Walker & Dunlop Inc (WD) 2013 Q2 法說會逐字稿

Welcome to Walker & Dunlop's second-quarter 2013 earnings conference call and webcast. Hosting the call today from Walker & Dunlop is Willy Walker, Chief Executive Officer. He's joined by Steve Theobald, Chief Financial Officer; and Claire Harvey, Vice President of Investor Relations.

Today's call is being recorded and will be available for replay beginning at 10 a.m. Eastern. The dial-in number for the replay is 800-688-7339. 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 is now my pleasure to turn the floor over to Claire Harvey.

Thanks, Zack. Good morning, everyone. Thank you for joining the Walker & Dunlop second quarter 2013 earnings call. This call is being webcast live on our website and a recording will be available later this morning.

Joining me this morning are Willy Walker, our Chairman, President and Chief Executive Officer; and Steve Theobald, our Executive Vice President, Chief Financial Officer and Treasurer. Both our earnings press release and website provide details on accessing the archived call. 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 much which Willy, and Steve, will touch on this morning. So participants who are interested in following along should pull up and have them available.

Please also note that we may reference certain non-GAAP financial metrics, such as adjusted net income, adjusted earnings per diluted share, adjusted operating margin, adjusted income from operations and adjusted total expenses during the course of this call. Please refer to the earnings release and presentation posted on our website for reconciliations of the GAAP and non-GAAP financial metrics and related explanations.

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 including the statements regarding future financial operating results involve risk, uncertainties and contingencies, many of which are beyond the control of Walker & Dunlop and which may cause actual results to differ materially from the anticipated results.

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 reports on file with the SEC.

I will now turn the call over to Willy.

Thank you, Claire, and thank you everyone for joining us this morning. The second quarter marks another strong quarter of financial results for Walker & Dunlop with solid growth in loan volumes, revenue and net income. I will walk through our origination volumes and some of the macroeconomic and political issues impacting our business, Steve will then provide details on the quarter's financial results and I will close update occupy strategic initiatives and what we see happening for the rest of 2013. During our remarks, we will make reference to slides posted on our website this much morning.

I will start on slide 4. We originated $2.6 billion of loans in the second quarter up 91% over last year. This fantastic growth for Walker & Dunlop and is dramatically higher than the industry growth rate of 7%. The mix of our business during the quarter with Fannie Mae at 30%, capital markets at 30, Freddie Mac at 24% and HUD at 16% reflects the significant diversification of our business, as we provided our customers with the very best execution for their financial needs.

Let me discuss each of these executions in turn. Fannie Mae is generally our largest and most profitable business. In Q2, 2011 Fannie Mae was 42% of origination volume. In Q2 2012, it was 46%. This quarter, it's only 30%, primarily due to Fannie Mae adjusting to their new lending cap, and Walker & Dunlop working to understand what loans and what markets Fannie Mae wanted to be in.

It is our understanding that we are still neck and neck with one other lender to be Fannie Mae's largest partner. And if you look at our Fannie Mae volumes over the past three years, our aggregate Q2 originations with Fannie Mae have growth from $550 million to have 2011 to $610 million in 2012 to $772 million in 2013. That's almost 40% growth over two years, which is fantastic just not as rapid as the growth in our other executions. We have a very strong partnership with Fannie Mae and we understand today much more clearly how they will are managing to the FHFA cap. Fannie Mae has plenty of money to lend throughout the balance of the year and we are extremely focused on remaining the number one Fannie Mae dust lender in 2013.

Our capital markets origination were $758 million in the second quarter up 87% from Q2 2012. During 2012, we made investments to add additional capital markets origination teams to the company, and we saw direct benefit of this benefit during Q2, as life companies, CNBS and banks were all aggressively lending. Our capital market business is a key element of our growth strategy and we will continue to recruit talent to our platform

In July, we brought an industry veteran [Bill Wine] to lead and grow our capital market business. Investors should remember that Walker & Dunlop is not to transform our lending platform into a brokerage platform. The growth in our capital markets business is to expand our originations, gain access to new clients and deals and simultaneously to grow other proprietary capital solutions so we not only did broker deals to other capital sources but also lend on deals with capital we control. Our HUD volumes in the second quarter $414 million, a record high for us.

The volumes in the quarter were due in part to the carry-over from the disruption we saw in HUD's commitment authority in March but also due to a very robust pipeline of HUD business. We continue to see strong demand from our customers for the HUD product due to the relatively lower rates and longer terms that HUD loans provide. It is likely that HUD will run out of commitment authority during the third quarter just as they did in March. This will impact HUD volumes in Q3, but given our expectation that a resolution will be passed by Congress at the end of the quarter, our strong pipeline should position us well for a solid Q4 and total 2013 volume .

