Walker & Dunlop Inc (WD) 2014 Q2 法說會逐字稿

Welcome to Walker & Dunlop's second quarter 2014 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 Claire Harvey, Vice President of Investor Relations. Today's call is being recorded, and will be available for replay beginning at 10.00 AM Eastern Standard Time (sic). The dial-in number for receipt play is 1-800-839-1198. 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 call over to Claire Harvey.

Thanks, Leo. Good morning, everyone. Thank you for joining the Walker & Dunlop 2014 second quarter 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 call.

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

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

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 include statements regarding future financial operating results involve risks, uncertainties, and contingencies many 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 report on file with SEC.

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

Thank you, Claire, and thank you everyone for joining us this morning.

The lending landscape for our business is dramatically different today than it was a year ago. FHFA's 2014 GSE scorecard was released in May, and the GSE's multifamily businesses are back. The personnel at Fannie and Freddy are excited and focused about winning business, and Walker & Dunlop's size and scale with the GSEs is paying dividends. Long-term interest rates are backed up, ending Q2 at 2.53%, and currently at 2.51%. This rally in rates has once again made long-term fixed-rate financing exceedingly attractive to borrowers. And even through 2014 commercial loan maturities are down 23% from last year, Walker & Dunlop has competed successfully to originate $4 billion in loans in the first half of 2014, down only 8% from last year. With the recent launch of our CMBS platform, the continued expansion of our capital markets group, the fantastic growth in on-balance sheet lending we have seen, and our leadership position with the GSEs, we feel very well positioned for the rest of 2014, leading into 2015 when there is a 73% increase in commercial loan refinancing volumes.

The GSE's multifamily financing activity dropped dramatically in the first half of 2014 due to several factors. First, both Fannie and Freddie ran hard to hit their lending caps at the end of 2013, and took delivery of every loan they could, providing no spillover activity to start 2014. Second, GSE refinancing volumes this year are at the lowest point since the financial crisis. Third, the 2014 FHFA scorecard was not released until early May, keeping both Fannie and Freddie in a state of wait-and-see. This all resulted in Fannie Mae's multifamily originations falling from $15.9 billion in the first six months of 2013, to $8.2 billion for the same period this year, a drop of 48%. Yet Walker & Dunlop, due to our size, scale, and focus on Fannie Mae, saw our Fannie Mae originations fall only 9%. As a result, our market share with Fannie Mae has grown dramatically, reaching an all-time high of 18% in Q2.

Our experience with Freddie Mac is similar. Freddie's multifamily volumes fell 47%, from $13.5 billion to $7.1 billion, during the first half of 2013 to 2014. Yet Walker & Dunlop's market share with Freddie Mac expanded from 8.4% for the first half of 2013, to 9.5% this year. We currently have a pipeline of GSE deals that we have not seen since we acquired CW Capital in 2013, and we expect our Freddie volumes in Q3 to exceed our family volumes for the first time ever.

Our HUD origination volumes were down 62% compared to Q2 2013. We have consistently said that HUD volumes are exceedingly hard to predict, so tracking them quarter on quarter is not a great indicator for this business. However, our HUD volumes are down 26% from the first six months of 2013, reflective of the competitive landscape and borrowers' unwillingness to endure the lengthy HUD origination process. Many borrowers would love to lock in long-term, fixed-rate financing for 40 years, given where interest rates sit today. Yet until HUD improves its processes and timings to rate lock, it will remain a niche product that is difficult to sell when capital is abundant. We have one of the very best HUD origination and underwriting teams in the industry, and we will remain focused on one of the very largest and most profitable HUD originators in the country.

