Walker & Dunlop Inc

NYSE:WD

Earnings Call Transcript 2019-Q3

[Operator]

Welcome to Walker & Dunlop's Third Quarter 2019 Earnings Conference Call and Webcast. Hosting the call today from Walker & Dunlop is Willy Walker, Chairman and CEO. He is joined by Steve Theobald, Chief Financial Officer; and Kelsey Duffey, Vice President of Investor Relations. Today's call is being recorded and will be available via webcast on the company's website. [Operator Instructions] It is now my pleasure to turn the floor over to Kelsey Duffey. Please go ahead.

[Kelsey Duffey, Vice President-Investor Relations]

Thank you, Brie. Good morning, everyone. Thank you for joining the Walker & Dunlop third quarter 2019 earnings call. I have with me this morning, our Chairman and CEO, Willy Walker; and our CFO, Steve Theobald. This call is being webcast live on our website, and a recording will be available later this morning. Both our earnings press release and website provide details on accessing the archived webcast. 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. I will now turn the call over to Willy.

[Willy Walker, Chairman and Chief Executive Officer]

Thank you, Kelsey. Good morning, everyone, and thank you for joining us. The third quarter was one of the most successful quarters in Walker & Dunlop’s history, due to strong financial results, record numbers of bankers and brokers hired, positive regulatory decisions, the implementation of technology in new and innovative ways and the continued progress towards our 2020 goal of generating $1 billion in annual revenues. As shown on Slide 3, we generated $212 million of total revenues in Q3, a 15% increase from a year ago, which drove diluted earnings per share of $1.39, a 21% increase over last year's Q3. As Steve will discuss later, during a quarter when we added a significant number of bankers and brokers to the platform, still generated outstanding financial returns due to the strength of our underlying business model. With over $1 million of revenue per employee, $92 billion servicing portfolio generating huge amounts of cash and a debt to equity ratio of 0.3 times. We feel exceedingly well positioned financially to continue growing our business. On the first day of Q3, JLL closed on its acquisition of HFF. The combination of these two competitor firms created an unprecedented recruiting opportunity for W&D and we took advantage of it, growing our sales force by 13% during the quarter. There are three primary reasons for our recruiting success. First, we recruited a number of talented teams away from the large global real estate services firms in 2018 and those teams played a major role in establishing a reputation within the industry that W&D is a great place to work and succeed. Second, with HFF being acquired by JLL and Eastdil Secured being spun out of Wells Fargo, Walker & Dunlop sits somewhat uniquely as the client-focused commercial real estate finance company with big company capabilities yet the touch and feel of a family-owned business. The client-focused world of commercial real estate, finance and sales, that combination of big company capabilities with small company touch and feel is gold. And third, the culture at W&D is very different from many of our competitor firms as we celebrate collaboration and reward exceptional sales performance. Those three cultural and market factors combined make Walker & Dunlop a fantastic place for highly talented professionals to join and be successful. On the regulatory front, the Trump administration's white paper on housing finance reform coupled with the release of FHFA’s 2020 multifamily GSE scorecard were welcome developments during the quarter. And in the conservatorship of Fannie Mae and Freddie Mac has outlined in the administration's white paper, would be a very positive development for the housing finance industry and Walker & Dunlop. The 2020 GSE multifamily scorecard announced by the federal housing finance agency in September provides Fannie and Freddie with $100 billion each of lending capacity over the next five quarters, which as you can see from Slide 4, is up from past annual volumes. The scorecard sent a clear message that FHFA under the new leadership of Director, Mark Calabria is the capital provided to the multifamily market by the GSEs as vital, particularly as part of the solution to the current affordable housing crisis in America. As you can see on Slide 5, the mortgage bankers associations most recent forecasts for the size of the multifamily finance market in 2020 is $390 billion. Buying Fannie and Freddie's combined market share will be around 41%. They use all of their capacity. 41% market share in an expanding market provides for volume growth for both GSEs. It also pushes their market share down to levels where the regulator would like to see them. The clarity provided by the 2020 scorecard allows Walker & Dunlop to continue to benefit from our strong market position and scale with the GSEs. We'll also continue to focus on building out other areas of our business that will complement our future growth. I'll now turn the call over to Steve to discuss our Q3 financial performance in more detail and then I'll come back to discuss our progress towards Vision 2020 and how technology is transforming our business. Steve?