We are growing dramatically with Freddie Mac and it is great to see. We did $616 million with Freddie in Q2 2013, up from $213 million in 2011 and $223 million in 2012. We believe we have moved up from the fifth largest Freddie Mac seller servicer to third and we are focused on continuing to gain mark share. Our ranking at this time of year is not issued or confirmed by Freddie Mac but simply our understanding of where our loan origination volumes rank us year to date.

Let's turn for a moment to the GSEs, the political debate and what we see happening along those lines. Q2 was the first quarter that the GSEs operated under the FHFA and post cap of $26 billion of annual lending for Freddie Mac and $30 billion for Fannie Mae. It is our understanding from both industry discussions as well as public filings that Freddie has lent $14 billion of its $26 billion, and Fannie $16 billion of its $30 billion. So both are over 50% of their annual limits halfway through the year but it's important to understand how the GSEs and Walker & Dunlop account for loan origination to fully understand annual lending capacity.

When Walker & Dunlop rate locks alone with Fannie or Freddie, we recognize the revenue associated with that loan. However, Fannie and Freddie recognize a loan when the loan is delivered to them by Walker & Dunlop, typically 30 to 45 days after rate lock. Therefore loans rate locked by Walker & Dunlop and other lenders during the last several weeks of the year will likely count towards the GSE's 2014 funding lending levels not 2013.

Two significant questions remain. Will FHFA reduce Fannie and Freddie's multi-family lending businesses again in 2014 and will any legislation be enacted that could materially change the GSEs next year. As it relates to FHFA, there are two issues we are tracking closely.

First, the nomination of Congressman [Mel Watt] the head of FHFA was voted upon by the Senate Banking Committee and is now awaiting a floor vote in the senate. There will need to be significant political horse trading to get [Watt] confirmed. But if confirmed, he would likely bring a very new approach to FHFA and its annual score card.

Second regardless of who the director of FHFA is, there is a chance the proposed continued reductions to multi-family in the 2014 score card. If FHFA is watching the political debate on Capitol Hill with regard to Fannie and Freddie reform , one would think they would not impose continued cuts to Fannie and Freddie's multi-family businesses, given the legislative framework currently gaining momentum. Senators Bob Corker and Mark Warner have introduced legislation in the senate that would wind down Fannie and Freddie over a five-year period and replace them with new federally mandated entity to provide government mortgage insurance with one major difference; private capital must take the first loss position. And since both Fannie Mae and Freddie Mac's multi-family businesses have private capital taking the first lost position today, the Corker-Warner Bill says that Fannie and Freddie's multi-family businesses should remain as is.

Now, there is clearly a disconnect between winding down Fannie and Freddie over five years, yet leaving their multi-family businesses as is but those issues will be likely worked out as this legislative framework moves forward. There are four very important themes that have developed reform during Q1 Fannie and Freddie reform.

First, the bipartisan bill in the Senate is gaining momentum, while the Republican bill in the House has been described as extreme and not legislatively

Second, risk sharing where private capital takes the first lost position on federally insured mortgages; something we have been promoting since Fannie and Freddie went into the conservership is on the table and it gaining support.

Third, Fannie and Freddie's multi-family has performed exceptionally well during the downturn, have shared risk between the private sector and government and don't need to be reformed.

And finally with the distance between the Senate bill and the House bill, even if Corker-Warner did gain momentum, it seems unlikely any legislation will be passed before the 2014 mid-term elections and possibly not until after the 2016 presidential election, if the Senate remains controlled by the Democrats.

In summary, although the political landscape appears headed in a positive direction with regard to Fannie -Freddie reform, we are not holding our breath that anything significant happens in the near future. We continue to watch the legislative process closely. Fannie and Freddie remain great partners. However, as you can see from our Q2 financials, we continue to invest in diversifying our business to minimize the impact of any future changes to the GSEs.

Let's turn for a moment to the macro economic environment and its impact on our business. Although interest rates ran up at the end of Q2 and clearly caused purchasers of properties and borrowers for refinancing to pause for a moment during the most volatile periods, the Federal Reserves has worked tirelessly to reinforce it's low interest rate and strategy and the ten-year treasury appears to have settled into a range of [250] to [270]. Most owners of the commercial real estate would like to finance as much as they possibly can at these rates.

At Walker & Dunlop's annual summer conference in Sun Valley, Idaho in July, I asked the 250 conference attendees whether we were in the best of times or worst of times. Two hundred and forty-nine hands went up for best of times, and one hand went up for worst of times. That may have been a somewhat bias pole, as the conference attendees were sitting in Sun Valley but I believe it reinforces the sentiment we get from the majority of our clients.

Times were good yet opportunities to deploy capital via acquisition are limited. This is leading many of our clients to focus on development, as well as value-add acquisitions and rehabs, which drives up demands for interim and bridge financing. This is exactly why we are so excited about the large loan bridge program we announced earlier this week.

Let me turn the call over to Steve to dive into our financial results and I will come back to discuss our outlook for the rest of 2013. Steve?