As seen on slide six, last year our capital markets team originated $729 million of loans in the second quarter, with 81% of those loans being brokered off to life insurance companies, banks and CMBS. This year, our capital markets team grew their total originations in Q2 by 7%, to $783 million, yet only 70% of those originations were brokered off to life insurance companies. The other 30% were originated for Fannie Mae, Freddie Mac, and HUD -- loan originations where Walker & Dunlop not only earned origination fees, but also mortgage servicing rights. As we outlined when we embarked on the expansion of our capital markets business, the strategy is to grow our access to deal flow, and when possible, generate new loan originations for executions where Walker & Dunlop earns origination fees and mortgage servicing rights. Our capital markets origination in Q2 show this strategy coming to fruition, and also reinforces our previous point about the GSE's increased competitiveness.

Our balance sheet lending, referred to as interim loan program, grew fantastically and provides a needed and highly strategic financing offering to our clients. We've originated $66 million of interim loans for our balance sheet in Q2, or 3% of total originations, up 74% from $38 million a year ago. The pipeline of interim loans is strong, as fully leased acquisitions are priced to perfection, and borrowers are seeking higher returns by our client transitional assets. We have generated double-digit equity returns in this program and plan to grow the average outstanding balance of loans to $250 million to $300 million.

No deal better illustrates the value of our interim lending program than the $70 million student housing deal we originated in upstate New York last August. The borrower needed a bridge loan to pay off their construction debt before the property stabilized. Walker & Dunlop won the financing assignment against strong bank competition, promising flawless execution on the bridge loan and the best permanent financing available. At the end of June, we structured a $72 million fixed-rate take out loan with Fannie Mae. We differentiated ourselves from the competition by moving quickly to underwrite and structure the interim financing and then executing flawlessly on the permanent loan. Prior to launching our interim loan program, we would not have had the ability to win either the bridge financing or the permanent financing. $142 million of financing later, we are very pleased to have this capability to offer our clients.

Our CMBS platform is up and running. And we are actively quoting deals, with our first group of loans, totaling $71 million, moving towards securitization in Q3. Our objective is to originate $1 billion in conduit loans during the first year, which should happen between now and next June. For the rest of 2014, we expect to do two securitizations totaling $200 million. Similar to our balance sheet lending, our CMBS venture benefits from the access to deal flow that Walker & Dunlop's origination platform provides. For example, we quoted a three-property, multifamily deal in June for execution with the GSEs. The borrower requested more proceeds than an agency loan could provide. So we quoted the deal for our conduit. In the process of quoting the deal for our conduit, the borrower asked us to look at three transitional properties that needed bridge financing. We closed and funded the three stabilized deals for our conduit and the three transitional deals for our balance sheet at the end of July. A year ago we would have lost the deal after providing the GSE quotes. Today, due to our new CMBS conduit and scaled balance sheet lending operation, we financed these six properties totaling $67 million.

I'll turn the call over to Steve to provide more depth on our financial results to date and then come back to discuss what we see in the market today and going forward. Steve?

Thanks, Willy. And good morning, everyone.

The second quarter of 2014 marks my fifth quarter as the CFO here at Walker & Dunlop. And I've never been more excited about where our Company is today and how we are positioned for tomorrow. Despite the challenges of last year, we've remained focused on creating a platform that is able to meet our customers' borrowing needs, while delivering solid financial results in any competitive environment. Now happens to be an environment in which our longstanding GSE partners are once again competing aggressively for business. And while this has clear benefits to us today, as can be seen in our Q2 results, it does not change our focus on continuing to invest in broadening our platform and positioning ourselves to take advantage of the $0.5 trillion refinance opportunity that lie ahead.

With that, let me go through our financial results for the quarter in a bit more detail.

Net income for the second quarter was $12.9 million, or $0.40 per diluted share, compared to $14.5 million, or $0.42 per diluted share, and $0.44 per adjusted dilute share for the second quarter of 2013.

Adjusted EBITDA was $20.9 million, a 50% increase from the $14 million we reported for the second quarter of 2013. Operating margin for the second quarter improved to 25% after being in the high teens and low 20s for the last three quarters.