[Steve Theobald, Chief Financial Officer]

Thank you, Willy, and good morning, everyone. Once again, our unique market position and focused business model generated strong financial performance across the Board. The third quarter results add to our exceptional year-to-date performance, positioning us well to meet our 2019 financial targets. Total transaction volume for the first nine months of the year was $22.2 billion, a 19% year-over-year increase led by growth in property sales, Fannie Mae and brokered volumes. We continue to enjoy a macro economic backdrop that is constructive for U.S. commercial real estate, particularly multifamily. Turning now to Slide 6, during the quarter, our overall transaction volumes increased by 16% from last year, including record quarters for brokered originations at $3.1 billion, up 29% from last year and property sales of $1.6 billion, up 83% from last year. These are the two areas in which we have been heavily investing and you can see the success of those efforts coming through in our transaction volumes. Our overall GSE volume of $3.8 billion in the quarter was down slightly year-over-year, as an increase in Fannie Mae volumes was offset by a decline in our Freddie Mac volumes. Our HUD volume picked up in the quarter to $281 million, up 42% from Q3 of 2018. The combination of higher volumes with Fannie and HUD, and an increase in the margin on our Fannie Mae business during the quarter resulted in a gain on sale margin of 162 basis points, an increase from 150 basis points last year. I want to spend a few moments talking about what we see as the potential impacts of the new GSE scorecard on our financials forward. To begin with, the clarity over what the market opportunity is for Fannie and Freddie over the next five quarters is welcome. With $200 billion of combined lending capacity through the end of 2020, the GSEs will continue to be the dominant providers of capital to the multifamily industry, and this will benefit W&D as one of their largest partners. You wouldn't know it from our strong Q3 financial results, but we did see a significant slowdown in Fannie and Freddie's lending volumes in September as they waited to see what the new FHFA scorecard would bring. And it took them most of October to ramp their lending back up and start with winning business, again. With both GSEs out of the market for September and October, we expect to only originate around $1.5 billion of loans with each GSE in Q4. While that is below our typical Q4 lending volume for Fannie and Freddie, given the construct of the new scorecard, a slow Q4 will simply push more capacity into 2020. Both GSEs are fully back in the market today. Given the robust pipelines we have across our entire lending platform, we are very optimistic about our outlook over the next five quarters. I would add that even with light GSE volumes in Q4, W&D should still finish 2019 with double-digit growth in revenues and earnings as we established at the beginning of the year. Revenue for the quarter was up 15% from Q3 2018 to $212 million, bringing year-to-date total revenues to $600 million, up 18% from the same period in 2018, driven largely by the increase in transaction volumes year-over-year. Our year-to-date financial metrics are highlighted on Slide 7. Diluted earnings per share was $1.39 for the quarter, up 21% from the same period last year, while year-to-date diluted EPS was $4.11, up 15% from last year as we remain on track to deliver double-digit EPS growth in 2019. As you can see on Slide 8, servicing portfolio was at $91.8 billion at September 30 and continues to fuel growth and servicing fees which contribute to $159 million to year-to-date revenues, an increase of 8% year-over-year. Our portfolio now includes over 7,000 loans and continues to exhibit strong credit fundamentals. During the quarter, the average LTV and debt service coverage ratio for new loans was 67% and 1.47 times respectively, consistent with the historical healthy levels that have characterized this commercial real estate cycle. Adjusted EBITDA remained strong in the third quarter at $55 million, down slightly from $58 million in Q3 2018, as growth in cash revenues was outpaced by growth in expenses, primarily the $15 million year-over-year increase in personnel costs, which was driven largely by increased commission expense. The $11 million increase in non-cash MSR revenues in Q3 did not benefit adjusted EBITDA in the quarter but will contribute to higher cash servicing fees and therefore adjusted EBITDA growth in future periods. Year-to-date adjusted EBITDA was $184 million, up 15% from the first 9 months of 2018, driven by our strong growth in cash revenues. We achieved a third quarter operating margin of 28%, bringing year-to-date operating margin to 29%, well within our annual target range of 27% to 30%. As Willy mentioned, we had a maiden success in recruiting new origination teams into our Company during the quarter. Expenses related to recruiting and on-boarding our new recruits totaled approximately $2.5 million. Q3 personnel as a percentage of revenue was 44%, up slightly from 43% in the third quarter of last year, even as we have added 115 employees to the Company over the past 12 months. Year-to-date 2019 personnel as a percentage of revenue was 42%, up from 40% in 2018, but within our historical range. We ended the third quarter with $66 million of cash on the balance sheet, and an additional $138 million being used to fund Agency loans rather than borrowing on our warehouse lines, bringing our total available cash to $204 million. During the quarter, we used $2.7 million to buyback 50,000 shares leaving us with 45.8 million of Board authorized repurchase capacity. Our strong cash position and financial results continue to support our quarterly dividend payment. Yesterday, our Board of Directors authorized a dividend of $0.30 per share payable to shareholders of record on November 22, 2019. We continue to grow our overall capital base, while still generating strong returns with a return on equity of 18% for the third quarter and 19% for the year-to-date period right in the middle of our high-teens to low 20% target range. Our third quarter and year-to-date financial results are reflective of both our competitive advantage in the market today, as well as our profitable business model, which continues to generate the cash we are investing in future growth. The recruiting success achieved this quarter sets the stage for a fantastic 2020 and beyond and we aren't even close to done yet. With that, I will now turn the call back over to Willy.