Thank you, Willy, and good morning, everyone. I'm going to discuss our second quarter financial highlights, as well as provide some perspective on how our more diversified and sustainable business model is expected to perform going forward.

Net income for the second quarter was $14.5 million or $0.42 per share. Adjusted net income, which excludes selective expenses relating to the acquisition of CW Capital was $15.3 million or $0.44 per share.

Operating margin for the quarter was 26% and adjusted operating margin was 28%. This compares to net income of $9.3 million or $0.43 per share and operating margin of 32% in the second quarter of 2012.

Total origination volume of $2.6 billion was up 91% from Q2 '12 and right in the middle of our guidance of $2.3 billion to $3 billion. Total revenue was $90.7 million, a 94% increase over Q212.

Our origination volumes this quarter demonstrated not only our industry-leading growth but also the improved diversify of our business model. We are pleased with our overall production levels and continue to see strong demand from our customers and great execution from our producers. Going forward, we expected capital markets will continue to be a high percentage of our overall volume, and of course we will still as much business as we possibly can that Fannie and Freddie and HUD as they are still the dominant providers of capital to the multi-family industry at very attractive rates and terms.

On slide 5, you can see the trends in our mortgage banking gains, which were at 246 basis points for the second quarter, down from 254 in the prior year quarter and off our three-year historical average of 262 basis points. Origination fees have helped steady over time, while the decline in the relative volumes of our Fannie originations has resulted in lower gains attributable to mortgaging servicing rights. Additionally, our diversification is taking place, not only with respect to sources of capital but also at the underlying product level.

For example, since the CB acquisition, we have originated a significant amount of adjustable rate loans due to GSEs. These structured arm loans have lowered mortgage servicing rights and fixed rate loans due to their prepayment flexibility. Due to these factors, we expect our overall gain on sale margin going forward will look like it has the last two quarters at 245 basis points.

It is important to out that we have not seen margin or servicing fee degradation at the individual product level but rather the mix of loans we are selling in the current market environment is driving our margin trends. The point of all this is that the Company has never been more diversified in terms of access to capital and product offerings to customers.

Diversification means less reliance on if the GSEs broader capabilities we can offer to customers and continued opportunities to grow. The impact of diversification is lower margins than we have reported historically when we were predominantly a fixed rate Fannie Mae lender. But we had all your eggs in one basket, and our increase scale and diversified product offering makes our business far more durable while still being highly profitable.

Another important element of our diversification is the continued growth in our servicing portfolio. As shown on slide 6 at $37.9 billion, our servicing portfolio is 116% larger than a year ago, and continues to grow, adding net loans of $1.1 billion during the second quarter.

We are now the ninth largest commercial mortgage servicer in the country. Our weighted average servicing fee remain at 24 basis points and the portfolio generated $22.4 millionof revenues during the quarter. Our servicing portfolio produces not only annuity-like income but also steady and growing stream of cash flow to the Company.

Total expenses during the quarter were $66.9 million increase, an increase of 112% from the second quarter of 2012. The increase in total expenses, when compared to the year-ago quarter was driven by investments made in growing and diversifying our business and the amortization expenses and right offs associated with the servicing portfolio.

Let me walk with through these in more detail. As you can see from slide 7, personnel cost is a percentage of revenues was 41% in Q2, higher than the 37% from the prior year quarter but in line with our expectations.

Personnel expense was $37.3 million up from $17.4 million in the second quarter of 2012, as our employee base more than doubled from a year ago largely as a result of the CW acquisition.

During the last 12 months, we have added 27 producers to our team. Our business relies heavily on the relationships and talent of our production team. And over the course of the last year, we have taken the necessary steps to retain as well as attract some of the best talent in the industry.

The incremental costs of these retention efforts in the first half 2013 was $1.8 million with half of that expense recognized in the second quarter. In addition, we have invested $2 million in our proprietary capital initiatives year to date, a $1.7 million increase from the same period last year; $1.65 million of this expense occurred in the second quarter. These expenses are primarily for the salaries of the addition the personnel brought on to lead our proprietary efforts. We expect to incur additional expenses, as we continue to invest in these it initiatives but with the launch of the large loan bridge program and expected growth in our interim loan program, we will begin reporting increased revenue from these investments as well.

Slide 7 also shows and amortization and depreciation expense has grown from $6.7 million, or 14% of total revenue to $17.7 million or 19% of total revenue in the second quarter of 2013. The increase was primarily due to the 116% increase in the servicing portfolio and related mortgage servicing rights, and a 74% increase in mortgage servicing rights prepayments. As the servicing portfolio grows and our servicing revenue increases, so will the amortization expenses associated with the portfolio.

The remainder of our operating expenses totalled $9.8 million for the quarter, an increase of 49% from the prior year. Recorded in the current expense is an $825,000 fee for the restructuring at CW Capital's former head office, which will save us more than $500,000 annually on rent expense. Absent that one-time expense, other operating expenses are up only 37% year over year and represent 10% of revenue in the second quarter of 2013, down from 14% of revenue in Q2 2012, as we leverage the increase scale of our business.

