Walker & Dunlop Inc

NYSE:WD

Earnings Call Transcript 2017-Q4

[Operator]

Good day and welcome to Walker & Dunlop's Fourth Quarter and Full Year 2017 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 Montz, Assistant Vice-President of Investor Relations.

The archived call is also available via webcast on the company's website. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions, following the presentation. [Operator Instructions]

It’s now my pleasure to turn the floor over to Kelsey Montz. Please go-ahead.

[Kelsey Montz, Assistant Vice-President of Investor Relations]

Thank you, Keith. Good morning everyone. Thank you for joining the Walker & Dunlop fourth quarter and full year 2017 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 this morning.

Please also note that we will reference the non-GAAP financial metric, adjusted EBITDA, during the course of the call. Please refer to the earnings release posted on our website for a reconciliation of this non-GAAP financial metric. Investors are urged to carefully read the forward-looking statements language in our earnings release. Statements made on this call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements describe our current expectations and actual results may differ materially. Walker & Dunlop is under no obligation to update or alter our forward-looking statements whether as a result of new information, future events, or otherwise. We expressly disclaim any obligation to do so. More detailed information about risk factors can be found in our annual and quarterly reports filed with the SEC.

With that, I will turn the call over to Willy.

[Willy Walker, Chairman and Chief Executive Officer]

Thank you, Kelsey and welcome everyone. Thank you for joining us today. As investors saw on the earnings release we put out this morning, Walker & Dunlop had a fantastic fourth quarter and 2017 like we started it. Explosive growth, continued execution of our strategic initiatives and strong profitability. We expanded our footprint and client base to grow our banking and brokerage [Ph] volumes across all capital sources and we generated record total transaction volume to produce the most profitable year in the company’s history.

$211 million in net income up 85% over $114 million last year. The team we have assembled, the brand we have established and the highly profitable business model we have built has allowed us to consistently outperform across all financial and operational metrics.

As you can see on slide three, total revenues of $712 million were up 24% over 2016 and put us well on our way to reaching our goal of generating $1 billion in annual revenues by 2020. Four years ago, on this same earnings call; we began telling investors that W&D would grow earnings per share by double digits on an annual basis.

Since that time, we have grown EPS year-over-year by 31%, 68%, 38% and 80%, that’s a 442% increase over the past four years. The 80% EPS growth this year is inclusive of $1.80 reimbursement of our deferred tax liability due to the Tax Cut and Jobs Act. Removing this onetime tax benefit we grew EPS by 30% between 2016 and 2017, the fourth straight year of 30% or better EPS growth.

Our commercial mortgage servicing portfolio surpassed $75 billion in January putting us well on pace to our goal of building a $100 billion servicing portfolio by 2020. As the servicing portfolio has grown so have the contractually obligated servicing revenue through a record of $176 million up 25% over last year.

The growth in cash origination fees, coupled with record servicing income pushed Adjusted EBITDA to over $200 million on the year, a 55% increase from 2016. If we look back to see what W&Ds EBITDA was when we went public in 2010 and realized that in seven years we’ve grown EBITDA ten times from $21 million to over $200 million. The strong profit and cash generating capabilities above business model should continue to drive growth and EBITDA over the coming years.

2017 total transaction volume of $28 billion was a record by a wide margin, with all-time highs in nearly every execution. As you can see on slide four, we have doubled the number of bankers and brokers at W&D since 2012 and during that period of time we have quadrupled our annual transaction volume. We originated close to $16 billion of financing with Fannie Mae & Freddie Mac drawing our total GSE originations by 41% year-over-year, far faster than our largest competitors in this space.

Our hard loan originations were up 54% year-over-year, topping $1 billion for the first time since 2013, a significant accomplishment. Our position for top of the league tables with Fannie, Freddie and HUD and reputation is one of the very best multi-family finance firms in the country. That’s broadened our client base, increased our access to deal flow and driven our financial results.

Capital markets originations at $7.3 billion were up 75% from last year, beating the previous annual record by over $3 billion. The acquisitions of Elkins mortgage at the end of 2016 and Deerwood Capital at the beginning of 2017 were home run transaction, but we acquired absolutely fantastic bankers and brokers that fit seamlessly into W&D and generated financial returns well above pro forma expectations.

Beyond the great success of our capital markets team and originating $7.3 billion in brokered loans, the same group originated $2.2 billion of financing for our Fannie, Freddie and HUD execution. To have explosive growth in our debt brokerage business, coupled with our $2 billion of incremental, higher margin agency business is exactly what we expect would happen when we became the best thing in our capital markets platform a few years ago.

Finally, we acquired Engler financial in 2015 to enter the multifamily investor sales business. We’ve been actively adding investment sales professionals to our platform and ended 2017 at a record $3 billion in total sales volume, an 18% increase over 2016.

We finished the year at the top of the GSE league tables, at number three with Freddie Mac and number with Fannie Mae. This is the fourth time in six years that we have been Fannie Mae’s largest multifamily lending partner; leaving one banker to come in Walker & Dunlop has become the Alabama of lending.

If you look at slide five, which shows the 2017 league tables, you can see that many of our closest competitors are firms with large investment sales business that feeds financing opportunities to their bankers. We are thrilled to have done $3 billion of investment sales last year, that we are still a small player in this phase relative to our peers. This shows that our consistent position at the top of the agency league tables is being known as a very best multifamily finance company in the country, and not because we enjoy the benefit of generating significant volumes from investment sales or other businesses.

This also presents us for the great opportunity to continue building our investment sales business and driving incremental deal flow to our financing business. Of our $25 billion of loan origination volume in 2017, 81% or $20 billion was on multifamily property. The average of the mortgage bankers association and Freddie Mac estimates with the size of the multifamily financing market last year was $281 billion.

As shown on slide six, using that average as the market size puts Walker & Dunlop's market share of total multifamily lending in the United States at 7.2% up dramatically from 5.2% in 2016. It is a testament to our bankers, brand and people that we are rapidly headed towards 10% market share in total multifamily lending in the United States.

