

Our HUD volume this quarter was $201 million, a year-over-year decrease of 70%, leading to a decrease in related revenue. The decline in volume and revenue is due to 2 primary factors. First, HUD offers a streamlined refinance product that over the last several years enabled our borrowers to lock in historically low interest rates without changing any other terms of the loan.

As interest rates have risen, streamlined refinance volumes have declined significantly, and we do not expect to originate streamlined refis moving forward. Second, the HUD product is an attractive source of capital for ground-up construction, with 26% of our HUD volumes being construction-related last year. As cost for new construction increased simultaneously with interest rates during the first half of 2022, many of our clients delayed their construction projects and the related financing activity. HUD is an important source of capital for many of our customers, and these recent disruptions have no impact on our long-term confidence in the HUD product. We expect to see our HUD volumes pick up in the coming quarters as more construction projects get back on track, but revenues will continue to be down on a competitive basis because of the lack of streamline refis.

Finally, our proprietary capital originations declined 59% this quarter to $132 million. Our proprietary lending is not a significant driver of our overall financial performance, and we took a cautious approach to lending our balance sheet capital this quarter. We did not extend ourselves while rates rose sharply. And importantly, we did not hold any collateral that needs to be securitized or warehouse lines subject to mark-to-market margin calls. We will continue to take a conservative stance to balance sheet lending, but as the market stabilize, we fully expect there will be opportunities for us to step in and support our clients in the coming quarters.

Over the past several years, our business has undergone a transformation into a technology-enabled commercial real estate financial services firm that also manages $136 billion of assets earning stable recurring cash revenues. That transformation was reflected in the dramatic 43% growth in adjusted EBITDA and 42% growth in adjusted EPS. Our financial performance used to be closely linked to our transaction volumes and the mix of business we originated. But because we have grown added more service offerings and scaled our asset management business, we introduced segment financial results to provide more transparency into our operating structure and overall financial performance.

Revenue from our transaction volumes is reflected in the Capital Markets segment and the mix of originations helps explain the financial performance for that segment this quarter. Although transaction volume grew 67% this quarter, segment revenue did not grow in line, increasing only 6% to $208 million. We invested heavily in scaling our debt and property sales brokerage businesses over the last several years, and revenue from those businesses grew dramatically this quarter. However, HUD revenues declined $23 million, offsetting a large portion of the growth from our brokerage businesses. As a result, cash revenues for this segment increased 16%, while non-cash MSR revenues decreased 16%. The increase in cash revenues drove an increase in variable commission costs.

And when coupled with the addition of the development team from GFI that is included in this segment, increased personnel expense as a percentage of revenue from 61% last year to 67% this year. Although the acquisition of GFI is already being reflected in the growth rates of the small balance lending and appraisal businesses, the combination of those businesses is not yet accretive to our overall operating margins. When coupled with the decline in HUD revenues, operating margin for the segment decreased from 37% last year to 31% this year. Finally, although net income from this segment declined $7 million this quarter due to the decrease in non-cash revenues, we were very pleased with the 19% growth in adjusted EBITDA to $17 million.

Over the last year, we acquired Zelman and Alliant, both of which are reflected in SAM, our servicing and asset management segment, which delivered fantastic growth across almost every financial metric this quarter. Revenue grew $47 million or 56% over last year, benefited by $37 million of revenue from the Alliant and Zelman teams this quarter. Revenue for the SAM segment also benefited from the rise in short-term interest rates as we saw escrow-related revenues nearly triple over the same quarter last year to $7 million.

We expect continued increases in short-term rates to further boost escrow-related revenues and I will touch on that more in a moment. Although the added headcount from acquisitions increased personnel expense as a percentage of revenues from 11% last quarter to 17% this quarter, the operating margin for this segment expanded from 35% to 38%. Our total managed portfolio stands at $136 billion, made up of a $119 billion loan servicing portfolio and $17 billion of assets under management. We are well positioned to continue adding assets to both portfolios with only moderate increases to headcount, presenting a powerful opportunity to further scale the operating margins within this segment.