Turning now to slide 8, our credit risk remains at the [9] levels. Our provision expense of $751,000 was in line with our provision expense in Q2 '12 but note that this year is against the portfolio that has almost doubled in size.

During the quarter, we settled on six loans with Fannie Mae for slightly less than what we had previously reserved for. [Sixty-plus data] delinquencies increased slightly to 6 basis points in the portfolio from 5 in the second quarter of 2012. When times are good, it is easy to forget about credit risk but we don't take our stellar performance for granted. We remain very focused on continuing to make sound credit decisions, which has served us well especially during the worst of times.

I want to briefly discuss our balance sheet and capital structure. As you will see from slide 9, our balance sheet shows significant growth from a year ago. We ended the second quarter with $66 million of operating cash, tangible net worth of $317 million and a debt to equity ratio of 0.2 all improved from a year ago. Because of our strong earnings growth, stable and growing cash flows and extremely low leverage we have a tremendous amount of financial flexibility.

We are exploring ways to take advantage of the strengths of our balance sheet, as we look at how to best fund our strategical initiatives, while optimizing our capital structure around between objective of sound risk manage testimony and creating it shareholder value. Despite the recent run up in rates, the depth market remain very attractive not just for our customers but for us as well, and we will be looking to take advantage of these markets.

Before I turn the call back over to Willy, let me make one more comment about our operating margin. Since during in the Company at the beginning of the second quarter, I've been looking at our margins relative to our competition. As I'm sure all of you discovered well before I did, it is difficult to find exact comparisons to Walker & Dunlop, as are one of the few public pure-play commercial real estate finance companies out there. And while we have no direct comparative set, we have looked at the financial statements of various real estates services firms, mortgage REITS and our bank competitors. I believe our combination of growth rate and margin is among, if not the best in our industry.

The key to maintaining attractive growth in margin is continuing making investments in our production capabilities leveraging our scale and back office and overhead expenses and maintaining the fantastic culture that made we decide to join this company. I believe we have created a compelling story by doing exactly that and we'll continue to manage the organization going that way forward.

With that, I will turn it back to Willy.

Thank you Steve. So where are we headed with this fast growing company that has fantastic clients, exceptionally talented people and strong macro drivers as it relates to investor's desire to own commercial real estate and strong loan refinancing volumes between now and 2018. I believe our Q2 results underscore the scale and the diversification we have been building since going public, and investors should know, as Steve just said that we are extremely focused on maintaining industry-leading growth rates and profitability going forward.

As you will see from slide 10, Walker & Dunlop's originations grew at a compound annual growth rate of 47% between 2007 and 2012,the highest in the industry. So we've had the highest growth rate of any commercial loan originator since the downturn, and we are consistently told we will are one of the best managed in the companies in the industry. We take both of these not as compliments to rest upon but rather a challenge to remain so.

As we discussed earlier in the call, our strategy is to build out our capital markets business to gain access to new clients and deal flow but also to raise capital so we can either broke those deals off to have other money services or lend on those deals with capital we control.

Earlier this week, we announced the successful rating of capital to launch our large loan bridge program; a joint venture with a Canadian institutional investor and a US real estate investment manager. We will are thrilled to partner with firms of this caliber and the $850 million in new bridge capacity is a significant addition to our product offering. The appetite for bridge lending is strong as borrower shy away from buying properties at sub five caps and instead focus on value-add investments and development.

Another source of capital we have discussed with investors in the past is CMBS. We were very close to launching our CMBS platform in June but our selected equity partner maturely changed the terms of our partnership agreement so we backed away. We are currently engaged with several institutions to form a partnership that will allow us to launch our CMBS platform in 2013.

Despite the volatility in CMBS at the end of Q2, we are still strong believers that CMBS will be an important capital provider to our industry over the coming years and we are remain focused on adding this capability to Walker & Dunlop and to our clients.

With regard to a public mortgage REIT, we have completed almost all of the work to file with the Securities and Exchange Commission but have decided to wait for now, given the recent run up in rates and overall market dynamics for a mortgage rate IPO. We believe a mortgage rate vehicle would be very beneficial to Walker & Dunlop, as a form of off it balance sheet financing, but for now that strategy is on hold.

Finally as we announced in May we hired [Brian Casey] to spearhead our initiative to raise capital to provide long-term fixed rate financing to our clients. [Brian's] extensive experience running one of the largest life insurance company lending platforms in the country is hugely value to our capital raising and capital deployment strategies. We have a tremendous origination platform that institutional capital appears to want to access. We are hopeful that we'll have a separate account up and running before the end of the year.

I'd like to look back to where we started of this call highlighting the terrific loan origination growth we experienced in Q2 by originating $2.6 billion of loans. That's more than we originated in all of 2009.