Outside of Fannie and Freddie, we did $4.3 million of multifamily financing which like insurance companies, banks, HUD and on our own balance sheet, it is clear that even as we have established a dominant position with the GSE’s that the borrowing community views Walker & Dunlop as the expert in multifamily financing, regardless of the capital source.

Excluding multifamily, the Mortgage Bankers Association expects total financing volume for all of their commercial real estate property pipes to have been $246 million in 2017. We did $4.7 billion of non-multifamily financing in the year or just under 2% market share.

Clearly as we continue to scale our multifamily business, we have almost unlimited opportunity to grow our commercial real estate banking and brokerage businesses as well. As we announced in our earnings release this morning, Walker announced Board of Directors has initiated a quarterly dividend payment of $0.25 per share.

Since our IPO in 2010, we have grown our company at a torrid pace, funding billions of dollars on commercial real estate, while creating a wildly valuable servicing portfolio. We have strategically reinvested the cash flows generated by the servicing portfolio back into our loan origination business, which has further accelerated the growth of the portfolio and generated more and more cash with the servicing portfolio at $75 billion today and close to $200 million of cash servicing revenues on an annual basis. We have the consistent cash flow to support a quarterly dividend payment and maintain our growth trajectory. It is our expectation that we will increase the dividend over time, while continuing to invest in growing the business, as our entrepreneurial spirit and focus on growth, remains the findings characteristics of Walker & Dunlop.

I’d like to now turn the call over to Steve to discuss our financial results in more detail.

[Steve Theobald, Chief Financial Officer]

Thank you, Willy, and good morning everyone. Fourth quarter was strong finish to an exceptional year Walker & Dunlop. As you can see on slide seven, we earned $3.06 diluted share for the quarter. Following the impact of the Tax Cuts and Jobs Act, which I will explain in detail in a moment, we earned $1.26 per share up from $1.16 in the fourth quarter of last year.

Q4 total transaction volume was $8.3 billion and was a record quarter for our HUD, Capital market and investment sales team, as we continue to see benefits from our investments outside of the core GSE business.

We generated a record $55 million of adjusted EBITDA during the quarter up 58% from Q4, 2016 and surpassing our previous quarterly record of $51 million. As shown on slide eight, since 2010, we have increased adjusted EBITDA [Indiscernible] to $21 million to $201 million.

Over that time in your period, we acquired five companies with the goal of expanding our origination platform and in turn increasing our servicing portfolio, adjusted EBITDA and cash flow, with cycle of reinvesting our cash to grow the business which then generates more cash has allowed us to think somewhat uniquely to significantly scale our platform and increase adjusted EBITDA without relying on large amounts of tax.

As has been widely reported to date, the enactment of the Tax Cut and Jobs Act in December but prior companies revalue that the Tax Cut assets and liability at the new Federal tax rate of 21%.

During the quarter, Walker & Dunlop recorded a $58 million benefit to income tax expense related to the revaluation of our net deferred tax liability. This benefit results in an additional $1.80 of diluted earnings per share in the quarter.

Beginning in the first quarter of 2018 we will also see an ongoing benefit to net income and cash flow from the reduction in the Federal Corporate tax rate. We are currently estimating that are effective tax rate will be reduced from its historical level of over 38% to somewhere in the range of 25% to 28% in 2018.

The overall decrease in effective tax rate will drive meaningful earnings appreciation and increases in free cash flow from 2017 level. Slide nine helps to put this in perspective. If you were to apply a 26% effective tax rate to our 2017 operating income, it would result in $0.59 of additional earnings per share and a reduction in our cash income tax expense of $18 million.

Though we are pleased with the ongoing benefit of a reduced tax rate, targeted impact cash reforms should not overshadow the strong earnings, cash generation capabilities and operational efficiency of our business model, which are all apparent from our 2017 financial performance.

We posted strong key metrics to the year with operating margin of 33%, gain on sale margin of 177 basis points and return on equity of 31`%. Let me spend a bit more time on this detail.

In terms of operating margin, we achieve a 32% in the fourth quarter and 33% for the year, which compares favourably in the 32% operating margin keyed in 2016. Our margins benefit [Indiscernible] platform and the efficiency of having more than $1 million in revenues per employee.

Gain on sale margin was 189 basis points in the quarter, near the top of our expected range based on the strong Fannie Mae and HUD volume during this quarter. For the year, gain on sale margin was 177 basis points. We have long stated that gain on sale margin will be variable from period-to-period but our overall profitability will continue to improve as we grow.

As you can see on slide 10, the chart out our gain on sale margin compared to operating margin from 2013 to 2017.If you look at 2013, we reported our highest gain on sale margin at 243 basis points, that 2013 also represented our lowest operating margin at 21%.

In fact operating margin had marched steadily ahead each year since 2013 moving from 21% all the way to 33% in 2017. While the gain on sale margin has varied from a high of 243 basis points to a low of 177 basis points over the same time period.

While you can see the gain on sale margin is variable, the content is in growth and revenues and effective cost management which has powered our operating margin upwards since 2013.

Return-on- equity was31% for the year, 23% excluding the tax benefit compared to 21% last year. Our growth has allowed us to consistently increase our returns at levels above our long-term target of near the high teens while retaining substantially all of our capital during that period of time.

We ended 2017 with over $800 million of [Indiscernible] and close to $200 million of cash on the balance sheet. As Willy mentioned, we have now initiated a quarterly dividend of $0.25 per share. At this rate, an annual dividend of a $1 per share represents a yield of 2.2% based on yesterday’s closing stock price with a payout ratio of less than 15% of 2017 net income. We believe this level of dividend represents a proven amount that can be sustained for the foreseeable future with plenty of room to grow over time as we continue to increase earnings.