[Willy Walker, Chairman and Chief Executive Officer]

Thank you, Steve. The Q3 and year-to-date financial results that Steve just ran through illustrate the growth Walker & Dunlop has achieved by remaining focused on our long-term mission of creating the premier commercial real estate finance company in the United States. Vision 2020 was established in 2016 as a roadmap to generating $1 billion in annual revenues by the end of 2020. The hiring and investments we have made over the past several years, including the 22 talented bankers and brokers we hired in Q3 alone, will provide the human capital and sales growth to achieve Vision 2020. Our revenues for the 12-months ended September 30th were $815 million. Adding $185 million of incremental revenues over the next five quarters will be challenging, but we have brought on the people and made the investments to have a real shot at achieving that goal. The cornerstone of Vision 2020 as outlined on Slide 9 Is continuing to scale our debt financing platform to originate $30 billion to $35 billion of annual loan volume, while we were already a market leader with the GSEs and HUD when we established Vision 2020. We knew there was a large opportunity to scale our debt brokerage business across the nation. And we have done just that, growing our brokered volume from $4.2 billion in 2016 to $9.3 billion over the last 12 months. Scaling our debt brokerage platform has helped to fuel growth in our overall mortgage banking volumes, which were $17 billion in 2016 and have grown to $27 billion on a trailing 12-month basis, a fantastic 59% increase over 2016. Given the additions to our debt financing team this year and the overall macroeconomic environment, we should reach our goal of $30 billion to $35 billion by the end of 2020. The second component of Vision 2020 was launching and growing a multifamily property sales business with annual volume of $8 billion to $10 billion. We entered this business in 2015 with the acquisition of Engler Financial, and over the past four years, we have added 28 property sales brokers across the country, and grown our sales volume to $4.4 billion over the last 12 months. Our growth has been dramatic and impressive, and with 50% of our current team having joined us just this year, we have visibility on brokering $8 billion to $10 billion with the multifamily properties in 2020. The third pillar of Vision 2020 and clearly the most lucrative is building $100 billion loan servicing portfolio. For the past several years, we have added an average of $10 billion of net new loans to our servicing portfolio on an annual basis. And with the portfolio at $92 billion today, we are within striking distance of our $100 billion goal. W&D is now the seventh largest commercial loan servicer in the country, and with an average servicing fee of just over 23 basis points, an average loan duration of just under 10 years, we have an asset base and cash flows that make W&D look a lot more like an asset management firm than a mortgage bank. Crossing the $100 billion mark in 2020 will be an amazing milestone and provide us with long-term prepayment protected cash flows that we can continue to reinvest in our business. The final piece of Vision 2020 is to build an $8 billion to $10 billion fund management business. This is the one component of Vision 2020 that we are unlikely to achieve, but we made great progress over the past 18 months in entering and scaling this business. The acquisition of JCR Capital in 2018 brought with it around $750 million in assets under management, as well as a registered investment advisory platform to raise new funds. We ended Q3 2019 with $1.6 billion in assets under management at JCR and in the Walker & Dunlop Blackstone Mortgage Trust joint venture. And given the momentum we are seeing in raising JCR Fund V as well as a new separate account with a long-standing Walker & Dunlop partner, we will have established a good sized fund management platform at Walker & Dunlop by the end of 2020 with the opportunity to reach our goal of $8 billion to $10 billion in AUM in the following years. While we focus on achieving Vision 2020, we are already setting building blocks in place for our next five-year strategic plan. We have had an amazing track record at Walker & Dunlop of establishing and achieving five-year BHAGs. BHAG stands for Big Hairy Audacious Goals, a term established by Jim Collins in his legendary book Built To Last. One component of W&D's 2025 BHAG will invariably be technology. Over the past 18 months, we have made significant strides in driving efficiencies in our business processes. As we've implemented technology to become more efficient, we have also aggregated large amounts of data that make us more informed in our credit underwriting and more insightful to our clients. We've also built a database that combines loan details with operating data from our servicing portfolio that allows us to accurately project property performance on a borrower's entire portfolio, even in cases where the borrower may have never done a loan with Walker & Dunlop. Since we started using this database a year ago, we have originated 65 loans for 39 different sponsors, totaling over $1.9 billion of new loan activity. We have just scratched the surface of what we can be achieved through our technology and data analytics investments and we are very excited about how these initiatives will continue to change the way our clients view W&D and the insight our bankers and brokers can provide. Before I close our prepared remarks, I'd like to look back to what I said at the beginning of this call. Q3 2019 was one of the most successful quarters in Walker & Dunlop's history, due to our financial performance, recruiting success, regulatory clarity, technological implementation and continued progress toward our long-term strategic goals. We've had plenty of quarters with one or two of those areas showing fantastic performance, but rarely all five, and that is extremely exciting. Two weeks ago, for the first time ever, we brought together our entire company to hear from our executive team and outside speakers, participate in training sessions and celebrate our collective success. We held the meeting in Dallas, Texas. Because as our President Howard Smith said, when we do things at W&D, we do them big. The all-company retreat was a wonderful way to welcome the new employees who joined us in Q3, and underscore what makes Walker & Dunlop such a great place to work for our 811 employees. One of our outside speakers was Bill Emerson, who for 15 years as CEO of Quicken Loans, transformed Quicken in into the largest single-family mortgage originator in the United States, while consistently being ranked a great place to work with exceptional customer service. Bill listened to a number of the W&D presentations before he spoke and encouraged W&D to think big and continue down the technological innovation path that we have started to implement. Bill didn't need to tell anyone in the audience to think big, but his insights after having scaled Quicken at what he described as "the intersection of culture and technology." We're incredibly informative and appropriate given where W&D finds itself today in executing on our long-term growth plan and mission to become the premier commercial real estate finance company in the United States. We will continue to recruit exceptional bankers and brokers to Walker & Dunlop, leveraging off our position as a company with big company capabilities, yet the touch and feel of a family-owned firm. We will continue to drive toward Vision 2020 to achieve our financial goals and grow the services we provide to our loyal and fantastic customers. And we will continue to develop and deploy technology to make us smarter, more efficient and more insightful in all we do. I'd like to thank my Walker & Dunlop colleagues for all you do to make our company so great, and congratulations on a fantastic Q3. With that, I'd like to ask the operator to open the line for questions.