As we look at Q3, which is typically a slower quarter for originations, we are faced with the challenge of HUD's commitment authority and the GSEs potentially slowing down originations to insure they have adequate capital for Q4. We are establishing Q3 origination guidance of $2 billion to $2.5 billion dollars andrevising our 2013 annual guidance to $9 billion to $11 billion.

We remain extremely focused on retaining our position as the largest Fannie Mae thus lender moving up in the lead tables with HUD and Freddie Mac and continue to diversify our lending platform by growing capital markets and raising proprietary capital. We are still clearly on the path to creating the premiere commercial real estate finance company in United States and our current quarter's financial operating results show this.

Two and a half years ago, we went public and our market capital approximately $220 million and near complete dependence on Fannie and Freddie Mac at a time when most people thought the GSEs were about to be shut down. Since then, we have invested time and capital to maintain our highly valuable GSE businesses and also expanded our platform by growing our HUD and capital markets businesses. We acquired CW Capital last year and plenty of people doubted whether we could acquire, integrate and grow our platform post acquisition. We have done just that while maintaining the exceptional culture and management practices that make Walker & Dunlop what it is today.

Our market cap has increased nearly 3X since our IPO. We are one of the fastest growing commercial real estate platforms out there. We invested in new business lines to continue meeting our customer needs and all the while we have grown the size of our servicing portfolio from $14.6 billion at the end of 2010 to $37.9 billion today.

We have produced dramatic growth in sales, significantly diversified our lending platform, maintained high profitability margins and continued to build a long term pre-payment protected servicing asset that will benefit investors in good times and bad.

Finally, we remain the seventh best small and medium-sized company to work for in the US in 2012, and we hope to be on that list again in 2013, with the addition of tower terrific colleagues from CW Capital.

With that, I'll thank you will of all of you participating in today call and open the line for questions.

The floor is now open for questions. (Operator Instructions). Thank you our first question will come from Cheryl Pate with Morgan Stanley. Please go ahead.

Hi, good morning. Just a question on -- given again the rate environment and the move on the second quarter, can you speak to the benefit perhaps that you received from prepayments in the second quarter and sort of how to think about the year ahead and sort of now that rates seem to have stabilized a little bit at this level.

Good morning, Cheryl. So as it relates to prepayments in Q2, the majority of the prepayments in Q2 were in with HUD loans and so as a result of that, we did not get prepayment penalties during Q2 for the majority of the payoff that we had because it was very focused in our HUD portfolio. But you are raising an issue that we have discussed before which is that has rates do move up, many of our customers are looking at, if you will, what's the strike point to pay a prepayment penalty and refinance at these lower rates. We haven't seen a lot of that in the Fannie and Freddie portfolio so far but there are plenty of clients of ours who have 2014, 2015 maturities who are pretty engaged on the lending calculations with us to figure out what the sweet spot is if you will.

Okay, great. And then just on the lower guidance for the full year, is that being driven sort of entirely by the lower Fannie-Freddie volumes or how should we think about capital markets and potentially HUD being back on line as potential offsets?

I guess there are a couple things there, Cheryl. First of all, as you know, we can grow our capital markets business dramatically and we plan to do that, but as it relates to the overall financial model, it is not as profitable to us as our agency execution. And so what we did in bringing the guidance down, there are a couple drivers there.

First of all, as we have said before, Fannie and Freddie's 10% reduction in 2013 is not a massive change, except as you saw in Q2 we had a lot of work to do on figuring out what markets Fannie wanted to be in and what deals they wanted to do. We -- as we just said have been very engaged in getting a better understand of where they want to be for the rest of the year and they have plenty of capital to put out. I wouldn't be surprised, given that both of them are over halfway through their annual allocations and Q4 is typically the largest loan origination quarter of the year that both of them are looking at deals in Q3 and wondering whether they want to put a ton of capital out in Q3 or wait and hold on to Q4. That is mitigated somewhat by the we made in the call, as it relates to how they account for loans and how we account for loans and their deliveries towards the end of the year will -- well, the loans we rate lock at the end of the year will be pushed over to being deliveries to them in 2014. So we see a very robust environment out there.

There's a lot of financing activity going on. But I think by bringing the guidance down we are just trying to say to people -- look, we are still very focused on doing as much business as we possibly can but if you look at the volume we did in Q2, which we are extremely pleased with and also in the guidance we have given for Q3, there were a lot of moving parts out there that we are working very hard to manage with but we thought that we would establish that guidance for the rest of the year.

Thanks very much.

Our next question comes from Jason Stuart with Compass Point. Please go ahead.

Hi, good morning, thanks. On the large loan bridge program, Willy, can you give us more details around what can expectations you have for leverage, your fees, and when you expect to start funding.

