Walker & Dunlop Inc

NYSE:WD

Earnings Call Transcript 2021-Q3

[Kelsey Montz, executive]

Good morning, everyone. I'm Kelsey Duffey, Vice President of Investor Relations at Walker & Dunlop, and I'd like to welcome you to Walker & Dunlop's Third Quarter 2021 Earnings Conference Call and Webcast.

Hosting the call today is Willy Walker, Walker & Dunlop Chairman and CEO. He is joined by Steve Theobald, Chief Financial Officer. Today's webcast is being recorded and a replay will be available via webcast on the Investor Relations section of our website. [Operator Instructions]

This morning, we posted our earnings release and presentation to the Investor Relations section of our website, www.walkerdunlop.com. These slides serve as a reference point for some of what Willy and Steve will touch on during the call.

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, executive]

Thank you, Kelsey, and Good morning, everyone. Walker & Dunlop's ongoing investments in people, brand and technology have fundamentally changed our competitive positioning in the commercial real estate industry. Our third quarter performance reflects the continued diversification of Walker & Dunlop's services and capabilities that is strengthening our business and our financial results.

For the second consecutive quarter, we closed record debt brokerage and property sales volumes, and in Q3, unlike in Q2, we had very strong financing volumes with the GSEs, the combination of which boosted our Q3 total transaction volumes to a record $18.5 billion, up 120% from the third quarter of 2020. $5.9 billion with the GSEs in Q3 was more volume in one quarter than we originated during the first 6 months of the year.

As you can see on this slide, the 120% increase in transaction volume lifted total revenues by 40% year-over-year to $346 million and generated diluted earnings per share of $2.21, up 33% from the third quarter of last year. The continued strength in the cash-generating components of our business drove record adjusted EBITDA of $72.4 million, up 60% from $45.2 million in Q3 of 2020.

While our growth year-over-year is great, our sequential growth from Q2 of this year is also fantastic, with revenue growth of 23%, diluted earnings per share growth of 29% and adjusted EBITDA growth of 9% over last quarter. And we delivered all of this terrific growth while announcing the acquisition of Alliant Capital, the largest acquisition in our history and continuing to invest in people, brand and technology to achieve our long-term strategic growth plan and titled the Drive to '25.

The core objective of the Drive to '25 is to double our revenues from $1 billion to $2 billion in 5 years by growing every facet of our business dramatically. Our progress towards the Drive to '25 only 9 months in is fantastic. Q3 debt financing volume of $13 billion, up 82% from Q3 2020, and year-to-date volume of $31 billion, up 32% from the first 3 quarters of 2020, have us well on pace towards our 2025 goal of $65 billion.

As you can see on the left side of this slide, our growth in 2021 reflects the diversification of our platform, with our capital markets and bridge lending volumes surging over historic levels, up 278% from Q3 '20 and up 111% from Q3 2019 on a combined basis.

The right side of this slide shows the growth in multifamily property sales, which remained exceedingly strong in the third quarter. Our team closed a record $5.2 billion in sales volume, up 373% from Q3 2020 and up 224% from the third quarter of 2019.

Year-to-date, we have closed $9.9 billion of property sales volume, up 204% from the same period last year and up 192% from the first 3 quarters of 2019, reflecting the strength of our team and the W&D brand in the market. We are incorporating Zelman's research into our marketing materials and applying our proprietary database, Galaxy, to give our team both greater insights and the ability to uncover new sales opportunities.

With $9.9 billion of year-to-date transaction volume and a very healthy Q4 pipeline of over $6 billion, Walker & Dunlop investment sales is well on track to achieving the Drive to '25 goal of $25 billion in annual multifamily property sales.

We originated $6.4 billion of Fannie, Freddie and HUD originations, resulting in a year-over-year increase in MSR revenue of $28 million. Agency originations comprised 34% of our total transaction volume in Q3 2021, down from 65% in the third quarter of last year when their countercyclical capital played its designated role during the pandemic.

Due to the strong growth in debt brokerage and property sales volume year-over-year, as you can see on this slide, our Q3 revenues not only grew by 40% from $247 million to $346 million, but cash revenues also grew from 68% of revenues to 74% of revenues, resulting in EBITDA growth of 60% on the quarter. We expect this trend to continue as revenues from property sales, debt brokerage, asset management, servicing and appraisals grow faster than our MSR income from agency lending. Yet make no mistake about it, we will continue to grow our core lending business by adding exceptional bankers and brokers to our team.