[Operator]

The floor is now open for questions. [Operator Instructions] And we'll take our first question from Jade Rahmani with KBW. Go ahead.

[Jade Rahmani, KBW]

Thanks very much for taking the question. Just in terms of the 2020 commentary you provided with respect to the MBA forecast of $390 billion that implies about 9% growth. Is that what you're internally expecting for the overall market?

[Willy Walker, Chairman and Chief Executive Officer]

Jade, I mean, we look at those numbers, as you know, Freddie Mac also gives their estimate of market size as well. We don't have an internal economist group to make our own projections as far as the overall market size. But given the velocity of the market today, without any external shocks from a macroeconomic standpoint, I think that's probably a pretty good calculation that the MBA has, no reason to not think it's a good number.

[Jade Rahmani, KBW]

And have you dug into the drivers of that increase? What would be driving the growth at this point in the cycle, given cumulative multiple years of extremely strong production? Is it new deliveries? Is it construction loans? Is it refis? What are – what's driving that level of growth?

[Willy Walker, Chairman and Chief Executive Officer]

So there were – I believe the MBA had projected 320,000 new units delivered in 2019. So you have all that – those deliveries, which by the way, have been absorbed extremely well by the market. And then you also just have a lot of capital chasing deals and therefore transaction volumes I think are underpinning a lot of that number, Jade. So there is a core refinancing number in there, which by the way we do not have a significant volume of refinancings in our portfolio for 2020. But there is a core refinancing volume and there's a lot of new M&A activity of trades and investment sales. And given the growth of our investment sales platform, we look to be a big beneficiary both on the investment sales side as well as on the lending side.

[Jade Rahmani, KBW]

In terms of the recruiting environment, you've stepped up recruiting it seems just based on press releases meaningfully in the quarter and I believe this is in advance of the FHFA scorecard. So I just wanted to get your – some insight into your thinking about what gave you the confidence to ramp up recruiting, carry those personnel costs, and thinking about the dynamic of potentially having to grow the brokered and potentially even the private label CMBS conduit business, which could have lower margins than the agency business?

[Willy Walker, Chairman and Chief Executive Officer]

If you look at the recruiting we did in the quarter, Jade, the majority of the bankers and brokers that joined us were in our investment sales business and in our capital markets business. So the – we have been scaling those two platforms as both Steve and I mentioned during our prepared remarks and the growth of those two business lines has been outstanding, and yet at the same time, there is still a huge amount of growth for us to capture in both of those businesses. So the recruiting we did for instance in the investment sales base, all of those hires are putting brokers in new geographies. So we added teams in the quarter in places like Southern Florida, we added another banking team in Houston, we added investment sales team in Chicago, we added an investment sales team in Portland, Oregon, we added an investment sales team in San Diego. So we're adding talent to the platform in geographies where we have not had coverage in the past. And so all of that is not only great to expand into those geographies, but to some degree, it's 100% accretive because we don't even have bankers and brokers in those markets prior to those hires. So all of that is just very net beneficial to the underlying platform where we don't have an existing operation, and today, we do.

[Jade Rahmani, KBW]

Thanks very much for taking the questions. I'll get back in the queue.

[Operator]

Our next question will come from Steve DeLaney with JMP Securities. Go ahead.

[Steve DeLaney, JMP Securities]

Thank you. Good morning and congratulations on the strong quarter. Going back for just a minute to the GSEs back away in late August and September. Willy, in your mind, was that close to 100% cap driven and the momentum in their volumes? Or could it have also possibly been due to the rate volatility we were seeing? I mean, they – yes, caps are an issue, but also they – when they're pricing loans, they need to know what the execution is going to be in the securitization market as well. So I'm just curious if you have any thoughts on that or has talked to anybody at the GSEs, that kind of gave you some clarity on why they reacted so cautiously? Thank you.

[Willy Walker, Chairman and Chief Executive Officer]

Good morning, Steve, and thanks for being on the call.

[Steve DeLaney, JMP Securities]

Sure.