Importantly, it still allows us to retain ample cash to continue investing in the business to foster future growth. We have also been buying back our stock requiring another 111,000 shares during the fourth quarter, bringing our total share repurchases for 2017 to 339,000 shares at a weighted average price of $47.10.

We continued repurchasing during 2018 to find another 233,000 shares at an average price $46.75. Our total repurchases under last year’s board authorization were $26.8 million. Yesterday, our board authorized a new share buyback program giving us $50 million of new repurchase capacity over the next 12 months. We have historically bought back our stock when it was cheap and have created significant shareholder value through $119 million of strategic buy backs since the beginning of 2014 at a weighted average share price of $18.41.

We feel well positioned to continue our growth trajectory and have set a goal for 2018 to deliver double-digit, digit growth in both pre tax income and adjusted EBITDA. We remain focused on bringing top bankers and brokers to Walker & Dunlop and aim to increase our sales force by 10% to 15% in 2018 from the year-end 2017 headcount of 145.

Based on our of our anticipated mix into business, we are maintaining an expected gain on sale margin range of 160 basis point to 190 basis point. As I mentioned, gain on sale margin can be highly variable and not at all predictive of our overall result. We remain focused on managing the business through our target operating margin goal and have been very successful in doing just that.

Based on the scale we have achieved to date, we are raising our target operating margin range to 30% to 35% for 2018, as we believe that level is sustainable with our current size of business model. Despite increasing our stockholders equity by 33% from year-end 2016 to year-end 2017, we have consistently outperformed our mid to high teens return on equity target range. It’s rare for a lending business to consistently deliver an ROE at this level and is reflective of our unique business model but they are able to do so.

The dynamics of reduced tax expense, dividend payments and share repurchase did result in sustainable returns above our historical targets that we are increasing our ROE targets to a range of 20% to 25%.

Our financial goals represent our objectives for the whole of 2018. It’s important to remember that the commercial real estate business can variable over the course of the year, as the first quarter typically being the lightest from an overall volume perspective. That was not the case in 2017 where we started the year with incredibly strong volumes, driven by a $650 million portfolio of financing done with Fannie Mae and a $0.27 tax benefit associated with divesting of sub stock compensation awards in particular the backing of our 2014 performance share.

We would expect that volumes in the first quarter of 2018 will look like a more typical Q1 and the tax benefits from the vesting of stock compensation will be much lower than last year as we do not have a performance share plan vesting this year.

Overall, we believe in a fundamental response multifamily housing market, reduce corporate taxes and a growing U.S. economy bodes well for us in 2018 and beyond.

With that, I will now turn the call back over to Willy.

[Willy Walker, Chairman and Chief Executive Officer]

Thank you, Steve. The 2018 targets that Steve just went through in fact a continuation of our pattern of dramatic growth and profitability. We expect the multifamily financing market to remain very up and going forward, which represents a tremendous opportunity for W&D within our strong market position, exceptional theme and growing client base.

As you can see on slide 12, though we have benefited from a growing commercial real estate financing market, we have not been dependant on it. Based on estimates from the Mortgage Bankers Association, the overall commercial real estate financing market grew by 5% last year while Walker & Dunlop’s loan originations grew by 49%.

The multifamily financing market increased by 4% last year while W&D increased our multifamily origination by 43%. Those market estimates for market growth in 2018 range from flat to slightly up, but as our track record has shown, we have the team, expertise and client base to grow meaningfully faster than the market.

We have a strong dependable market position on a constant multifamily finance, but our mission remains to become the premier commercial real estate finance firm in the United States, and has been the driving force behind our strategy of building out a loan origination platform across the country to grow our client base and access field flow.

We have continuously set ambitious objectives and achieved them, all over remaining disciplined in our growth and true to our stated mission. We will continue laying out our plans for growth and delivering on them, building on our track record of financial outperformance and execution. To execute on our strategy, we will continue building our national brokerage footprint to broaden our client reach and gain further access to deal flow.

As I have already discussed, we have successfully acquired companies, recruited talented professionals and promoted internal talent over the last several years in pursuit of this goal. We’ve grown our capital markets team from 24 bankers at the end of 2013 to 82 at the end of 2017. Despite rapidly expanding our capital markets footprint over the last four years, there are still many regions across the United States where we are lacking feet on the street. While we have a national platform with a great brand, we still have a huge opportunity for continued growth and we will continue to pursue our goal of expanding our reach and deal flow by targeting those regions where we feel we are lacking a presence.

Outside of strategic geographic hiring, we are also focused on expanding our client base and the types of loans we are originating. We are still seeing large flows of foreign capital coming into the United States commercial real estate industry and the majority of that equity is being sold by institutional sponsor groups, who have recently become part of Walker & Dunlop’s client base. We started to target these firms last year and have been successful in those efforts.

Having closed loans for the first time with Blackstone and Carlisle these years, as well as the largest deal in the company's history for Greystar. Breaking into the large borrowers isn’t easy, but our consistent execution and reputation as one of the top multifamily lenders in the country continues to built on itself and open the door to bigger and bigger opportunity.

We will also continue to strengthen our dominant brand in multifamily finance. We will do this in two ways. First, we will continue building out our investment sales platform. Since acquiring Engler Financial Group in 2015 we’ve expanded the team in the Southeast and Mid-Atlantic, but we need to grow our presence across the country to take advantage of these synergies doing property sales and financing.

In 2017 we arrange the debt placement for the buyers on 38% of our investment sales transaction, many of whom were first time W&D borrowers. This is an incredibly valuable source of deal flow that also broadens and deepens our client relationships.

Our goal is to grow this platform to $8 billion to $10 billion in annual investment sales volume and as we get there it will become an increasingly important and strategic part of our business.

Second, we will continue add bankers to our multifamily finance business. We are frequently asked our investors how we can keep growing so rapidly. On 2016 to 2017 we moved up in the league tables of both Fannie and Freddie and increased our multifamily finance volume by 43%.