We had a great quarter expanding our multifamily small balance lending business. We continue to further automate the underwriting and closing processes, and our differentiated product is gaining traction in the market. We grew loan volume from $96 million in Q3 of last year to $162 million this year, a 69% increase, and we will soon launch our new small loan customer experience powered by TapCap technology that we believe will transform the SBL customer experience. This is a very exciting part of our business, where we have the people, brand and technology to scale dramatically and achieve our Drive to '25 goal of $5 billion in SBL originations per year.

Our Apprise platform, which we formed 2 years ago with JV partner GeoPhy, is using technology to disrupt the multifamily appraisal market. Apprise has built out a national appraisal footprint and is using technology solutions to make our products faster and better than the competition. A year ago, Apprise performed 97 appraisals in Q3 and grew that to 665 appraisals in Q3 this year, up 586%. We expect Apprise to be a great stand-alone business, but also see significant opportunities to use this valuation tool to make our lending and property sales businesses more competitive.

The acquisition of Alliant Capital, which is expected to close later this month, is a wonderful move for W&D. We will immediately become the sixth largest syndicator of low-income housing tax credits in the United States and a market leader in the affordable housing industry with expertise in lending, development and tax credit syndication. We have been a large affordable housing lender for years, having originated $8 billion of affordable housing loans in the first 3 quarters of 2021.

To establish an affordable housing powerhouse with the combination of Alliant and Walker & Dunlop, we have asked Sheri Thompson, who has had tremendous success scaling our HUD business, to run our affordable lending platform and partner with Alliant CEO, Shawn Horwitz, to match W&D's lending capabilities with Alliant's tax credit syndication capabilities to bring unified and comprehensive capital solutions to our clients.

Our transaction volume, revenue growth and profitability in Q3 are reflective of the team we have built, the brand we have developed and the technology we have implemented. We have diversified and scaled W&D to a point where our biggest competitors are the world's largest banks and services organizations. Yet, we only have 1,200 people with over $1 million of revenue per employee. So as we scale our lending business, we will continue to take share from the big banks, which dominate the small loan market. We will continue to gain share in debt brokerage and property sales from the large services firms. And yet, underlying Walker & Dunlop's dramatic growth and profitability is our $114 billion servicing portfolio that kicks off cash very much like CoStar's data subscription business.

And if our emerging digital businesses of small balance lending and appraisals continue to scale, we will disintermediate the incumbent lenders and service providers. What should be evident is that W&D sits at the crossroads of finance and service with incredible people, a great brand and innovative technology, and we plan to take advantage of that positioning.

I will now turn the call over to Steve to discuss our financial results in more detail. Steve?

[Steve Theobald, executive]

Thank you, Willy, and good morning, everyone. Our third quarter financial results further demonstrate the diversification of our platform and our team's ability to successfully meet our clients' needs with our broad capabilities and differentiated people, brand and technology strategies.

Investor appetite for commercial real estate assets, particularly multifamily, continues unabated, and our team executed extremely well within a strong market environment to deliver third quarter total transaction volume of $18.5 billion, up 120% from Q3 of '20.

In the third quarter, not only did we close record debt brokerage and property sales volumes, but we also saw Fannie Mae and Freddie Mac return to the market in a big way, which enabled us to provide our multifamily clients with attractive GSE financing options and originate nearly $6 billion of GSE loans.

As shown on Slide 6, year-to-date transaction volume of $41 billion is up 53% over the same period last year, reflecting our ability to leverage WD's strong brand, broad capital solutions and innovative data analytic tools to attract new clients and grow volumes amidst the backdrop of the strong market recovery we have seen throughout 2021.

We generated near record total revenues of $346 million in Q3, bringing total revenues to $852 million for the first 3 quarters of the year, an increase of 16% over the first 3 quarters of 2020. Origination fees, property sales brokerage fees and cash servicing fees were $228 million in the quarter, an increase of 51% over Q3 of last year, driven by the strong growth in transaction volumes and the significant amount of mortgage servicing rights we recorded in 2020 that are now translating into cash servicing fees.

As you can see on this slide, the servicing portfolio continues to grow, ending the third quarter at $114 billion and with a weighted average servicing fee of 24.6 basis points. The growth in our cash revenue streams drove adjusted EBITDA to $72 million in Q3 and $200 million for the 3 quarters of 2021, up 60% and 27%, respectively, over the same periods last year. At the same time, revenues from recording mortgage servicing rights increased 15% from Q3 '20 and 45% from the previous quarter of this year due to the jump in GSE originations this Q2, all of which will drive growth in our future cash servicing fees.