Sure. Jason, first of all, congratulations on your note the other day on to taking a look at the overall environment and understanding that things are moving around out there, if you will. I would -- the large loan bridge program, as I said, we are thrilled with our two partners there. And I want to underscore how big a accomplishments it is for Walker & Dunlop to have gone out and raised that much capital from two very establish institutional investors to spear head this effort.

I think there's going to be a tremendous amount of opportunity going forward for us to raise capital in this manner and I think this is just the first step that investors will see of us growing our relationship, both with these two investors and also other investors. There is a significant amount of demand for bridge or interim financing due to what I mentioned in the call people often shy away from buying asset to the [sub-5] cap and just holding on to them. Many people are looking both at the development world, as well as the [act]-we-have world, and this fun place perfectly into that.

This is a large loan fund and we are fortunate to have an origination sales force that has access to lots of large deals. I would underscore that because in the CW acquisition, we picked up a number of very large relationships with some producers now at Walker & Dunlop, who have access to larger loans which will play right into this strategy.

And then as it relates to the specific fees, Jason, we haven't sort of issued a press release, if you will, on all the different components to it. We will make asset management fees on its fund and we will make origination fees as well as servicing fees.

And the -- I'm trying to -- as it relates to leverage, we are not looking to lever this, we are getting it 65% leverage, I believe, on it. Is that right, Steve?

That's right.

And so we're getting 65% leverage on it, Jason. And so it will have a moderate leverage for a fund of this nature, and looking at low teens returns, given where coupon rates are today and the type of leverage we will put on it.

Okay. So we can expect you to start funding these in the third quarter?

It's -- you know, we spoke to our -- we announced it day before yesterday and I had three emails with one of our co-investors yesterday saying -- we're cranking and let's get some deals in here and let's go get going. So we're very focused on it and getting as much as we possibly can going with them. It's a great opportunity.

Okay. I appreciate the color there. And then one follow-up on the expenses. You know, it sounds like a lot of the hiring and building for these business it diversification efforts has occurred. Would there be an expectation that the growth rate there slows or is there still a little bit more building to do, a little more expense to come in the second half of the year for those initiatives?

So we talked about, and I'll let -- Steve, if you want to add anything here -- we talked the fact of that we have hired some super, super talented people, and I'm thrilled with the hires that we have made both on our CNBS platform, as well as separate account platform as also for this large loan bridge program. And Jeff Goodman who runs all those efforts should be congratulated for all talent that he has attracted to our platform.

One of the big expenses we were modeling, Jason, was the mortgage REIT. And as we said in the call, we've put that on hold for now. So we invested a bunch of time and effort, in both our own resources as well as external -- particularly legal help in getting all that pout put together.

And so that is now on hold so that doesn't kind of continue to [burn] for a period. We might add at an appropriate time look at that again. And then we will really be looking at it from acapital standpoint.

Really now that we have got the people here, we're putting it the partnerships it in place, it really kind of it turns back to Steve as it relates to how much capital that we have are we putting into these ventures? And as Steve highlighted in his comments, our balance sheet right now is in such a form that he's got plenty of both cash on the balance sheet, as well as borrowing flexibility to be able to potentially raise capital to put in to these initiatives should we need additional capital.

And the only thing I would add are -- one, we also continue capital markets and origination teams. So I would expect they will still continue to see expenses, related to those efforts as we find the right folks to fit here.

And then with respect to CMBS platform which Willy mentioned, once we get that signed up and up and running, there will be some investment associated with that as well. But I think that rounds out what Willy had to say.

Great. Thank you.

Yes.

And our next question comes from Brandon Dobell with William Blair. Please go ahead.

Thanks, good morning. I want to make a couple of quick follow-on comments on the expense structure. Given the pacing of the had GSE origination, it doesn't sound like you guys are going to make any change to the expense structure -- no commissions flex have been flexed down, other than the investments you guys continue to make or have made in the diversification efforts. Anything to talk about with expense structure in the back half of the year relative to the pace originations now versus your prior expectations?

Yes, Brandon, I think I mean -- we're going to -- as we would always do, look at expenses and where we think we're spending too much, we are going to take action on that. But at this point from an origination perspective, I don't think we are looking at any adjustments to our expense base.

Okay, got you. And Steve, your comments on the balance sheet, you talked about taking advantage of the balance sheet. Maybe some more color on what you guys are thinking of. I know there's putting capital work in the large loan fund is an example of that. But what other kind of things are you guys looking at to take advantage of your financial position right now?

Yes. So, Brandon, I think if you look at the structure of our balance sheet and the cash flow that we are producing right now, I think we are under leveraged. And so I think there's an opportunity for us to accomplish a couple things.

One is take advantage of the interest rates and provide -- we're not talking about crazy leverage, but --Right. So don't anybody get too excited there. But we are looking at increasing the leverage in the company, which will make us more efficient on the capital side.

Okay.

And then that will also then give us the increase in capital necessary to support some of these proprietary capital efforts. So the large loan bridge program, the CMBS platform, our interim loan program all require capital contributions from us.