This is fantastic growth, but we are still not a dominant player in every market across the country. To keep growing we have looked at every MSA in the country and identified specific cities and regions, but we don't have a commensurate market share of multifamily financing.

Our plan is to focus our origination effort on increasing our coverage of these geographies which may involve reallocating internal resources or hiring team’s originators to grow our client base and deal flow in these markets.

If we’re able to execute on this strategic growth initiatives, we will continue to grow our financing volumes at a rapid pace allowing us to make additional progress towards achieving the ambitious 2020 goal we set out last year.

As shown on slide 13, our 2020 include generating $1 billion in annual revenues and to do that we needed to grow our annual loan origination volumes from $30 billion to $35 billion and our annual investment sales volumes to $8 billion to $10 billion.

And as we increase our transaction volume our servicing portfolio will grow from $75 billion per day to over $100 billion by the end of 2020. The final component of the 2020 vision involves building an asset management business to expand our access the capital designed to meet our borrower’s wide range of financial need.

To that end we took our first step into that space in 2017 by establishing our joint venture with Blackstone Mortgage Trust, the lend on transitional multifamily asset and we remain very focused on building that portfolio to $1 billion in outstanding loan.

But to meet the needs of all of our customers we must broaden our access to capital beyond multifamily pursuing debt. We’ve been actively pursuing a variety of sources and strategies that will meet those needs with the ultimate goal of building an $8 billion to $10 billion asset management business by 2020.

Once established our asset management platform should generate stable revenue stream similar to our largely prepayment protected servicing revenue that will be use to continue fuelling our growth and delivering superior returns to our investors.

At Walker & Dunlop we have cultivated a culture of outperformance that drives us to continuously raise the bar and achieve as exemplified by a number 17 ranking on Fortune Magazine's list, the fastest growing companies in 2017.

Our mission to become the premier commercial real estate finance firm in the United States pushes our team to better, faster and more innovated in everything we do. Our unique workplace culture has also allowed us to attract and retain the very best commercial real estate professional in the industry and remain the great place to work for five out of the six years by Fortune Magazine.

I’d like to thank everyone at Walker & Dunlop for bringing the W&D culture to light everyday and your interactions with one and other and our client. Many congratulations to all of you on another widely successful year.

And finally, I’d like to thank our shareholders for their continued confidence in our team and for their investment in W&D.

With that, I’d like ask the operator to open the line for any questions.

[Operator]

[Operator Instructions]. We’ll take our first question from Jade Rahmani with KBW. Please go ahead.

[Jade Rahmani, KBW]

Thanks very much. In the spirit of no good deed goes unpunished, I was wondering if you expect WD’s 2018 transaction volumes to grow at a similar rate as your double-digit growth expectations for operating income and adjusted EBITDA?

[Steve Theobald, Chief Financial Officer]

Not exactly sure the context to that question, Jade, in terms of no good deed goes unpunished. If you're asking whether we plan to continue to grow W&D at the same rates that we have in the past. I would say, yes. There is nothing from our past performance that we need to believe that future performance doesn't follow. You got the same team. We continue to add exceptional bankers and broker’s platform and the underlying fundamentals of the market look to us to be extremely positive for 2018. And to be totally honest with you can’t really see 2019 yet, but the general sentiment in the market right now, Jade, is that there is more equity capital and more debt capital than there are deals which I think will continue to drive cap rates down and continue to drive significant amount of deal volume which present a great opportunity for Walker & Dunlop to continue to growing.

[Jade Rahmani, KBW]

And then, to give investors a sense of current market conditions, you did mention you expect a more normal seasonal first quarter, but could you provide any data points either in terms of closings deals in progress or the pipeline so far this year? We did see the $700 million student housing deal which is a positive, seems like your large deals initiatives are working out, but any color you could provide on how things are tracking so far this year?

[Willy Walker, Chairman and Chief Executive Officer]

Jade, just one thing I want to point out that $700 million deal you reference was actually a Q4 [Indiscernible], so that’s in the Q4 number, not – it won’t be in Q1.

[Jade Rahmani, KBW]

Okay.

[Willy Walker, Chairman and Chief Executive Officer]

So with what that clarification by Steve, I would say, but I would reiterate what I just said Jade, is just that -- if you backup two years at the National Multifamily Housing Conference two years ago in Orlando, most multifamily, owner operators, acquirers, developers were willing sellers and reluctant buyers. They were looking forward to the election and wondering where the economy was going to go. And I would say to you, we saw flat to declining NOI growth. And it was generally speaking a wait-and-see attitude.

But a year ago at that same conference, the election just happened, everyone was scratching their heads to sort of figure out what a Trump Presidency was going to mean. But the general sentiment was positive. But as you may recall interest rate spike for period of time people were waiting to see how cap rates would adjust. And people were kind of adjusting their attitude from a -- I'm a willing seller and a reluctant buyer too. Hey, I actually might get back into to this market.

By year later these two weeks ago down in Florida there was not a single borrower. Buyer, owner or apartment that I met with, we did not say that they are looking for product, but they are net buyers and that the fundamentals of the market look extremely positive to them, not one. And I did 17 meetings on Tuesday and 21 meeting on Wednesday. So ,the overall attitude of the market to specifically to your question is extremely positive right now, that could cause some people to be concern, but there is a certain euphoria that the market is so great, lot of capital chasing deals.

I would point out that with that type of dynamic in the market what is unique right now is that lending standards have not changed. As we had talked about previously last year we are around 68% -- 67%, 68% LTV and over 1.40 debt-service cover on all of our agency lending. That moves a little bit quarter-to-quarter, but that's the average across of last year. So typically at this point in a cycle you would see lenders reaching because borrowers are reaching to make deals and fill out.