Net income increased 66% to $38 million this quarter, but perhaps most exciting is that adjusted EBITDA for SAM increased 43% to $105 million. The stability of the recurring cash revenues produced by this segment are hugely valuable to our business model and provide us with a terrific source of liquidity to strengthen our company and create long-term shareholder value.

Our corporate segment produces little to no revenue because it includes our functional support groups as well as the cost of our corporate debt and earn-out related expenses. For the second quarter of 2022, total expenses for the corporate segment increased $12 million or 43% over last quarter. The largest component of that increase, about $5 million, is the increase in interest expense on our corporate debt. Our term debt is indexed to SOFR. And when we closed the borrowing late last year, we locked the index rate through the end of June.

We will see increases in our borrowing costs in the coming quarters as short-term rates rise, but our escrow serve as a natural hedge that I will detail in a moment. During the quarter, we also recognized $1.5 million of costs for acquisition-related earn-outs. When we close an acquisition, we estimate the fair value of the earn-outs. And as those earn-outs are achieved, we adjust our estimates, often resulting in additional expense. Through just 6 months, the Alliant team has achieved 23% of its earn-out target, leading to the majority of that expense recognized this quarter.

Our consolidated operating margin this quarter was 22%, and year-to-date is 25%, slightly below our target range of 26% to 29%. This compares to operating margin of 26% in Q2 last year and 29% on a year-to-date basis in 2021. The decrease in operating margins on a quarterly and year-to-date basis is primarily driven by the decrease in operating margins within the Capital Markets Segment, but also to a lesser extent by the increased support costs of our corporate segment. We expect our agency lending volumes to pick up in the second half of 2022 as HUD lending picks up and the GSEs deployed their $92 billion of remaining lending capacity. As our agency volumes increase, we expect our operating margin to increase as well due to increases in non-cash MSR revenues from those executions.

Rapid increases in interest rates present challenges. However, the $2 billion to $3 billion of escrow balances we hold in connection with our servicing portfolio provides us with a natural hedge that will stabilize our earnings in this rising rate environment. For context, if Fed funds increased to 3% later this year, quarterly interest income will increase by between $11 million and $15 million over our current Q2 escrow and interest income.

That increase will be offset by a quarterly increase of about $4 million in interest expense on our term debt, still providing a net benefit of between $7 million and $11 million in bottom line earnings. This is an important feature of our business model. Sharp increases in short-term rates initially slowed down some transactions, but the long end of the rate curve has stabilized in recent weeks and lending activity is picking up. Most importantly, activity at the GSEs is accelerating as they have 59% of their lending capacity left in the second half of the year and the combination of elevated escrow earnings and strong transaction volumes in the second half of 2022 will be a powerful driver of our financial performance.

The credit quality of our at-risk portfolio remains very healthy. As we did in the year ago quarter, we lowered the loss forecast used to determine our allowance for risk-sharing obligations resulting in a $4.8 million benefit to the provision for credit losses compared to a $4.3 million benefit to the provision in the second quarter of 2021. Although COVID is still active, the economic impacts from the pandemic have largely dissipated and we removed a majority of those impacts from our loss forecast this quarter while offsetting a portion of that reduction by incorporating current macroeconomic conditions into the forecast.

Importantly, our credit exposure is limited exclusively to multifamily assets. Despite the broader concerns of inflation and rising rates, the fundamentals underpinning the multifamily sector remained strong due to a lack of affordable single-family homes, continued rent growth, historically low unemployment and growth in asset valuations over the last several years. Given these fundamentals, we feel very comfortable with the $48 million allowance for credit losses in place to cover future losses in our risk sharing portfolio. As we look ahead to the second half of 2022, we are confident that we will still achieve our goal of double-digit growth in adjusted EBITDA.