As illustrated on slide seven, total originations were $2.4 billion in the second quarter, down 7% from second quarter of last year. The second quarter this year was almost the complete opposite of last year. It started quietly and ramped up very quickly, with Fannie Mae and Freddie Mac competing heavily for deals. Our originations with Fannie Mae and Freddie Mac were up 12% over the second quarter last year, as both GSEs got progressively more competitive throughout the quarter. For example, Fannie's monthly delivery statistics show their volume increasing throughout the quarter, from $1 billion in April to $1.5 billion in May to $2.2 billion in June. We expect both Fannie and Freddie to compete aggressively for business over the remainder of the year.

While our GSE volumes increased this quarter compared to last year's second quarter, our HUD volumes were down 62% year-over-year. While significant, this is not surprising, as the second quarter of 2013 was our second largest quarter with HUD ever, as we had a number of loans shift from the first quarter last year into the second quarter. Having said that, we are not expecting growth in our HUD business this year, as overall HUD industry volumes are down significantly.

Our brokered originations in Q2 were down from the prior year Q2, but as Willy mentioned, that is a function of agency competitiveness, as our capital markets team originated significantly more agency volume in the second quarter of this year than they did in the second quarter of 2013. We had another strong quarter of originations in our interim lending program, which helped us grow the portfolio even with the number of loans paying off. The portfolio ended the quarter at $194 million, up $47 million from the end of June of 2013. We did the permanent financing on all of the $58.6 million of loans that we financed out of the portfolio during the quarter.

Turning now to revenues. As you can see from slide eight, total revenues for the quarter were $85.3 million, a 6% decrease from second quarter 2013. The decline in mortgage banking gains from the year ago quarter was partially offset by increased servicing fees, net interest income, and other income. Mortgage banking gains declined as a result of lower HUD and brokered volumes and from lower margins, particularly gains attributable to mortgage servicing rights, which declined from 111 basis points in Q2, 2013 to 95 basis points in Q2 of this year as shown on slide 9.

Servicing fees for our Fannie Mae originations have been under pressure this quarter as credit spreads generally have tightened. And Fannie has been aggressively bidding for business. This is been particularly true in larger deals, which typically have lowest servicing fees to begin with. Looking at our loan originations in Q2, our average deal size has increased very significantly, from $11.6 million in the second quarter of 2013 to $14.1 million in the second quarter of 2014, as a higher percentage of our GSEs loans have been larger than $20 million. In fact, 64% of the loans we originated with Fannie and Freddie this past quarter are over $20 million, compared to only 41% in the year ago quarter. We expect the impact of deal size and competition to continue for the remainder of the year, and therefore would expect the overall mortgage banking gain margin of 219 basis points earned in both the first and second quarter of this year to be a reasonable estimate for the back half of 2014.

Turning now to slide ten. Our servicing fees increased 7% over the prior year, to $24 million. The servicing portfolio grew to $39.8 billion at the end of June, up 5% from the end of 2Q, 2013, and as you may have seen in our press release last week, has since crossed over to $40 billion market. The weighted average servicing fee held steady at 24 basis points and we don't expect much deviation from this rate going forward based on both the size and dynamics of our portfolio. In fact, weighted average servicing fee of loans added to the portfolio during the quarter was also 24 basis points. I think it's also important to point that the third party valuation of our mortgage servicing rights at June 30 was $432 million compared to our net book value of $349 million, indicating a substantial amount of unrecognized value embedded in our financial statements.

Interest and other income, while still a relatively small part of our revenue base, continue to grow and add meaningfully to the bottom line. Interest income nearly doubled in the quarter compared to the prior year, as lower borrowing costs and our agency warehouse lines, the significant increase in our own balance sheet portfolio, and growth in our escrow deposits help generate over $5 million of net interest income during the quarter. Other income increased by $1.5 million year-over-year, due entirely to an increase in prepayment fees.