[Willy Walker, Chairman and Chief Executive Officer]

I would put forth to you that it had very little to do with rates and everything to do with annual volumes, and two things, one, trying to make sure that as the regulator under new Director Mark Calabria was defining the 2020 scorecard that they were not doing volumes that would make the FHFA and the regulator put a downward cap on their 2020 volumes. So I think both of them were running at a pace up until August that was going to put them into a number well north of $75 billion of annual origination volumes each. And I think they both felt that if they continued at that pace that there was a real chance that the regulator would put in a downward revision to the caps for 2020. So they both hit the brakes basically saying we're not going to go over that number and we're going to stay at that number for 2019. And I would say to you as well once they put on the cap, the brakes and then the regulator came out with the scorecard, what we have seen before is that neither GSE, no lender can just cut or snap their fingers and come right back into the market. And as Steve said in his prepared remarks, both of them are right back in the market and the business we're doing we love and they're both playing their commensurate all, if you will, in the markets today, but it took them a while to get back up and get going. But the clarity that the new scorecard has provided has been fantastic because we know the role they're going to play going forward and I would also add that it is the first scorecard under Director Calabria. So this was the moment where Director Calabria would establish the role he wanted to see Fannie and Freddie play in the multifamily space and it was a very, very positive scorecard.

[Steve DeLaney, JMP Securities]

That's helpful and thanks. Thank you and Steve for giving the clarity that you gave us on 4Q because it was unclear to us how much of that impact would have been in 3Q and 4Q. And I think we have that answer now. But rolling out to 2020, $100 billion, I mean, I think, the market, we all took the new caps and the structure is being an improvement under the old structure, and $100 billion over five quarters sounds like a lot, but also we can't overlook the requirement at 37.5% of that needs to be classified affordable. So as you look at your mix of business now in terms of larger loans and newer projects that may not be deemed affordable, is – could that be a potential a barrier for you and also in terms of borrower demand for larger loans that wouldn't be considered affordable, could we still get a little tight next year in that regard? Thanks.

[Willy Walker, Chairman and Chief Executive Officer]

Yes, on the affordable side, Steve, both Fannie and Freddie said both publicly and well personally that they should have no problem hitting the 37.5% affordable requirement given their historic business mix. So it's great that the regulator has been focused on that market segment that they will continue to provide capital to that market segment because it is very much needed. As it relates to any challenges as it relates to their lending mix, we've heard no, if you will, concerns or warning signs from either of them that that's going to be overly challenging. And then as it relates to larger loans, as you well know, we've had in our history, we've done sort of mega portfolios, but our average loan size of W&D is somewhere around $18 million or $19 million. So actually some of our large competitors such as JLL and CB, they are sitting there doing $50 million and $60 million loans. I would say that there might be a moment where Fannie and Freddie do shy away from those larger loans a little bit and the Class A stuff, they'll still do them, but they might shy away from them a little bit, and for us, which is more of a middle-market firm, that does institutional business, I don't see any issues as it relates to our overall deal flow and not finding a home for those financing.

[Steve DeLaney, JMP Securities]

Thanks, Willy. Yes, Steve, go ahead.

[Steve Theobald, Chief Financial Officer]

Yes, sorry, with respect to W&D, we're extremely active in the affordable space ourselves.

[Steve DeLaney, JMP Securities]

Okay.

[Steve Theobald, Chief Financial Officer]

We're one of the largest manufactured housing community lenders with the agencies. We'll continue to do that. So I think we will certainly be contributing our share of that 37.5% over time.

[Steve DeLaney, JMP Securities]

Got it. And Steve, one for you, on Page 3, the trends obviously all look great, year-over-year, up 15% to 20%, but – and if you – EBITDA surprisingly down 6%. I apologize if you explained that. But could you remind me what that is? Or is there one particular item in there that caused that decline?

[Steve Theobald, Chief Financial Officer]

Yes, I think, Steve, we – this particular quarter, we obviously had a significant increase in MSR income, which doesn't count toward EBITDA because we back that out of the cash revenue. And if you look at just the amount of hiring we did in the quarter, plus commission expense that we paid out this quarter given the success we had on the volume side, those cash expenses essentially exceeded our cash revenues this particular quarter.

[Steve DeLaney, JMP Securities]

Got it. Got it. Thank you both for the comments.

[Operator]

Our next question will come from Henry Coffey with Wedbush.

[Henry Coffey, Wedbush]

Good morning. Let me add my congratulations on a great quarter. When we look at profitability metrics, I know you did mention you know that MSR – that your servicing fees are sort of coming down as some of the older product matures. Are we about where that gross number will be for the next few quarters around 23 basis points?

[Steve Theobald, Chief Financial Officer]

Henry, it's super hard to predict, obviously not knowing what the future is going to look like, but I – we had seen decline in that average servicing fee rate over the last few quarters and that certainly slowed in Q3. I mentioned this in my remarks that we did see an increase in our Fannie Mae servicing margins this past quarter. I think a function of a little bit less competitive dynamic in that space resulted in us seeing an increase there. I think you're still seeing servicing fees from 10 years ago rolling out of the portfolio. And 10 years ago, we were still not long removed from the great financial crisis and that was a period of time when there wasn't much lending activity going on outside of the agencies. So that dynamic still exists. I think the other thing that is still occurring is the mix, the overall mix of our servicing portfolio is changing as we're doing more brokered business with life insurance companies, that servicing is being added to our portfolio in many cases and those are coming on at lower than our average servicing fee rate.