Personnel as a percentage of revenues was 49% for the quarter, up from 46% in Q3 '20, but down slightly compared to 50% in Q2 '21, despite a sequential increase in commissions expense. Year-to-date personnel as a percentage of revenues of 48% reflects the continued significant investments we're making in new business initiatives, technology capabilities and our emerging business areas on our path to achieving our Drive to '25 objectives, all of which should propel revenue growth and margin expansion in future years.

During Q3, we also recorded onetime professional fee expenses of $2.9 million related to the Alliant transaction, which reduced our third quarter operating margin of a full percentage point to 27%, bringing year-to-date operating margin to 28%. Finally, Q3 return on equity was 22%, bringing ROE to 20% for the first 9 months of the year, within our annual target range of 19% to 22%.

Our $114 billion servicing portfolio continues to perform extremely well. We have no pandemic related defaults and believe that the fundamentals underpinning the multifamily industry, including continued healthy rent growth figures, should support continued strong credit performance of the portfolio. During the third quarter, we recorded additional provision for credit losses of $1.3 million, driven solely by growth in the at-risk portfolio.

At the end of August, we announced that we entered into a definitive agreement to acquire Alliant Capital and its affiliates. Under the terms of our acquisition agreement, we will acquire Alliant at a total enterprise value of $696 million. The purchase consideration will be a combination of cash, assumption of certain Alliant's debt, $90 million of WD common stock and the potential for another $100 million of cash tied to an earn-out over the next 4 years. Based on a projected closing in mid-November 2021, Alliant's debt will have an outstanding balance of $145 million, which will make the cash portion of the purchase price paid at closing $361 million.

We have the commitments in place to refinance our senior secured term loan at $600 million, subject to closing the Alliant transaction. We will use the proceeds to repay our existing $292 million term loan and to fund the cash portion of the Alliant acquisition.

The debt raise, which was the first ever SOFR-based leverage loan to hit the market, was well oversubscribed and priced at a spread of 225 over 1 month term SOFR plus a 10 basis point credit spread adjustment, with a floor of 50 basis points and an original issue discount of 99.75%, well inside of the initial price target. The strong interest in the debt and excellent execution is a testament to the strength of our business model and track record as a company since first entering the debt markets in 2013.

We are targeting to close the Alliant transaction later this month. Based on a mid-November closing, we expect the transaction to have a positive but immaterial impact on fourth quarter diluted earnings per share. While a majority of the costs associated with the transaction were recognized in the third quarter, we do expect to incur additional integration and closing costs in Q4, including a onetime write-off of deferred issuance costs related to our existing term loan of approximately $2.7 million, which will offset a portion of the net income expected from Alliant in Q4.

As outlined on Slide 8, in 2022, we expect Alliant to generate $90 million to $100 million of revenues and $0.45 to $0.60 of diluted earnings per share. This EPS estimate includes the costs associated with both the incremental debt service payments from the $600 million term loan and the assumed securitization debt from Alliant. We expect Alliant will generate approximately $60 million of adjusted EBITDA in 2022, providing a meaningful boost to the strong adjusted EBITDA growth we are seeing from our core business. These estimates do not include synergies that we expect to realize from new opportunities to refinance or sell the underlying properties in Alliant's funds.

For the full year, we are on track to deliver operating margin and return on equity within our annual target ranges. We are also affirming our expectation for flat to 5% percent growth in diluted earnings per share.

As reflected in our 27% year-to-date growth in adjusted EBITDA, we are well on track to achieve our annual goal of double-digit growth. The surge in adjusted EBITDA we have seen in 2021 is indicative of the strong performance of the cash-generating areas of our business, which are also expected to be the high-growth areas over the next several years.

In mid-October, the FHFA released the 2022 GSE scorecard, which increased the multifamily lending caps for Fannie Mae and Freddie Mac to a combined $156 billion from $140 billion in 2021, an 11% increase in total lending capacity. Like 2021, 50% of the GSE's volume must be mission-driven financing on affordable units, which aligns directly with the strategic rationale behind our acquisition of Alliant.

The scorecard issued by FHFA acting Director, Sandra Thompson, is positive for multifamily in that it recognizes the forecast for an increase in the size of the multifamily financing market in 2022. The MBA is projecting that the multifamily market will grow from $360 billion last year to $409 billion this year. Their estimate for 2022 was released in August and puts the market at $421 billion.

However, just last week, Freddie Mac issued their own forecast that projects the multifamily finance market at $476 billion in 2022. This is significantly higher than the MBA forecast and consistent with expectations for continued increases in property values and NOI next year.