The components of total expenses are illustrated on slide 11. Total expenses for the quarter was $64.4 million, down 4% from last year as we continue to benefit from our cost-reduction efforts. Compensation and benefit expense was down $3.3 million from the prior year as a result of our reduced headcount and lower commission expense. Overall, personnel expenses were 40% of revenue in the quarter, down from 41% last year. With the exception of interest and amortization expenses, all other expense categories were $5.2 million lower year-over-year, a decline of 11%. In addition, our credit performance continues to look great, with very low levels of provision expense. As you can see on slide 12, we ended the second straight quarter with no loans over 60 days delinquent and with the low level of losses, as we continue to settle with Fannie Mae on the few remaining problem assets we have left resolved.

Our results generated an improvement in our key return metrics compared to the first quarter, as operating margin was at 19% for Q1, compared to 25% this quarter. Annualized ROE during the quarter was at 13.4%, compared to 7.2% for Q1. Perhaps most rewarding was the continued growth in adjusted, EBITDA which, as slide 13 shows, was $20.9 million during the quarter, compared to $19.8 million last quarter, and only $14 million in the year ago quarter. Growth in our nonorigination income and expense management continue to power increases in adjusted EBITDA.

Looking ahead, we have a significant amount of capital available to invest to continue growing and diversifying the Company. That capital will be deployed in a variety of manners. For example, we are committed to making an investment of up to $20 million in our CMBS platform. During the second quarter, we began to build the pipeline of potential deals, and subsequent to quarter end we began putting our capital to work, as loans have now been closed and funded. The next step is to securitize those loans, and we are expecting our first securitization deal to happen this quarter. As Willy mentioned, overall we would expect the venture to securitize about $200 million in loans during the remainder of 2014, of which we would receive 20% of the benefits through our ownership stake. We are very pleased with our CMBS pipeline and expect to gain momentum on the origination front in the second half of this year. Importantly, we will be well positioned to take advantage of the market opportunity in 2015, when we believe our CMBS platform will add meaningfully to the bottom line.

In addition to investments in our conduit program, we will continue to invest in our interim lending programs, with the goal to grow our balance sheet portfolio to between $250 million and $300 million in total outstanding. This would result in another $30 million to $40 million of capital based on the size of the current portfolio at the end of the second quarter. We continue to be pleased with the performance of our current portfolio, and have sufficient capital and borrowing capacity to support our plan growth.

As we look for other ways to invest for growth, perhaps the most obvious is continuing to bring on the origination talent. We are aggressively recruiting and have a number of potential hires in the pipeline. One benefit of having raised capital through the term loan is that we now have the financial wherewithal to bring on larger teams of originators all at once rather than one at time, accelerating our access to deal flow.

Given the dynamics of the last six quarters, we knew that the first half of this year would be a challenging comparison to the prior year. Having said that, I am very pleased with our year-to-date results and believe that we have the momentum and the right business model in place for a successful second half of the year.

With that I'll turn the call back over to Willy.

Thank you, Steve. A year ago when it was evident that our two largest business lines were going to be challenged to grow, I hit the road and started a concerted effort to help sell Walker & Dunlop's financing solutions, both new and old. I logged over 100,000 miles, net with over 100 clients and helped work on billions of dollars in deals. From hundreds of client meetings, I have a pretty good sense of what the market wants, and what is making Walker & Dunlop win. At a time when capital is abundant and deal supply is limited, real estate owners and developers want deal flow. Many of the larger real estate developers have shied away from the acquisitions market and focused on developing new assets, while owner operators without development capabilities are competing fiercely for stabilized and non-stabilized assets.

REITs are not Walker & Dunlop's target market, given their direct access to bank financing for construction loans and unsecured credit facilities. However, private developers of all shapes and sizes come Walker & Dunlop to secure bank or life insurance company financing for construction loans, as well as permanent financing once the development is complete. In a stabilized acquisition space, it is a food fight to win deals, and therefore certainty of execution and timing from underwriting to rate lock is hugely important. Walker & Dunlop is differentiating itself along these lines, with one $72 million in Q2 going from issuing an application to locking the interest rate in 47 hours.