Yes.

And this will be a way for us to finance those contributions over a longer period of time.

Got it. And maybe Willy, given all the political flip balling back and forth, what 's your sense of next year a potential, you know, one more down tick in the commitment levels or ceilings from Fannie and Freddie and I guess if there is a change depending on who is -- although it's [Mell Watter] somebody else is putting that position.

That -- it's a perfect question, if you will, Bandon, and obviously one that we don't know the answer to as it relates to trying to read the tea leaves. As I mentioned in my comments, if FHFA is watching the political debate on Capitol Hill, one would think they wouldn't ask for a continued decrease.

Okay.

And at the same time you sort of -- you never know and we won't know until they come out with the 2014 score card. And so there's really -- it's almost right now for us it's almost impossible to handicap.

What I look at is the disruption, if you will, or the difficulty in understanding where Fannie was in Q2 was something of a one-time event, as they, for the first time in their history, had to deal with a cap and what's their strategy to deal with that cap. They have now done that and now are figuring out how they are deploying capital.

As you saw in our numbers with Freddie Mac, I would put forth that Freddie really didn't skip a beat. They've stayed consistent in the markets and it stayed consistent with the type of deals that they wanted to do and as you saw our quarterly volume with Freddie was in an all-time high over $600 million and Freddie continues to deploy capital at a very, if you will, effective and efficient rate.

So if they took another 10% out in 2014, that's bringing Fannie down to $27 billion and bringing Freddie down to $24 billion, $23.5 until -- you still have in the two of them, if they just did the same thing again, well over 50% of the capital that's going to go into multi-family in 2014. So they are still going to be huge players, regardless of whether they get changed in that manner or they may come up with something else.

But let's just say that they do what we do. It's still amount of capital, and I think the agencies will be better, particularly Fannie, at managing through any potential reductions.

The final thing I'd say on all of it, Brandon, is the agencies -- because FHFA came out with their score card in March, the agencies already into Q1 when the score card came out. So they have put in a request that FHFA would come out with their score card earlier this will year, so to come out with the score card in '13, so they know what they're planning and budgeting to in '14. I don't know whether FHFA is going to live up to that request and whether we'll see something in the next couple of months or whether they are going to wait as they have historical done into the fiscal year that they are actually setting a score card for but we could know sooner rather than later. That's, I guess, at the end of the end what I'm trying to say.

Got it. Okay. And then one follow-up from that. Given the portfolio construction, I guess, with at-risk loans versus loans without risk at Fannie and I think your comments, Willy, about trying to figure out where Fannie wanted to be with different types of programs, should we expect an uptick or a down tick or no change in what that at-risk portfolio proportion looks like kind of going forward?

So the at risk portfolio, as you have seen has grown dramatically over the past couple years -- Yes. Both through organic originations, as well as the acquisition significance of CW. I think that really as we look at the percentage of our businesses that we do with Fannie Mae, it's -- everything we're doing with Fannie Mae is generally speaking full risk.

As you will know, Brandon, if we do larger deals, they are capped at $63 million of aggregate risk to Walker & Dunlop, and then everything above that we don't take risk sharing on. And so I think the issue there is that they will still be all the deals we do with Fannie Mae will still be a full risk.

I think the that point that I would underscore from Steve's comments was that we have done a number of structured arms since acquiring CW and we didn't do a lot of structured arms prior to acquiring CW but some of our larger clients and CW's past clients like the dynamics of these structured adjustable rate mortgages. And so when we're doing those deals -- they are typically five and seven-year deals. And because they have greater prepayment flexibility to them, then a standard ten-year fixed rate loan, we're not -- we book an MSR for the first year's mortgaging servicing rates but beyond that we don't book the servicing income as an MSR when we put them on the books.

Okay.

What that means is with when we actually originate those loans, we're getting our origination fee and we're booking a small MSR. But because all those loans have caps on them, the chance that they prepay in this market environment is very low and therefore what will see is we pick up just the servicing income that comes in over the life of the loan and doesn't have an offsetting amortization expense of having set up an asset that we're in the process of depreciating.

So --

So the bottom line there is you don't see it today but see it tomorrow, if loans stay on our books because they've got very health servicing fees, just like a standard fixed rate deal, except we're just not booking non-cash income when we're originating them; we're taking the cash flows off of them as they stay on the books, for three, five, seven years

Got it. That's very helpful. I appreciate the color. Thanks.

Yes.

And we'll go next to [Whitney Stanson] with JMP Securities. Please go ahead.

Hi there, everyone -- Willy, Steve and Claire. So I think you usually have some top-line seasonality with revenue ramping as the year progresses , and I'm just wondering if you can give us an idea of percentage of personnel comp is fixed salaries and what percent is commission driven?

Whitney, we have that -- we have a slide. Everyone's diving for our slides. I don't have it right in front of me, but we -- let's see. Do you want me to pause for a second or do you want me to send it to her?