Year-to-date in 2021, we have maintained our leading presence in the multifamily market due to our originations with both the GSEs as well as life insurance companies, banks, debt funds and other providers of capital to the multifamily industry. $156 billion for the GSEs is significant lending capacity that provides us with the opportunity to increase our GSE lending in 2022, while the overall growth in the market will provide additional tailwinds for growing our overall financing volumes.

We ended the quarter with $318 million of cash on the balance sheet. During Q3, we closed the acquisition of Zelman & Associates and continued to actively invest in people, brand and technology, including the soon to be announced rollout of our new automated small balance lending platform.

Yesterday, our Board of Directors approved a quarterly dividend of $0.50 per share payable to shareholders of record as of November 19, 2021. After closing the acquisition of Alliant during the fourth quarter, we expect to have somewhere between $275 million and $300 million of cash on the balance sheet. At the same time, our profitable business model continues to generate strong cash flows, supporting the ongoing growth of our dividend over time and giving us financial flexibility to pursue additional strategic investments that align with our Drive to '25 strategy.

We feel very good about our current financial position and our ability to continue generating the strong financial results our investors expect as we also make meaningful progress towards our long-term objectives.

Thank you for your time this morning. I'll now turn the call back over to Willy.

[Willy Walker, executive]

Thank you, Steve. I think it's appropriate to look at W&D's growth and development as a public company in 3 phases: gaining scale from 2010 to 2015, diversifying from 2015 to 2020, and going digital from 2020 to 2025. We went public in 2010 as a small family-owned mortgage finance company. The success of our business rested on leveraging our partnerships with Fannie Mae, Freddie Mac and HUD to gain scale in the multifamily lending arena.

As you can see on this slide, during that period of scaling the platform from 2010 to 2015, we grew revenues from $122 million to $468 million, EBITDA to $124 million and gained the scale and financial success to begin diversifying.

In 2015, we began investing heavily in our debt brokerage platform by acquiring small brokerage firms and hiring brokerage talent across the country. We also entered the multifamily property sales business with the acquisition of Engler Financial.

As you can see here, the results of the diversification stage were incredible, more than doubling revenues from $468 million to $1.1 billion and driving EBITDA up to $216 million.

So having successfully scaled and diversified our business, we now enter the digital era. The financial drivers of the digital era are spelled out in our Drive to '25 business plan and include taking revenues up to $2 billion and EBITDA to over $500 million.

But what exactly does digital mean in the commercial real estate finance and services industry? We had 203 bankers and brokers at Walker & Dunlop in Q3 of 2020 and increased that number by less than 10% to 222 today, yet due to the market recovery and use of technology, total transaction volume grew by over 100% from $8 billion in Q3 of last year to $18 billion in Q3 of this year. Nothing beats a strong macro environment, but it is clear we are doing more business with existing and new clients due to our use of technology.

The proof point we have used over the past 6 quarters is the number of new customers technology has helped us acquire and how many refinancings are new loans, which are largely identified by our technology rather than simply financing -- refinancing existing loans in our portfolio. And in Q3 2020, the proof points are that 27% of our total transaction volume was done with new clients to Walker & Dunlop and 76% of our refinancings were new loans to our portfolio. We can't win and execute this business without fantastic bankers and brokers, but our existing technology continues to generate dramatic transaction volume and revenue growth.

Beyond growing our existing debt and property sales businesses by seamlessly integrating our people, brand and technology, we will grow our digitally-enabled businesses of small loans and appraisals. Today, we have national platforms to originate and underwrite small loans and appraisals using significant amounts of technology to find, underwrite and close transactions faster and more efficiently than the competition. These businesses have the ability to scale fast and generate high operating margins, which will significantly contribute to achieving the Drive to '25.

While we continue to invest in people, brand and technology to scale our existing financing and servicing businesses along with our new digital businesses, we will soon close on the acquisition of Alliant, which brings to W&D $14 billion in assets under management, a scaled tax credit syndicator and 120 talented professionals with deep expertise in the affordable housing industry. Alliant will be integrated rapidly to combine their tax credit syndication expertise with W&D's affordable debt capabilities. We will also take W&D's significant investment in technology and make Alliant more efficient and insightful to their clients.

To fund the Alliant transaction, as Steve mentioned, we will refinance our term loan. I want to thank Steve and his team for their incredible work on what will be the first ever SOFR-based leveraged loan. The success of the offering allowed us to drive down pricing and is truly a groundbreaking achievement by our team and partners at JPMorgan.