But as we’ve talked about previously because of the amount of equity capital chasing deals what is ended up happening is equity return expectations have gone down. And the other piece that you can't forget is it because Fannie and Freddie are close to 50% market share they have established lending standards that are extremely conservative and they have stuck with them. Without getting a very significant waver which don’t come along very often you cannot lend below 125 debt-service cover with Fannie or Freddie, which means that like a deal that we’re working on right now on California which is a sub-four cap rate, the three-seven cap rate, but at a 125 debt-service cover we’re lending 53%. There were 47% equity in front of our 53% debt, we feel extremely good about lending on that property. So while there’s a tremendous amount of activity in the marketplace, what it hasn't done, exchange lending standards which makes us feel extremely good about the outlook for our business going forward.

[Steve Theobald, Chief Financial Officer]

Jade, if I might add maybe a little more context here for Willy’s comment as well. So if you go back 2016 you remember we had a – at that time we’re really slow at Q1. I think all the volatility that within the market and some of the trepidation that Willy referenced from the Conference two years ago impacted that and then obviously volumes that cost after Q1 of 2016. Last year’s Q1 we did have a large as I mentioned in my remarks, $350 million student portfolio that we locked and closed in the first quarter of last year. We paid last year in combination with the excess tax and as we reported a pretty robust – I’ll pay out of the non-robust Q1.

[Jade Rahmani, KBW]

Make sense. In terms of competitive environment, the press release noted your defensible market position and your commentary about specific plans to grow market share on the service markets. Can you elaborate on those two points which MSA is origin of the country do you feel that your presence could expand?

[Willy Walker, Chairman and Chief Executive Officer]

So, Jade, we talk about this previously in relation to the competitive environment. It couldn't be more competitive. It couldn’t be more active. As you well know, we go up against all the big banks and all of the big commercial real estate services firms on daily basis, and fortunately we’ve been able to continue the scale and grow and win. I think it is interesting if you look at the league tables that were put out last week in commercial mortgage alert as it relates to Fannie and Freddie volumes for 2017 and overall market share.

As I noted in my comments not only that W&D grow faster than any of the other large agency lenders, but there really is sort of group of three of us sitting at the very top of the league tables, CBRE, Berkeley and Walker & Dunlop, and then there’s a pretty gap for the next level which is Wells Fargo and a decline, and then it kind of falls off from there. So the commercial mortgage really talked about a big eyeball [ph] support, there’s really a big three [ph] in this space right now and we will continue focusing on and trying to be top of league tables with both, but feel extremely good from a competitive positioning standpoint that we’re right there at the very top. As it relates to your other point beyond competitive positioning was…

[Jade Rahmani, KBW]

On market.

[Willy Walker, Chairman and Chief Executive Officer]

Yes. On market, yes, so without putting up a play book in front of all of our competitors what we had done is gone and looked at major MSAs across the country where W&D is if you will under punching our way in the sense that we are one of the dominant players in this space and there are certain geographies where we just don't have feet on the street and we don’t have the coverage of the client base in those market.

And so we’ve gone through and looked across those markets and we’re very focused on expanding market share in those market. So I'll give you one example, we don’t have an office in Houston, Texas and we’ve been very focused on getting in to Houston. It’s a wildly competitive market in the market that’s been recovering quite nicely since the hurricane unfortunately hit that region. But we don’t have an office in [Indiscernible] so what do we’re going to do to get in Houston. We’re going to hire people. We’re going to reallocate people. We got a Dallas office focus whose focus on Houston.

So, without going through city-by-city where we plan to invest time and resources there is a tremendous amount of growth that we can achieve by expanding our geographic footprint and by focusing on clients in those markets. As we’ve discussed before and as we noted in our in our earnings call, we only have 145 bankers and brokers at Walker & Dunlop. Their competitors also have that many bankers and brokers in the one office and one city.

So as much as we’ve gotten to be a very significant player in this space, we’ve done it with a reasonably small team, and as Steve mentioned we still well over $1 million of revenue per employee which comes incredibly well versus our big competitors who all are generating anywhere between $100,000 and $200,000 of revenue per employee. So lots of people sit there and say, how can W&D growing? It’s not that hard. We continue to add great people to the platform. Continue to expand our client base and continue to grow.

[Jade Rahmani, KBW]

Great. Well, solid quarter and thanks very much for taking the questions.

[Willy Walker, Chairman and Chief Executive Officer]

Thanks, Jade.

[Steve Theobald, Chief Financial Officer]

Thank you, Jade.

[Operator]

We’ll take our next question from Jason Weaver with Wedbush Securities.

[Jason Weaver, Wedbush Securities]

Good morning. Thanks for taking my questions. First, you might have alluded to this little in the last statement there Willy, but the depositories as we saw in the senior loan office survey last few months carrying back in the CRE multifamily lending, is there obviously a positive for companies like yours, but to take advantage of that whole are your more aggressively trying to recruit originators oblique to the banking sector? Or can you make that equator share – can you take advantage of that greater share of your current footprint?

[Willy Walker, Chairman and Chief Executive Officer]

You know, Jason, I’m sure that I will offend somebody at Walker & Dunlop by saying this. But we haven’t been that successful at recruiting people away from commercial bank. There is a – there is just a distinct approach to the market between people who have been large commercial bank and people who are been successful at firms like Walker & Dunlop. Many people, large commercial banks if you will use the client relationships and the deposit to sell the type of financing that we do, whereas we don't have the benefit of that kind of backing up to one of things I said previously.

We don’t have a lot of feeder businesses in the W&D like banks and commercial real estate servicing fund to do. And so as a result there people who are here really have to go out to sell their capabilities just to finance the deal. And so, I think at the end of the day, the fact that some of the commercial banks are pairing back up or pulling back on exposure to CRE is as you said a good thing, but as it relates to how do you go and sell into their client base, it’s really taking people who know how to sell W&D’s products and services and getting in front of those clients.

[Jason Weaver, Wedbush Securities]

Okay. Thank you. And Steve, I think you mentioned the $58 million tax benefit for the DTI, but where does the DTI actually stand for..?