At the same time, rising rates have slowed the pace of debt brokerage and property sales transactions relative to a robust start to the year. We are still seeing plenty of deal flow, but credit spreads are also tightening on our lending executions to soften the relatively sharp increases in the cost of borrowing over the last few months. For that reason, we slowed the pace of hiring in our core businesses, but continue making strategic hires to support the long-term growth objectives of the Drive to ‘25.

We are also adjusting our guidance for 2022 in light of a potential slowdown in transaction activity and tightening profitability and now expect that diluted earnings per share growth will range from flat to up 10% and operating margin will range between 24% and 27% and return on equity will range between 15% and 18%. As Willy mentioned in his remarks, this environment is when our agency lending products have historically stepped in to provide liquidity to the multifamily market, just as they did in 2020 and in the second half of last year. If the GSEs utilize their full lending capacity and credit spreads normalize, we could still achieve our original goal of double-digit earnings per share growth, but we are not managing our business with that scenario in mind, and we have taken steps to ensure we have a successful year under any scenario.

We ended the second quarter with $151 million of cash on the balance sheet. We have always maintained a strong liquidity position to execute on our long-term business objectives of growth and shareholder return. Our business generates plenty of cash and although we expect to conserve a portion of that to further strengthen our liquidity position in the coming quarters, markets like this have historically presented us with opportunities to create long-term value for our shareholders. We will continue using capital to add bankers and brokers to cover strategic markets and products in pursuit of our long-term Drive to ‘25 goals and remain confident in our ability to achieve those objectives.

During the quarter, our stock reached a level that we felt was undervalued relative to those long-term expectations. And we used $11.1 million of our $75 million board authorization to repurchase 109,000 shares of stock at a weighted average cost of $101.7. We expect to continue buying back shares over the remainder of the year as it represents an attractive use of capital when our stock is undervalued. Yesterday, our Board approved a quarterly dividend of $0.60 per share payable to shareholders of record as of August 18, 2022.

Over the last 4 years, I played an important role in identifying the strategic opportunities that would enable our long-term growth plan. As I settle into my new role, it’s been fantastic to see how those recent acquisitions have immediately enhanced our brand, strengthened our business and broadened the services we offer across the platform. These businesses are already contributing to our top and bottom-line growth, and we have only just begun to integrate them into the Walker & Dunlop brand.

Our business model is resilient during times of uncertainty because of the strength of our long-term recurring cash flows. Predictable cash flows will enable us to enhance our liquidity position while simultaneously reinvesting in our business. During my 12 years at Walker & Dunlop, markets like this have historically presented us with opportunities to invest in and grow the business when others pull back. Thank you for your time this morning.

I will now turn the call back over to Willy.

Willy Walker

Thank you, Greg. As Greg just outlined, we have an exceptional business model that has allowed us to transform Walker & Dunlop into a broader services firm, while maintaining the highly profitable recurring revenue streams that are servicing and asset management businesses produce. We are currently generating a huge amount of cash, and we will use that cash to continue investing in existing and new businesses and returning capital to shareholders in the form of share buybacks and dividends.

The multifamily market continues to perform exceptionally well, with operating statistics such as occupancy and rent growth at historic levels. The credit quality of our $119 billion servicing portfolio has never been this good on a scale basis. And while there has clearly been a pullback in both debt and equity capital inflows to the commercial real estate market due to inflation rates and the fear of recession, we have the benefit of being one of the largest countercyclical multifamily lenders in the country due to our partnerships with Fannie Mae, Freddie Mac and HUD.

Should the markets continue to dislocate and Fannie and Freddie used their full $156 billion of lending capacity for 2022. Our historic 12% market share, which we have significantly beaten year-to-date, would imply total GSE volume of $19 billion for the full year, up 23% from 2021 and almost to a record high of $21 billion in 2020. 1.5 years into our 5-year growth plan titled to Drive to ‘25, we are well ahead of schedule. We set a goal to grow our debt financing volumes to $65 billion by 2025. We need to grow annual volumes by 7% to achieve this goal, and we grew our debt financing volumes by 33% in the first half of 2022.