Our brand continues to expand in lockstep with our success. The Walker Webcast has accumulated 2.6 million total views and on average over 54,000 people are watching it weekly. We recently hit record total views on one webcast with Peter Linneman at 114,000 views, with several other guests exceeding 100,000. The huge success of the webcast has propelled our brand across channels, contributing to a 48% year-over-year increase in media hits in the third quarter alone, positioning Walker & Dunlop as a thought leader in the industry differentiates us in the market and helps grow our brand and business.

I would like to thank all of my Walker & Dunlop colleagues for another fantastic quarter and all your amazing work. We are extremely well positioned to continue executing on the Drive to '25, investing in people, brand and technology and continuing to build a company that isn't just a specialty finance company, isn't just a real estate services firm, but as a technology-enabled enterprise focused on providing capital and solutions to our clients faster and more efficiently than the competition.

I want to thank everyone for joining us this morning, and I'll now ask Kelsey to open the lines for any questions.

[Kelsey Montz, executive]

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

[Henry Coffey, analyst]

Congratulations on an amazing quarter. I guess I don't quite know where to begin since so many things seem to be working in the right direction. But when you look at the Alliant transaction and you look at the competitive marketplace there, how many of your "large players" in that space bring to the table both the ability to do tax-related investing and origination? How common is that to have that combination?

[Willy Walker, executive]

There are a couple of people in the market, Henry, who do that, but we have a lot of confidence that the combination of Alliant and W&D will make our proposition or offering into the market extremely compelling. And if you look at the list of just the tax indicators, I think if I showed it to you, you probably would identify all 10 names on it. But if I showed it to the average person walking down the street, they might know 2.

And so it's a very fragmented market. It does not have large players in it. And as we have successfully done in the multifamily loan space and lending space -- we already have that league table, Henry, kind of, if you will, stuck to the wall. And as we have done very successfully in other businesses, we look at the league tables, we look at our market share and we start to march it up.

And so Alliant as the sixth largest tax credit syndicator in the country has a whopping 3% market share of total syndications. So the ability for us to go from 3% to 6% to 9% and do in that space what we've done in the multifamily lending space is exactly what we plan to do.

[Henry Coffey, analyst]

So it's fair to say that there are other teams out there that might work their way to WD as happened in the multifamily loan business?

[Willy Walker, executive]

Just one quick thing on that, Henry, which I would just add is that if you look at the explosive growth in our investment sales business, that is all due to the team that we have built over the last 5 years and going out and getting the very best people. We have very clearly hit a tipping point there, where the very best multifamily investment sales brokers in the country are joining Walker & Dunlop's platform because they see it as the very best in the country. It took a long time to build up that reputation. And obviously, we hope we will have the similar type of success in this line of business.

[Henry Coffey, analyst]

And then as -- you're looking at the brokered business. How much of the activity was outside of the core multifamily segment and how much of it was just multifamily?

[Willy Walker, executive]

That's a good question. Steve, do you have the percentage breakout of multi versus non-multi in capital markets?

[Steve Theobald, executive]

Yes, I don't have that in front of me, Willy, but anecdotally, this was a very strong quarter for multifamily. And Henry, historically, we've been -- 80% to 85% of our debt financing volume is multi, and I think that this quarter is within that range.

[Henry Coffey, analyst]

We follow the residential market, of course, as do many of my colleagues. That market has its own cyclical characteristics. It sounds like from just looking at the forecast that '22 was another up year. Is -- what is -- what in your mind is driving that? And how does that impact your outlook for 2022?

[Willy Walker, executive]

So I think one of the interesting things, Henry -- you probably watch CoStar. And what I found to be very interesting about CoStar's quarter was that -- look, their core data business continues to chug along and they obviously dominate the commercial real estate data space. But where they showed weakness was in Apartments.com. And the reason they showed weakness in Apartments.com is because all the apartment buildings in the United States are full. And so owners of those buildings don't need to advertise on Apartments.com and that then led Costar to bring down their Q4 expectations on Apartments.com.

I think that is emblematic of -- all you have to do is to look at the multifamily REITs and their Q3 rent increases, in many instances 11%, 12%, 13% quarter-over-quarter. The fundamentals of the multifamily market are extremely strong right now. There is supply that is going to be coming online over the next 12 months. But right now, the dynamics of it are is that there are far more renters looking for a place to live than there are available apartments. That is driving rents up. That is driving Apartments.com listings down. And it is setting up for a very active 2022 as it relates to aggregate origination volumes.

As Steve mentioned, there's quite a difference between what the Mortgage Bankers Association and Freddie Mac's most recent projection for the 2022 multifamily financing market. But first of all, anything over $400 billion is a huge market. But adding another $30 billion on the top of the MBA estimate, which is what Freddie did last week, just shows the growth and opportunity there.