[Henry Coffey, Wedbush]

Thank you. And then I know you sort of just went over this, but basically we're talking about in the fourth quarter, not a dramatic fall off in Fannie and Freddie volumes, but basically going to $3 billion. Is the brokered business turning out to be more robust going into year-end with rates where they are? Should we be altering our total origination estimates all that much? I know this could have a more brokered, less Fannie, Freddie, could have an impact on GAAP earnings, but then be equally positive to EBITDA. So what should we be thinking about? We've got the $3 billion number. Is there an offset from the brokerage side of the business? And then obviously the expectation would be for a bigger than expected March, am I thinking about all this the right way?

[Steve Theobald, Chief Financial Officer]

Yes. Henry, I think without obviously giving guidance around origination volumes for Q4, I think while those were the Fannie, Freddie volumes that we discussed in the call for Q4, are below what we would typically expect to see in a fourth quarter, we're obviously still pretty optimistic about the future here. The markets are still very good. Jade asked specifically about the MBA forecast. So we clearly are still seeing strong financing volumes out in the marketplace.

[Willy Walker, Chairman and Chief Executive Officer]

I do want to jump in on. Henry, I just jump in on that, just quick. First of all, we're one month into Q4. So we look at our pipeline and we're trying to tell the market about where Fannie and Freddie were for September and October, which has driven our pipeline to where it is today and we're giving people some insight into what we think Q4 is going to look like there. I think the Q3 numbers from a capital markets standpoint, show the growth that we are experiencing in that business line, and so broadly to your question, yes, our capital markets business has been growing significantly and there is nothing in the market that would say that it should not continue to grow. And so just underscoring what Steve said, the overall financing market and property sales markets today are transacting at a great pace, it’s a very healthy environment, we’re not the only company in our industry that is reporting good earnings this quarter, and I think a lot of people see tremendous opportunity going forward. I would say that with the hiring we have done, we positioned ourselves exceedingly well to have increased volumes across all of our lines in 2020 and 2021, and that Steve pointed to in his prepared remarks, that’s what really gets exciting is when you take the hiring we did in Q3 and you play it into the P&L for 2020 and 2021, we’ve hired a lot of growth in Q3 of this year and that’s great.

[Henry Coffey, Wedbush]

Just on a bigger picture, we went through the FHA white paper and other comments, I think he is talking about a $20 billion IPO or something with the GSEs, but as this business evolves, is there a tweener market developing something between the GSEs and the insurance companies? Are there people that picked up that white paper and said, hey, we could build the multifamily business inside of this? Or is it just, that was nice, let’s just go on with business the way it is?

[Willy Walker, Chairman and Chief Executive Officer]

If you look at the $390 billion market size expectation from MBA for 2020 and you take that Fannie and Freddie should do $160 billion combined between the two of them at $80 billion each, that still leaves $200-plus billion market for other capital to meet in the multifamily space. So there were 3,220 distinct lenders who provided capital to multifamily industry last year, Henry, and Walker & Dunlop was the fifth largest. And so I think the real question you’re asking is, is there an opportunity for Walker & Dunlop to be providing capital to that other $230 billion that’s going to go out to multifamily in 2020? And the very direct answer is, yes. So we’ve entered the small loan space with the agencies, we can broaden that out. We have our joint venture with Blackstone to be able to originate multifamily bridge loans. We have our Capital Markets Group which is sending loans across to life insurance companies, banks and CMBS. We have our own CMBS group, it is stable funding CMBS loans. And we are consistently looking for opportunities to either find bankers and brokers who can deploy capital or raise capital at our new fund management business that can be deployed into the market. So we see a lot of opportunity in providing capital to that other part of the market that Fannie and Freddie aren’t covering currently.

[Henry Coffey, Wedbush]

And, but – and you think for Fannie and Freddie, it’s steady as she goes. And there is not going to be the emergence of either a third GSE our GSE like structure or the merger of the Fannie, Freddie business or I mean it seems like GSE reform is kind of an urban myth right now in the market, so just taking care of the business themselves.

[Willy Walker, Chairman and Chief Executive Officer]

I would not underestimate Director Calabria’s desire to get Fannie and Freddie out of conservatorship, and so there is a lot of focus and a lot of time being spent on achieving that mission. And the second thing I would say is as it relates to emerging Fannie and Freddie and the multifamily space, FHFA has been declaratory in saying that they greatly appreciate and want to maintain the two securitization models and distinct the securitization models that Fannie and Freddie have for multifamily loans. So I see the merging of those two enterprises together into one common platform as exceedingly remote.

[Henry Coffey, Wedbush]

Great, thank you very much.

[Willy Walker, Chairman and Chief Executive Officer]

Thanks, Henry.

[Operator]

Our next question will come from Jason Weaver with Compass Point. Go ahead.