[Steve Theobald, Chief Financial Officer]

Yes. Jason, I don’t think it's in our financials yet. Our whole tax will include all that detail when we file our 10-K in couple of weeks.

[Jason Weaver, Wedbush Securities]

Okay. Fair enough.

[Steve Theobald, Chief Financial Officer]

It’s right around somewhere between $100 million and $120 million.

[Jason Weaver, Wedbush Securities]

And I couldn’t see you clearly, but I just wanted to confirm your 2018 tax rate expectation is 25 to what?

[Steve Theobald, Chief Financial Officer]

25% to 28%.

[Jason Weaver, Wedbush Securities]

25% to 28%. Okay. Well, congrats on the quarters, guys. Look forward, guys and thank you for taking my question.

[Operator]

Thanks Jason. We’ll take our next question from Steve DeLaney with JMP Securities. Please go ahead.

[Steve DeLaney, JMP Securities]

Thanks. Well congratulation guys on a great quarter and year-end, a $1 billion in revenues looking a little more realistic after we can see where it put you just – but really you were down I guess you bought that multifamily housing conference. I’m just curious it sounded like there was a lot of optimism and people pretty positive on the market. Was anybody talking about the fact that long-term rates are turning on where you want to measure somewhere between 40 and 50 basis points above? Are they were sort of on average in 2017? And I’m curious hearing from clients and also you’re your end bankers about the current rate environment?

[Willy Walker, Chairman and Chief Executive Officer]

Steve, first of all good morning.

[Steve DeLaney, JMP Securities]

Good morning.

[Willy Walker, Chairman and Chief Executive Officer]

You know rates are up plus 30 basis points from the beginning of the year, that sort of 270, so it’s -- of people, so we say now [Indiscernible] relatively speaking that’s still very cheap on our long-term historic basis.

[Steve DeLaney, JMP Securities]

Sure.

[Willy Walker, Chairman and Chief Executive Officer]

Will it cause some issues for a specific deal or someone’s – the margins and doing their return calculations as rates move up and they’re trying to get to a rate lock, so our bankers and our guests [ph] have work extremely hard to manage client expectations in the lighting rate environment. And at the same time you're still going to have the sponsored groups borrowing with floating-rate debt because they want the flexibility and that group has just an unbelievable amount of dry powder. Starwood just raised an $8billion funds. Blackstone has got a private REIT, its generating over $200 million of equity capital a month.

And if you go down the list and you look at the way that rates are went and raise their growth and income fund to be able to face monogram. There’s just a huge amount of equity capital that wants to get into this space. And so the thing that I think is most important to see this, the general sentiment is that although rates have moved 30 basis points in the month of January or year to-date, generally speaking rates are going to be in sort of a band and whether that band is 2% to 3% or 2.5% to 3.25%, there are very few people that I've spoken to both in the industry and outside of the industry who believe that rates are headed to 4%.

And so as a result of that, I think there are lot of people who are discipline are looking at deals getting the proper financing in place for their fixed rate or floating-rate and moving forward with the deal and not really sitting there day-to-day watching the fix on the tenure. And with that said, I would reiterate, it make certain deals with certain borrowers is very challenging because they’re very rate sensitive. And as a result our bankers and our DUS have to work hard.

[Steve DeLaney, JMP Securities]

Got it. That’s helpful, Willy. And thinking about the MBA or Freddie Mac forecast for 2018, I think you’ve indicated the expectation is flat to slightly higher and I guess, I’m curious, have you ever seen them as a result of any disruption like we had in the first quarter of 2016 with credit spreads? Have they ever come out in robust say, three, four months ended the year and change their full-year forecast?

[Willy Walker, Chairman and Chief Executive Officer]

We are constantly looking – they’re constantly forecasting. I can’t remember and see whether they ever gone in publicly done it. They go into FHFA every quarter and re-forecast what they think volumes are going to be for the rest of the year. And FHFA as you may recall very clearly stated when they put up a scorecard for 2018 that they will look at quarterly volumes and adjust accordingly. And so if the FHFA sees any change in the market dynamic where either other capital sources are backing away, where the market have lost liquidity they will allow the agencies to expand out and they will not as they been very clear in saying restrict the agencies if the market expand. So I think, FHFA has been very clear in saying on a quarterly basis they will check the overall market size and they will if we have adjust Fannie and Freddie’s caps if they need to.

[Steve Theobald, Chief Financial Officer]

And the MBA typically updates forecast price here somewhat they see.

[Steve DeLaney, JMP Securities]

That’s helpful Steve, okay.

[Steve Theobald, Chief Financial Officer]

Okay. I just quickly just go back. We put it in this way. The overall commercial real estate market was supposed to grow 5% last year and we grew it well above 46% hence the multifamily market grew at 5%, we grew at 40%. I mean, I think one of the thing that I find to be really interesting here is everyone sort of says, W&D just a pie on the overall market. We’re not a pie on the market. Our past history is nothing but show that we grow faster than the market and faster than our competitors.

[Steve DeLaney, JMP Securities]

Yes. And I think that’s the point is been in [Indiscernible] look at 2018, I mean, we have had a tailwind and it looks like we’ve added $200 million annual market in 2014 has gone to 280. So I'm thinking what you’re saying is you’re at 7%, your goals to move into 8% to 10% range and going forward over the next couple of year it sounds like it’s more of the market share story and gain for W&D to play rather than just an absolute market growth situation. That’s probably what we’re looking at?

[Steve Theobald, Chief Financial Officer]

If that is continues to expand in other business lines, I mean, we are in the fall and we did over $4 billion in multifamily lending outside of the agency. So people are looking to W&D, I’ve got a multifamily property, I need to finance, where do I go. Call Walker & Dunlop and then we find the appropriate capital to meet that opportunity. So I do believe a number of people have sort of said well, W&D’s growth is restricted on both scorecard, the agencies lending volumes and that sort of the end of the story on W&D, and what we are showing is that we build this trend and become one the very best multifamily lenders in the country. It provides the opportunity to grow our sales business. It provides the opportunity to grow our brokerage business on non-multifamily commercial real estate and it also deposit [ph] to grow our multifamily lending business on non-GSE capital source.