And I would say it's very important to remember that for Walker & Dunlop's extremely strong positioning with Fannie and Freddie and HUD -- as we all know, Q1 and Q2 of this year, Fannie and Freddie were not nearly as significant players in the market as other sources of capital. And as everyone saw in Walker & Dunlop's financials, we were able to take that other capital and put it to work in the multifamily industry. And so while we have a great scorecard for Fannie and Freddie for 2022, we also have an incredible team across the country that has access to lots of other capital that will fill that gap between what Fannie, Freddie and HUD can do and what the market is going to demand in 2022.

[Henry Coffey, analyst]

Great. Congrats on a great quarter.

[Kelsey Montz, executive]

The next question will be coming from Jade Rahmani of KBW.

[Jade Rahmani, analyst]

Curious about your thoughts on what's driving cap rate compression in the multifamily space.

[Willy Walker, executive]

Capital. Just straight up capital, Jade. It's not -- as Peter Linneman has said many times on both the Walker Webcast as well as in his published work -- he's done decades of research that say that everyone thinks that cap rates are tied to interest rates. They're not. They're tied to capital flows. And right now, what we are seeing in the multifamily market is an unprecedented amount of capital flows.

There is a huge amount of equity capital trying to get deployed into multifamily right now, and we're seeing buyer after buyer take down very large acquisitions, all cash. We're right now in -- we've just awarded a deal here in Denver. It's a 300 -- it's going to sell for $315 million, $320 million, and it's going to go down all cash. And so there is a huge amount of cash in the market, a huge amount of equity capital. And that is what's driving cap rates.

[Jade Rahmani, analyst]

And do you think that for 2022 the outlook for growth in transaction volumes overall is still robust? You expect growth over 2021 for the market?

[Willy Walker, executive]

There is nothing that we are seeing that says that we would not see growth in 2022 over 2021 given the dynamics of the market right now.

[Jade Rahmani, analyst]

Just on the inflation and labor constraints as well as supply chain, any impacts you're seeing on your business? Some thoughts that come to mind, is potential -- wage inflation, potential staffing constraints and also supply chain impacts that could impact deals you do with real estate developers or perhaps on the bridge lending side, those transitional capital improvement projects?

[Willy Walker, executive]

So I had a long debate with one of Walker & Dunlop's Board members yesterday at our Board meeting about inflation and my view that it's more transitory than permanent and his view that it is here and is staying for a long time. And I have to say after Chairman Powell did his press conference yesterday saying he reinstates his transitory position, I had a fun time showing that to my Board member, who still didn't believe it.

Jade, look, you know more than I do as it relates to the fundamentals of the data and what the outlook is as it relates to inflationary pressures. We've been pretty consistent at saying that rates will stay relatively low for as far as we can see. And that is just due to a yield starved world where sovereign debt -- real sovereign debt yields are still negative around the globe and people view U.S. sovereign debt as a great place to be investing.

And while we've obviously seen the 2-year move up significantly and the spread between the 2-year and the 10-year tighten over the past several weeks, we're still sitting in the mid-1.50s to 1.60% range on the 10-year. And as you know, from a historic standpoint, that's still incredibly cheap capital.

And so I think we will continue to see a huge amount of transaction volume and I think we will continue to see commercial real estate as something of a safe haven for global capital. If you think about investing in multifamily -- you asked the question about cap rates. Yes, cap rates are low. But cap rates right now -- you can still buy a multifamily property. You can put positive leverage on that multifamily property and still carry that property and have the opportunity to have 2 things happen: one, push rents; and two, potentially sell it at a tighter cap rate than you bought it.

And so those 2 variables are making commercial real estate in the United States, and most particularly multifamily, an exceedingly attractive market for global capital to invest, which that is driving those capital flows and that is driving cap rates down.

[Jade Rahmani, analyst]

Okay. And then lastly, somewhat related, is just on the margin side. I've been impressed by -- with all the growth in the non GSE businesses, that margins have come in extremely strong. For example, we look at adjusted EBITDA margins came in at 28.2%, which would be industry-leading compared to commercial real estate brokers, and we were expecting 27%.

Post the closing of Zelman and the pending Alliant deal, do you anticipate margins to remain relatively consistent? Do you think that there's potential operating leverage? How are you thinking about the margin outlook?