[Jason Weaver, Compass Point]

Hi, good morning, and thanks for taking my question. I’m just trying to close in on the asset management outlook as it pertains to AUM goals. Can you tell us the targeted size for JCR Fund V and what other plans are in the pipeline for further funds?

[Willy Walker, Chairman and Chief Executive Officer]

Good morning, Jason. Thanks for joining us. We haven’t – we are out marketing JCR Fund V – can I tell what the cover is on that?

[Steve Theobald, Chief Financial Officer]

Met with the target.

[Willy Walker, Chairman and Chief Executive Officer]

Yes. So we’re looking to raise $250 million, Jason, into JCR Fund V and looking at a first close quite soon and then have some great commitments for that fund, and then as it relates to how we continue to grow the business, what comes on Fund VI and do we go out and acquire other either fund platforms or actual portfolios? And that is still TBD. What we wanted to kind of give investors an update on is we established that goal back in 2016 with no fund management business. It took us 2016 and 2017 and a little bit of 2018 to find a company to acquire. We’re thrilled that we’ve acquired JCR and have a really solid platform, but achieving that $8 billion to $10 billion goal barring some opportunity that we don’t see right this moment, we probably don’t achieve that goal by the end of 2020. But as I tried to say, we’ve got a great platform that we can start to build upon, and given that JCR had $750 million of AUM when we acquired them and we’re now at $1.06 billion with the combination of our Blackstone business as well as what’s at JCR, the growth is significant.

[Jason Weaver, Compass Point]

All right, thank you. And on the same subject regarding 2020 goals, do you have any expectations of a number of new brokers you’re looking to add in investment sales near term?

[Willy Walker, Chairman and Chief Executive Officer]

We haven’t put that out there. I would just say that the market is in no way settled right now. So there is still a significant amount of opportunity for us to continue to build off of the Q3 momentum and bringing on additional talent to our platform. As I tried to underscore in my comments, we really do have a very unique market positioning today and that is paying dividends with people who want to really be a part of the growth of a firm that has big company capabilities but there’s touch and feel of a small company. And so I think that we will continue to benefit from our market positioning and also benefit from the recruiting we’ve done because every time we add some under the platform and they join W&D and they see how productive they can be on in a company that is such a great place to work, that momentum just builds upon itself.

[Jason Weaver, Compass Point]

Okay, thank you. I’d also say congratulations on another strong quarter.

[Willy Walker, Chairman and Chief Executive Officer]

Thank you.

[Steve Theobald, Chief Financial Officer]

Thanks Jason.

[Willy Walker, Chairman and Chief Executive Officer]

Thanks for being on.

[Operator]

Our next question is a follow-up from Jade Rahmani with KBW.

[Jade Rahmani, KBW]

Thank you for taking the follow-up. In terms of the affordable component of W&D’s business, does it line up with the 37.5% target that the FHFA has put out?

[Willy Walker, Chairman and Chief Executive Officer]

In what sense line up? We have, as Steve said, Jade, we’re a very big originator of manufactured housing, which typically qualifies as affordable. We have our HUD business which we saw some pretty significant growth in the quarter and that is all affordable business that we’re doing on the HUD side and many opportunities there come both into HUD as well as into Fannie and Freddie, and we also have specific bankers in the affordable space who bank a lot of the affordable housing developers and owners. So I guess if you’re saying, do we have bankers and brokers who focus on that segment of the market? Yes, very much so, and so we see big opportunity there. I would also say that our small balance lending operation as well qualifies in the affordable space, and we’ve, as you know, brought on a team about a year ago now and they’ve hit the ground running in 2019. And we see an opportunity for significant growth there as well.

[Jason Weaver, Compass Point]

I guess the question is, is 37.5% of W&D’s GSE origination volumes in the affordable category?

[Willy Walker, Chairman and Chief Executive Officer]

I don’t have that of top of my head. I’m looking across the table, I don’t have – we could – I don’t know the answer to that question, Jade.

[Jade Rahmani, KBW]

Okay. In terms of the 4Q outlook, do you expect – should we expect an increase in gain on sale margins as a result of the pullback that the GSEs had? I think they widened their pricing and that could be a benefit to gain on sale margins. Or would gain on sale margins decline from 3Q levels because of the mix shift toward more brokered business?

[Willy Walker, Chairman and Chief Executive Officer]

As you know, we don’t – what we’ve given is a range there and the range has been 150 basis points to 170 basis points. As you saw in Q3, we came in at 162 basis points, which was up 12 basis points from Q3 of 2018, and I would not read anything more into it in the sense that we didn’t change the range. 162 basis points on Q3 is a very healthy number, and Steve didn’t modify the range of 150 basis points to 170 basis points. So if you’re building a model, I wouldn’t go outside of that range for Q4, but to exactly all the points you just put in there, there are lot of moving parts here, as it relates to what percentage of our volume is Agency, where the pricing on specific Agency loans and then what’s the volume on the non-Agency brokered volume? So, the range is 150 basis points to 170 basis points. We haven’t changed it and so wherever you want to pick your point in that range, you’re probably somewhere within very close to where we’ll be.