[Steve DeLaney, JMP Securities]

Here you’re loud and clear on that especially the clarity you gave us on investment sales earlier in the call. It’s very helpful. Just one final thing on the dividend, a very good news to see, I think it’s going to be well received and maybe open some new doors, you’ve indicated obviously you’ll be looking to possibly increase it overtime, should we think about the dividend and related to the backup, should we look at that as annual type of decision that you in the quarter will be making?

[Steve Theobald, Chief Financial Officer]

Yes, Steve, I think we’ve spend a lot of time talking about this internally as you would imagine and I think the dividend is meant to be quarterly ongoing sustainable for the foreseeable future and it gives us an expression of our confidence in the continued growth and cash flow generation of our business. So we’re not really calling it an annual and we’ll revaluate this is going to be ongoing and sustainable

The share repurchase obviously that an annual discussion we have at the board about having the capabilities to go into the market when we perceived value to be misalign with our view, again based on what we’re seeing and where we think things are heading when we got to acquire stock option.

[Steve DeLaney, JMP Securities]

Right. But it sounds like that, I mean, you got up to 50, but it’s not a direction to go out buy 50 regardless of where it’s trading, you’re going to be practical, I assume in terms of when and how you use that?

[Willy Walker, Chairman and Chief Executive Officer]

Last year’s authorization was 75 and we use 25.

[Steve DeLaney, JMP Securities]

Okay. All right. Very good. Appreciate the color. Thank you.

[Willy Walker, Chairman and Chief Executive Officer]

Thanks, Steve.

[Operator]

[Operator Instructions] We’ll go next to Fred Small with Compass Point. Please go ahead.

[Fred Small, Compass Point]

Hey, good morning. Thanks for taking my question. In terms of the margin range in guidance what sort of overall volume growth would you expect in the high-end scenario?

[Steve Theobald, Chief Financial Officer]

Fred, its Steve. Good morning. I think the margin is not really a growth driven metric, it’s a mix issue. And again I think as you can see we’ve grown our capital market brokerage business pretty significantly, while continuing to also fit up growth numbers on the agency side and that makes that to came out to 177 basis points this past year right in the middle of the range, so our view is the range is still good relative to what we’re looking at or expecting from an overall business mix for second for the year. It’s not really driven by growth per say as much as it has been.

[Willy Walker, Chairman and Chief Executive Officer]

Fred, Steve is not giving direct answer to your question, because as you know we’re not guidance and what we’re doing from a volume standpoint. And so as I said in response to Jade’s question, I think our track record hopefully speaks for itself as it relates to outgrowing industry significantly and we view this as a dynamics of the industry’s fantastic work in 2018, given the amount of capital out there and generally positive outlook for multifamily financing.

I think this is a quick opportunity, just talking about one of the things, it is just that you know GDP growth between 2% and 4% is really, really good for the multifamily industry, below 2% GDP growth you’re not getting occupancies where you need on, you’re not getting the wage growth in the overall economy to make to you push rents. And then you get yourself over 4% and most people in America think that they’re rich and they can afford whatever single family mortgage they can get and the single-family industry starts to really get on pace.

So right now we’re sorted in the sweet spot of multifamily sitting at about 3% GDP growth. We get over four as well and commercial real estate developers start building buildings where they really aren’t needed. And that’s good in the short term but not too good in the long term. And so fortunately right now we haven't either of those hands of the spectrum if you will. We pulled up from sot of 2% GDP growth where you are going to be able to continue to push rents but you’re not over the 4% GDP growth on a sustained basis which makes a bit single-family industry starts to really zoom, and so multifamily owner operators are feeling from a general macroeconomic standpoint.

[Steve Theobald, Chief Financial Officer]

The last thing I would add, Fred your question is, as I highlighted in my high remarks. Our focus is really on operating margins not on getting on sale margins and we’ve been steadily growing that operating margin in our overall efficiency and profitability each year.

[Fred Small, Compass Point]

Great. Thanks. I though we’ll try to attempt another one on kind of volumes growth [ph] so just following up on what you said there. If I look at the slide where you track operating margin sort of gain overtime, how much of that you attribute to the growth of servicing business, I know you don’t break out the segment, but can you sort of give any rough estimate?

[Steve Theobald, Chief Financial Officer]

I mean, I can’t really give you an estimate, Fred, I think it's fair to say that the growth in our servicing business has had a very positive impact to both adjusted EBITDA and operating margin. It is scale business from a financial standpoint. So as it get larger, the efficiency of how we run it gets better and so the operating margins improve there. The other thing I would point you to as we -- we’ve had a pretty sizable increase in interest income over the course of the year and that’s a direct bottom-line benefit to us because there's no compensation or whatnot going on relative to that revenue stream, so the faster that grows better the operating margin.

[Fred Small, Compass Point]

Okay. Thanks. One last one on the 2020 goal, $30 billion to $35 billion of the annual origination, how much market share gains do you think is embedded in that, I think those sort of following up on those assets?

[Willy Walker, Chairman and Chief Executive Officer]

I don’t know, because you got a mix assumption there. Fred, it relates overall market growth between here and there, so we haven’t really looked at it. The bottom line is, I mean, look at – I think we’ve gone from $8 billion to $11 billion to 7 billion to 18 billion to 28 billion and we have said pretty consistently over the last four years as we’re adding people and growing the servicing portfolio and create brands we’re going to hit a certain different points where things kind of grow ex-financial. And people have listened to that, other people have not.

But I think one of the really exciting things from my standpoint is that we now have the brand, we now have the market positioning and so adding people to the platform and allowing them to benefit from being on the platform is sort of greater and greater. So I don't know what that will back into, but I will say there’s moving from 20 – well, it’s a 25 billion of financing volume last year, but 30 billion to 35 billion over the next three years. We have management team. We have a reputation of a client [ph] great companies and integrating them pretty seamless way. And so it’s a lot of work, but I’m confident we’ll get there.