No. That's fine. Is it in here?

We've got it, [Whitney]. We've shown the -- there's been historic slide that we've got in past presentations, which shows quarter by quarter the fixed versus the variable. And as you look at our history, if you will, in Q4 typically because that's such a large origination quarter, the variable kind of sky rockets up because you're paying a lot of commissions and then in quarters like one and three where you have lower volumes; your fixed expense and you percentage of expenses comes up But do you have the actual number? Do you want to send it to me?

Yes. You're right.

I mean the split right now is about [55] fixed [45] variable. The variable includes not just the commissions but it's also our discretionary bonus pool, et cetera, for the non-sales force but it's [55], [45].

And so -- is that [55], [45] split for a first half or a second quarter?

That's for the first half.

Okay, okay. Perfect. Thank you.

Yes.

Your next to Bose George with KBW. Please go ahead.

Hello. Good morning. To the extent that the GSEs are not providing financing because of their caps, where do you see some of those borrowers getting their funding or is it too early tell?

Good morning, Bose.

Hey, Willy. Good morning.

The markets are plenty active, as everyone talks about private capital coming back to the US mortgage market and the fact that Fannie and Freddie are dominating the single-family space, I wish members of Congress would come and hang out in our office and see the competitive set that go after deals that we're lending on. As you have seen from the volumes from our competitors, there are -- CMBS is back; was really cranking pre-interest rate run up and took a pretty significant pause, Bose, in sort of the six weeks of the quarter, as rate started to move and we got significant volatility in the market.

CMBS is back; making quotes and actually processing business. But that's sort of -- that's the typical cycle, right? They are cranking when things are pretty stable, and then the moment when there's significant volume volatility, they are taking a pause seeing where the markets kind of shake out and then coming back in.

The banks are still aggressively lending because they're looking for yield. Some bank competitors have gone to doing longer term fixed rate loans. My [tummy] would tell me that their CFOs and treasurer at some are going to walk in and say our capital structure is not designed to be doing seven and ten-year fixed rate lending, and we ought to get back to doing construction loans and three and five-year variable rate loans or adjustable rate loans. But for right now, some of the banks are going long and going fixed, which is a competitive, if you will, a significant competitor out there.

And then the life insurance companies got out of the gates extremely fast in 2013, put a lot of capital to work in Q1 and continued for -- capital work in Q2. We know a couple of the smaller programs have pulled back because they have basically run out of money.

But you may have seen -- announced this week that MetLife got a big separate account from SunTrust. I think it was $5 billion that MetLife got from SunTrust in a separate count.

So someone like MetLife who I believe put out $9.5 billionlast year just got a separate account allocation from SunTrust for I don't know how much they plan to put out of that $5 billion in 2013. But the life insurance, in particularly in big guys like MetLife and New York Life in others, they'll have plenty of capital to continue to be an active lender in the market this year.

Okay. Great. That's helpful. And then -- actually on the CMBS is that -- initially you guys are going to be -- have -- be a conduit, but could that tie into the commercial mortgage REIT as well where you essentially hold some of that many risk? Is that the idea?

That's clearly the idea, given that the REIT is on the shelf right now; not something that we get to right away. But sure that -- the flexibility, if you will, that the REIT would provide us with, as it relates to have a funding source for potentially the conduit and then for all of our lending operations, would be great. And we are still -- we would love to have that vehicle but we have also got a lot of -- and I think right now if you think about it from a prioritization standpoint, Bose, as Steve underscored, our platform is more diverse today than it's ever been but we underscore that diversification, with making sure that we are raising proprietary capital that we can feed into our distribution network. And the source of capital, if you would, or the type of it capital that is most needed today is that long-term fixed rate capital that Fannie and Freddie provided that we need to have in case Fannie and Freddie continue to shrink their operations. And so we're very focused on both the CMBS platform as well as that account because that type of capital matches up perfectly with the customer's need for that type of capital.

Okay. Great. Thanks.

Yes.

And I would now like to turn it back to Mr. Willy Walker for any closing or additional remarks.

Appreciate all the questions and all the focus that the analysts have on WD. Q2 was a great quarter. Everyone at Walker & Dunlop had a fantastic quarter and we are already solidly into Q3 and I just close the call by saying we haven't even come up on the one year anniversary of the acquisition of CW, and we have a company that is operating at a very efficient and a very integrated level right now, well within a year of having brought on basically doubling the size of the Company.

And as an individual, I have tried exceptionally hard and spent a lot of time on making sure that we bring these two companies together and maintain a consistent culture and continue to do things the way that both Walker & Dunlop and CW did them previously to meet our customers' needs, continue to grow rapidly and maintain a high profit margin in our core business, and we've done just that.

So, thanks everyone for joining us today. And we'll be talking to you soon.

Thank you. This does conclude today's conference call. Please disconnect your lines at this time, and have a wonderful day.