We are also doing more acquisition financing this year, growing the percentage of financing for acquisition from 20% of total origination during the first six months of 2013 to 28% this year. This data point is extremely rewarding, as two of our largest competitors HFF and CBRE, both have scaled investment sales platforms to tie financing activity with investment sales. Yet from their recent earnings calls, both saw dramatic reduction in GSE origination volumes.

Two points here. First, W&D's scale and partnership with GSEs is showing its value every day. And second, 2014 is showing itself to be a year with high acquisition financing volumes and low refinancing volumes. As we transition towards 2015, when refinancing volumes grow dramatically, W&D's financing expertise will continue to differentiate us from the competition.

The new leadership at FHFA has established a very distinct approach to the conservatorship of the GSEs. Although the scorecard remains in place, the leaders of the GSEs understand the mandate to which they are running their enterprises. Nobody can predict with certainty what will happened at FHFA or on Capitol Hill, but the regulatory and legislative landscape look better today for the continued operations of the GSEs than at any point since they went into conservatorship.

For the first time in many years, the GSEs are innovating products to address market need. For example, they have created an index lock program that allows borrowers to lock the Treasury rate up to 90 days prior to locking in the all-in interest rate on a loan to compete with life insurance companies. They are offering longer interest-only terms to directly compete with CMBS lenders. And they are allowing us to underwrite assets that are not fully leased to compete with banks and life insurance companies on transitional loans. This innovation has been a clear shift under the new FHFA scorecard, and it is wonderful to see the GSEs back in the market with renewed energy and new products.

In addition, our HUD, capital markets, and interim lending program are finding ways to win. Our HUD team is winning by focusing on seniors and affordable housing, two verticals where HUD financing is still competitive in a market with an abundant supply of capital and impatient borrowers. Our capital markets business is differentiating itself based on access to capital and longstanding client relationships. It is also winning business for our GSE, HUD, and proprietary capital groups where we control the underwriting process and ultimate credit decision in many cases, adding a degree of certainty to the loan process. Finally, the growth of our proprietary capital group is fantastic, and shows the value of our origination platform and underwriting capabilities as we expand inTO new areas of commercial real estate lending.

Between now and the end of the year, we will continue to execute in the market where we have an established brand and fantastic client relationships to grow our lending volumes. We expect to originate more loans in the second half of 2014 than we did in the first half. And we believe our bottom line in the second half of the year will show solid year-on-year growth. We are working exceedingly hard to maintain our leadership position as Fannie Mae's largest DUS lender, and we will keep chipping away at CBRE's standing as the largest Freddie Mac's seller/servicer as we continue to gain market share. We will focus on winning new HUD financings, and work with HUD to improve their processes and systems to better compete in these markets.

We established a goal of brokering $3 billion to $5 billion in loans per year, and are very focused on adding origination talent to our capital markets group. Our CMBS conduit expects to complete two securitizations totaling $200 million before year end, while establishing a strong reputation in the marketplace before the swell of CMBS refinancings in 2015 and beyond. All of this activity will grow our origination volumes over 2013 and position us extremely well for the future.

We will also continue building out our other lending and brokerage operations to be a broader, more diversified company. Just because the GSEs are back does not mean that we are going to slow down our efforts to continue diversifying and scaling our lending operations. Over the past 12 months, we originated $8 billion in new loans when our two largest business lines were pulling back. We scaled our on-balance sheet lending program to close to $200 million. We created a brand new conduit from scratch. We grew our servicing portfolio to $40 billion, and we generated $70 million in EBITDA. Top-line growth is paramount to our future success, and we believe we are about to see that. But below the top line is an exceedingly durable, profitable business that is significantly more diverse than it was a year ago and it will be significantly more diverse a year from now.

We will continue adding loan originators to all of our business line by acquiring companies or adding teams of loan originators as we've done periodically over the past several years. As we continue to scale our capital markets business, we will aim to start lending on non-multifamily assets using our own capital, or with capital we raised from third parties. We will also continue to add new financing capabilities to our existing offerings, such as mezzanine debt and preferred equity to expand our suite of products as the market evolve and clients' needs change.