[Fred Small, Compass Point]

Okay. And just maybe follow-up on that, in [Indiscernible] environment, I mean assuming we’re flat over the next three years not maybe in the best scenario you laid out before, but its happens maybe probably the low end of the 2020 target?

[Willy Walker, Chairman and Chief Executive Officer]

2020 targets don’t really have a low end. They got 1 billion in revenues. So yes, you’re saying 30 billion on the financing equity, 3 billion of financing activity side, I feel very confident. I will tell you, the 8 billion on the low end of investment sales we go a lot of work to do there. We got a lot of work to continue to build on vessel sales platform and create a real brand, the $8 billion asset management business as we’ve talked about before we will need to do at least a if not a couple of acquisitions there to be able to scale that business and get to that goal, and the $100 billion servicing portfolio if you do get your financing volumes to $30 billion by 2020 then with the little amount of runoff we have in the portfolio today, the $100 billion servicing portfolio is just an output of that continued origination volume feeding into the servicing portfolio.

So I can see Steve kind of squirming [ph] in his feet as I talk about $30 billion of financing in 2020 being something that I feel quite confident at, but there’s nothing from our past growth that without some wake up scenario and the one other thing I talked about on the way to fast scenario, people forget Walker & Dunlop is a top of the league table where Fannie, Freddie and HUD which are all countercyclical sources of capital. And that doesn’t mean that volumes don’t come down, but it does mean that as borrowers need capital, one of the first places they look is to Walker & Dunlop who has a strong positioning with Fannie and Freddie and HUD who do not leave the market when other sources of capital do.

[Steve Theobald, Chief Financial Officer]

Yes, I guess -- just a maybe put a fine point of this and I’m not really squirming. And not to be cheeky Fred, but we don’t really care what market. Right, if there is a wipe-out, obviously you know that’s one scenario frankly if the market grows, 20% a year then we are under shooting based on our relative performance to the market over the last few years. So our 30 to 35 was done and established based on what we think we can do as a company, whether the market’s up, down.

[Fred Small, Compass Point]

Okay. Thanks a lot.

[Steve Theobald, Chief Financial Officer]

Thank you.

[Operator]

And next, we’ll go to Jade Rahmani with a follow up. Please go ahead.

[Jade Rahmani.]

Thanks very much. On the dividend, to what extent is this an employee retention and recruitment strategy? Some of your competitors do paste [ph] dividends including HF special dividend and new market is anticipated to pay dividend?

[Steve Theobald, Chief Financial Officer]

I would just say that is not under consideration at all, Jade. As we said around in our board meeting last week talking about the dividend, I can just tell you that was not a consideration for the board.

[Willy Walker, Chairman and Chief Executive Officer]

Then I think you have to keep focused on. We’ve been named a great place to work five out of last six years. We have grown salaries at Walker & Dunlop, we haven’t disclosed what it is, but at a phenomenal piece. Our employees, I believe feel that they work for a fantastic company with a great culture, and that they get paid extremely well.

We are not looking for ways right now to – if you will or always looking I should say. We are not looking for a dividend to try and add to kind of a lot of people. We are constantly looking at ways to attract and retain the very best people, and we feel blessed with the team we have today, but the dividend was no factor in all of that.

[Jade Rahmani.]

Okay, in terms of the recent market volatility, has that had any impact, is there like a direct relationship between stock market volatility and sort of the tone reflected from clients?

[Willy Walker, Chairman and Chief Executive Officer]

I mean just this week, I’ve had three clients say to me, have you seen deals falling out? Has the rate movement sort of impacted the overall market? And when I got back, generally speaking from our investment sales people was no. If we grow our deals that are under contract, and moving forward with them, but as I said if you see previously Jade, the market rate volatility and rate moving up does make certain deals challenging with borrowers who are very rate sensitive on how they’re buying and what they are buying and as a result of that our bankers have to work very hard, come up with data solutions, need to do early rate locks to be able to walk them through why they need to keep their head down and get the deal done. And in some instances it feels to be [Indiscernible] and they say it because it worked for me anymore. But we had not seen anything that I would call a base, a trend or a pattern so far, so far with the movement and rate.

[Jade Rahmani.]

And any changes in mix shift based on the anticipated rate hikes towards fix or on the other hand that the risk covered ratio targets and move toward more floating in the last quarter?

[Willy Walker, Chairman and Chief Executive Officer]

It really depends on how successful we are to continue to penetrate this cost [ph] of goods. If we continue to do large transaction for the big sponsors, floating rate will if you will hold its place as far as our overall business mix. If we end up doing more lending to smaller borrowers, who are typically fixed rate borrowers, and they are going to hold it, and they are not as concerned about the possibility that floating rate financing gives you, you’ll see fixed move up because people do want to walk in. Like if we end up doing mega transaction like we had been shown to do in past years with the big sponsor group that will drive the floating rate number right back up.

[Jade Rahmani.]

And just in terms of cross selling potential with tension with Engler, right now what percentage of Engler deals is WD doing with that priced [Indiscernible].

[Willy Walker, Chairman and Chief Executive Officer]

We stated that in the script [ph] its 36%, 37%.

[Jade Rahmani.]

Okay. Thanks very much for taking the questions.

[Willy Walker, Chairman and Chief Executive Officer]

Thank you Jade.

[Operator]

And it appears we have no further questions. I’ll return the floor to Willy Walker for additional or closing remarks.

[Willy Walker, Chairman and Chief Executive Officer]

Thank you, operator. I would just thank everyone again for joining us this morning and thanks to the W&D team for a fantastic 2017, and on as we go to 2018. Thank you everyone.

[Operator]

And this will conclude today’s program. Thanks for your participation. You may now disconnect. Have a great day.