In property sales, we set a goal to grow to $25 billion in annual sales volume by 2025. And with over $11 billion in volume year-to-date, we will easily surpass the $25 billion mark by 2025. Our loan servicing portfolio ended the quarter at $119 billion, which will require 8% annual growth to hit our $160 billion goal, something we should achieve with the lending volume growth we have seen. And finally, we set a goal to grow assets under management to $10 billion. With the acquisition of Alliant Capital at the end of 2021, we added $14 billion of AUM, achieving our Drive to ‘25 goal immediately. Yet, we are still focused on growing our commingled fund management business to $10 billion to build a diverse capital base to feed into the transactions our bankers and brokers work on every day across the country.

What’s most exciting to me is that we have grown our brand, increased our transaction volumes dramatically, transformed our business to being more financial services oriented and still have been able to invest in technology and new emerging businesses. As Greg outlined earlier as short-term interest rates increase, our escrow and warehouse income balloons. And as the market adjusts to higher rates, Fannie, Freddie and HUD have the ability to win and gain back market share. And then in 2023, when the Fed continues to raise rates or rates normalize, we will have the scale and products to meet our clients’ needs while our servicing, escrow and warehouse income generate revenues at much higher levels. And that is when the combination of our business model, brand, people and technology really starts to hum.

W&D has a track record of exceptional performance throughout all cycles, along with the reputation for achieving the bold and highly ambitious 5-year business plans we set. And while past crises, such as the great financial crisis and pandemic caught us all by surprise, what we are currently enduring is not a surprise to anyone. Will there be times when rates move dramatically and clients can either suffer or take advantage of the rate movements up or down, no doubt. But that’s why they are called markets. As I said to our guests at the Walker & Dunlop Summer Conference in July, the only way to take advantage of the 30-basis point drop in treasuries is to be in the market, quoting re-financings, underwriting new deals and being ready to move when the timing is right.

We remain focused on our True North, our Drive to ‘25 objectives. We continue to manage our business to meet our long-term goals with the core financial objective to doubling our revenues to $2 billion and generating $13 to $15 of diluted earnings per share. If we keep expanding our services and meeting our clients’ needs as we did so dramatically in Q2, we have no doubt we will get both targets.

I am so thankful and impressed by all our team has accomplished in Q2 and throughout this challenging year. Our incredibly talented team is what sets us apart and will continue to underpin our success and growth in the future. Thank you to my WD colleagues and to everyone who has joined us this morning.

I will now turn the call over to Jenna to open the line for any questions.

Question-and-Answer Session

Operator

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

Jay McCanless

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

Willy Walker

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

Jay McCanless

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

Willy Walker

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

Jay McCanless

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

Willy Walker

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

Jay McCanless

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

Willy Walker

Thanks, Jay.

Operator

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

Steve Delaney

Good morning, everyone. Can you hear me?

Willy Walker

We can.

Greg Florkowski

Yes.

Steve Delaney

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

Willy Walker

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

Steve Delaney

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

Willy Walker

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

Steve Delaney

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

Willy Walker

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

Steve Delaney

Thanks for the comments Willy.

Willy Walker

Thank you, Steve.

Operator

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

Jade Rahmani

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

Willy Walker

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

Jade Rahmani

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

Willy Walker

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

Greg Florkowski

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

Jade Rahmani

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

Greg Florkowski

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

Jade Rahmani

And on Apprise, could you make similar commentary there?

Greg Florkowski

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

Jade Rahmani

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

Greg Florkowski

That’s what we are expecting, yes.

Jade Rahmani

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

Willy Walker

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

Jade Rahmani

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

Greg Florkowski

Both.

Jade Rahmani

So, okay.

Greg Florkowski

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

Jade Rahmani

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

Greg Florkowski

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

Jade Rahmani

Thank you.

Ginna Semmes

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

Willy Walker

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

Greg Florkowski

Take care.

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