[Willy Walker, executive]

I'll turn this over to Steve in a second. I'll just give you some really quick thoughts on it. The first one is, I appreciate you pointing out the health of our margins, particularly versus the competitive set. I would reinforce the fact that we are only 1,200 people at Walker & Dunlop going head-to-head against companies that are many, many multiples the size of our platform.

And one of the reasons why I think investors should have great confidence in W&D as it relates to maintaining both growth as well as profitability is that we start from a very small base and have the opportunity to invest in people and technology to grow our market share versus all of our big competitors that have lots of people. And as they implement technology, the outcome of that is, a, it's very challenging to get existing humans to change the way that they're doing what they're doing and to use the technology. And the other is, as efficiencies come, they will be challenged with having to lay off human capital.

And so I feel that they're sitting there with lots of people and lots of brand and lower margins. We have fewer people. We're applying more technology and we have the opportunity to grow and take market share. So I'd much rather be sitting where we are than they are. And I think that our growth and margins will be reflective of that.

Steve, you want to dive into that question a little bit deeper on your thoughts on overall maintaining of margins?

[Steve Theobald, executive]

Yes. I would echo what Willy said and add to that. In the near term, Jade, I wouldn't expect a significant change from a margin standpoint. I think -- as you know, we're continuing to make investments in growing the business. Adding Alliant is, I think, actually a positive. It's a -- the tax credit syndication business is a relatively high EBITDA margin business.

But to Willy's point, as we continue to make those investments in technology and drive efficiencies in the organization over time -- and I think this is laid out in our 5-year plan -- is I would expect margins to expand from here over the long run. But in the near term, I wouldn't expect much change.

[Kelsey Montz, executive]

Our next question comes from Steve Delaney of JMP.

[Steven Delaney, analyst]

You hear me now?

[Willy Walker, executive]

Yes.

[Steven Delaney, analyst]

That's fantastic. Congrats on a -- I'll extend my congrats to, as the others have, on a fantastic quarter. Willy, we've been seeing -- in the direct lenders earnings report everybody talks about an extremely healthy, vibrant market out there and CRE broadly, all property types, especially in multifamily. In your comments, you mentioned interim lending, and that's not an area that you've spoken about much in the last several quarters. So I'm just curious, when you look at that, are you seeing opportunities on a direct or joint venture basis? Or do you just see that as a brokered product that you're directing those bridge opportunities more to debt funds or other banks?

[Willy Walker, executive]

Sure, Steve. Great to have you on the call. So we mentioned it because it's grown dramatically from 2020 when we basically pulled back in that space almost completely just because of concerns about the credit markets during the pandemic. And so as I think you recall, we have a joint venture with Blackstone to do bridge loans in the multifamily space. That joint venture is doing a huge amount of business and has been a fantastic joint venture. I'm not a huge fan of joint ventures. And of all the joint ventures we've ever done, that one is a true success. And it's great to see the volume we're doing there.

I think the other thing to keep in mind, Steve, is this. There are, as you know, a huge number of debt funds trying to do both interim as well as permanent financing in the multifamily space today. We have been exceedingly disciplined from a credit standpoint in that product, if you will, to not be doing 80% LTV loans that are 2-year floaters on new entrants to the multifamily borrowing market, if you will.

And so the -- I just looked at the largest borrowers in our interim lending program and they are to a person -- our largest GSE borrowers. These are large institutional borrowers who need a bridge loan because they took down an asset and are waiting to raise the LP equity. There's some transitional reasoning on why they're going to take it down and stabilize it and then put permanent debt on it. But I won't go to actual names, but take my word for it, it's big institutions that are using that product from Walker & Dunlop.

And so I feel really good that it's not what I would characterize as looking at some of our competitors going high leverage with sort of smaller operators, where I think you can run into some problems on bridge lending. These are established borrowers and lower leveraged deals that we're doing, and it has been a huge value proposition for our origination teams to be able to offer that product to their borrowers on, if you will, transitional transactions.

[Steven Delaney, analyst]

Well, it's good to hear because it is somewhat of a frothy market. And while that raises -- that rising tide lifts all ships, I'm a little concerned that on the fringe we're going to see some problems as you suggest, Willy. So...

[Willy Walker, executive]

And the one quick thing I'd add there, Steve, is just this. Many of our competitors are CLO-ing all this paper. We are not. So if the CLO market seizes up to any degree and there's a lot that's going to sit on balance sheets. And so I'm not predicting that the CLO market freezes up anytime soon. I'm just saying that the way we're originating these loans, we're either holding them on Walker & Dunlop's balance sheet or they're going into the joint venture with Blackstone. And so our funding mechanism here is far more stable than many of the competitors out there that are using the CLO markets to sell the paper.