[Jade Rahmani, KBW]

Okay, just a technical question on the Fannie Mae risk sharing side. In terms of capital that you have the post, that represents the first 5% of loss that you would eventually have to absorb if there were losses. Is it just the pledged securities that you post, which I believe is around $120 million?

[Steve Theobald, Chief Financial Officer]

That’s right. Jade, I mean, there are minimum net worth requirements and minimum liquidity requirements associated with the business, but the specific set aside is that pledged security account, which is essentially Fannie’s collateral against our guarantee.

[Jade Rahmani, KBW]

And is there any risk of that requirement increasing in what the FHFA has considered?

[Steve Theobald, Chief Financial Officer]

This is a – there is a provision in the Fannie documents that they can look at it at least annually to assess. To my knowledge, there is no move to increase those requirements at this point.

[Jade Rahmani, KBW]

Okay.

[Steve Theobald, Chief Financial Officer]

The right question is, is it a risk? It’s always a risk, but there is nothing happening right now to suggest that that risk is happening.

[Willy Walker, Chairman and Chief Executive Officer]

And with the losses or lack thereof in this space, I’m hard pressed to think that that’s a hot-button issue for either the regulator or Fannie at this point.

[Jade Rahmani, KBW]

Okay, fair enough.

[Willy Walker, Chairman and Chief Executive Officer]

We talked about, just real quick, Steve gave the data point. Our average LTV in Q3 was 68% and our average debt service coverage 1.47 times in our Q3 lending book. We are not out as over our skis nor or any of our competitor firms as it relates to the loans that we are putting out with Fannie or Freddie at this time.

[Steve Theobald, Chief Financial Officer]

Yes. If anything, given the loss history, I would argue that we’re way over collateralized at the moment.

[Jade Rahmani, KBW]

In terms of M&A, I often get asked about potential mergers, acquisitions for Walker & Dunlop, and I was wondering if you think it could ever make sense to combine with a REIT or elect a REIT designation which Arbor Realty, your smaller competitors has.

[Willy Walker, Chairman and Chief Executive Officer]

I’d say a couple of things. First of all, as it relates to combinations, we clearly have been the net beneficiary of our size and scale in this marketplace, given the HFF JLL merger and what’s happened after that. So the idea of – we’re very well positioned in the market today, Jade, in our current form and size. As it relates to a mortgage REIT, whether it be a public or private REIT, that would be a source of funding that we would be able to use very effectively. We have clearly in the past looked at that as something that we might do. And so, who knows, I mean, in the sense that we’re constantly looking for the ability to raise additional capital and given our success at creating a platform to deploy it.

[Steve Theobald, Chief Financial Officer]

But I think to be clear, that said, we would love to manage REIT, as opposed to transforming our company from a C corporation into a REIT, Jade. I think as we’ve looked at this on multiple occasions in the past and I think two things that don’t really work that well for us. One, I think a not insignificant amount of our revenue is not good REIT income and so you wouldn’t gain all of the tax efficiencies that you might as a REIT. And secondly, our success has been driven by the fact that we’ve been able to reinvest our capital into future growth of the company. And obviously in a REIT model, your dividend indecipherable all of that capital to shareholders and having to you to borrow or raise new equity in order to continue to grow and that’s just not a model that we think is the right one for us over the long run.

[Jade Rahmani, KBW]

Would there ever be a consideration of carving out some portion of the MSR portfolio, which is very REIT like in terms of consistency of cash flow and contributing that to a REIT structure?

[Willy Walker, Chairman and Chief Executive Officer]

We’ve looked at that in the past I think given the requirements of the agencies. That’s not really feasible for us unless you become a REIT.

[Jade Rahmani, KBW]

And then just lastly, I guess a related question, in terms of the platform, have you or would you consider Property Management or other landlord-centric services as a way to create deeper touch points and potentially leverage off the network that you’ve built with those relationships, in order to also diversify the company’s revenue streams?

[Willy Walker, Chairman and Chief Executive Officer]

Yes, I would say, never say never. But that is clearly not in what our mission statement says today. We want to be a commercial real estate finance company. We are a commercial real estate finance company, we want to be the premier one, and those are real estate services. And we have been very definitive in saying we are not a real estate services company, we are real estate finance company. So all areas that we have looked at in the past, all interesting as it relates to customer touch points, but we feel really good about the strategy and the people we’ve added to the platform and our growth opportunities and our given space now for the next several years. And so I’d reiterate, never say never, but that’s clearly not the strategy today.

[Jade Rahmani, KBW]

Thanks very much for taking the questions.

[Willy Walker, Chairman and Chief Executive Officer]

Thank you, Jade.

[Operator]

And there are no further questions at this time, so I will turn it back to speakers for closing remarks.

[Willy Walker, Chairman and Chief Executive Officer]

Great. Fantastic Q3. Many thanks to all of you who joined us on the call this morning and I hope you have a great day. Bye-bye.

[Operator]

This does conclude today’s program. Thanks for your participation. You may now disconnect.