[Steven Delaney, analyst]

Yes. Good point. And my follow-up question would be on the 11% increase in the caps, the GSE caps from FHFA. I think, obviously, given the market, it had to go up. And it sounds ample, but then we have to caution ourselves that 50% of that must be affordable. So I'm wondering if we're not going to get into a situation where Freddie and Fannie fill up on the large loan segment there and borrowers are going to have to look elsewhere and -- whether that's the private CMBS market or whatever. It would seem to me that the GSEs -- that FHFA may be more flexible on the affordable if there's a market demand. But your thoughts on whether the FHFA would consider increase in the caps midyear if there was tremendous demand and whether that -- any increase might benefit the larger market as well?

[Willy Walker, executive]

Sure, Steve. So 2 quick things on that. One is, if we didn't have other capital sources to do our business and if all of our business was done with the big, what I call, brass and glass owner developers in major cities that are doing A class multifamily, I think what you just outlined would be a reasonably concerning scenario.

The bottom line on it is, is that W&D, a, has lots of other capital solutions to meet the needs of the brass and glass borrowers, and the second thing to it is that, that's not our traditional client base nor the types of properties that we fund.

As I mentioned in my comments, we've done $8 billion of affordable lending in 2021 alone, alone just this year. And so the affordable space is a space that we've done a tremendous amount of lending in. And so as the caps on the GSEs are focused increasingly on affordable, a, we have a client base that's focused there; b, we have a very strong track record; and C, we just made the largest acquisition in our company's history to partner and bring Alliant into Walker & Dunlop to further attack the affordable industry.

And you have to keep in mind of the fact that Alliant has partnerships in all of their developments with every major affordable developer and owner in the country. So not only is Alliant great to us that we have all the deal flow that Alliant has that's going to come out that we will either be able to refinance or sell, but beyond that, they're going to introduce us to a whole client base, many of whom we've never met before. And so clearly, we want as much flexibility for the agencies as possible to continue to meet all the needs of the market, not just the affordable part of the market.

But with that said, an expanded overall cap with the percentage that they have focused on affordability, I think, plays very well into Walker & Dunlop and our strengths and our client base.

[Steven Delaney, analyst]

Yes. And as you pursue your affordable initiatives, are you doing any work to try to explore the single-family rental market or the build-to-rent market apart from agency type executions?

[Willy Walker, executive]

Very much so. We have a dedicated team on SFR, BFR. I will tell you that having Zelman at Walker & Dunlop has been a huge help to us as it relates to all the research that they are doing in both single-family, SFR, BFR as well as multifamily, to be able to, if you will, analyze these 2 markets that have come together.

As you well know, Steve, the single-family market and the multifamily market have basically been 2 different worlds forever. To give you an example of that, at Fannie Mae, as you can imagine, I have personal relationships with tens of people, hundreds of people on the multifamily side, and other than the CEO of Fannie Mae, I know almost nobody on the single-family side. It's that kind of bifurcated. SFR, BFR brings these 2 worlds together. It brings Lennar from the single-family side in the SFR, BFR space and it brings lots of multifamily developers into the SFR, BFR space.

And so the melding of these 2 worlds is really exciting and to have the relationships and research that Zelman has developed over so many years has been a real value-add there. And then our team is doing deal flow and research that I know for a fact from a number of very, very large players in this space is very, very innovative and at a level that is far above the competition. And so very pleased with what we're seeing in the SFR, BFR space and the amount of financing we're doing there.

And by the way, just one quick thing. We're also doing sales in the SFR, BFR space. So the team we have here in Denver, they're listing a BFR asset right now. And so we are also in the investment sales space and the BFR in that vertical, if you will.

[Steven Delaney, analyst]

Everyone stay well.

[Willy Walker, executive]

Thanks, Steve.

[Kelsey Montz, executive]

Thanks, Steve. We have no further questions at this time. So I will turn the call back over to Willy for concluding remarks.

[Willy Walker, executive]

Great. Appreciate the questions from the analysts. I appreciate everyone joining us today. As I think it was Henry who said -- his words, "Amazing quarter." Really great work by everyone on the W&D team. Thrilled at all of the momentum we have gained, the strategy we put in place and the execution we're getting against that strategy.

Steve, thanks to you and your team. Kelsey, thanks to you. Great seeing both of you in California for our Board meetings and strategy meetings this week. And I wish everyone on this call a very, very happy Thursday and a great end to the week, and thanks again for joining us this morning. Have a great one.

[Steve Theobald, executive]

Thanks all.