If interest rate stay where they are today for the next several years, mezz and preferred equity will not be in high demand. But if rates move as many predict, mezz and preferred equity will be hugely important to meet the refinancing needs of many borrowers. And as we add these lending capabilities, we will be adding asset management fees and interest income. As we stated previously it is our goal to have over 50% of Walker & Dunlop's revenues derive from servicing and asset management fees by the end of 2017.

I am as always extremely grateful for all the fantastic work of everyone at Walker & Dunlop. During the challenges of the past year, our team has kept its head down, focused on the task in hand and done a fantastic job. We continue to win awards for being one of the great places to work most recently from the Washington Post. And we continue attract and retain some of the very best professionals in our industry. Stockholders at W&D own stock in a fantastic company today that has generated very solid financial returns over the past year in a shrinking refinancing market with significant regulatory changes. The outlook today is very different from a year ago, and those investors who have stuck with us own stock in a dramatically more scaled and diversified company that has firmly established itself as one of the premier commercial real estate finance companies in the United States.

Thank you all for joining us today. And I would like to ask the operator to open the call for questions at this time.

(Operator Instructions) Thank you. Our first question is coming from Bose George, KBW.

Hi, everyone, good morning. Actually the first question is on the outlook for the GSE market share -- obviously did an impressive job, continue to grow that. Just curious how you think that could trend?

Bose, as you can see from the slide both the Fannie and Freddie market share have grown significantly and consistently over the past several years. I honestly -- I think we are seeing our, if you will, standing as the largest Fannie Mae DUS lender and third largest Freddie Mac seller/servicer, really position us very, very well with clients. That scale and expertise and what we are doing for clients is showing its value every single day.

So I honestly, I have no idea, can't project out -- but what I would say is as you probably know CBRE is the largest Freddie Mac seller/servicer and has consistently had over 20% market share. And as I said in the call we are going to continue to chip away at Freddie's position as the largest Freddie seller/servicer and work hard to maintain our status as the largest Fannie Mae DUS lender.

I don't think there is any cap if you will but it's a highly competitive market. As you know there are about 25 DUS lenders and about 25 seller/servicers and so it's hard for me to say we'll have 18.5% market share or 20% market share that will fall back to 15%, quite honestly don't know. But we feel very good about where we are and how we are competing today to win agency execution.

Okay, great, that makes sense. Actually, I wanted to switch to the comments you guys made on some -- seeing some compression on margins on the larger loans. I just wanted to get an idea what kind of magnitude that was?

I mean you gave the actual numbers on what we are seeing?

Right. I think it was on the mortgage servicing rights, I think most of the compression was from the larger loans. There has been a little bit of compression in the sub $20 million market but not nearly as much. And then I think the other dynamic of this is generally large loans and particularly really large loans where we don't have full risk-sharing have lower servicing rates anyway. And so to the extent we do more a larger dollar not full risk share originations. That's going to also cause compression in the mortgage servicing.

Okay. Thanks a lot.

Thank you, Bose.

Our next question comes from Jason Stewart of Compass Point.

Hi, this is actually Amy DeBone filling in for Jason. But if you go back to the servicing fee compression question just one more time and maybe I can ask it a little bit differently, but from an ROE perspective for larger deals, does the size of the deal offset to lower fee, once lower costs are factored in?

So Amy I would put the forth the following. We are very focused on earning servicing fees on large transactions that, a, are paying us for our risk and, b, paying us for the job we do in servicing the actual loan. And so as a result of that we constantly monitor if you will when we are getting paid for the risk and we are not. I would also say to you that as we look at that, one of the most exciting pieces to it, particularly in Q2 was that we actually this year versus Q2 of last year had the ability to win deals. A year ago, fee compression and whether we will getting paid enough on our servicing fee, quite honestly was not even a debate, because we weren't winning the deals. The agencies were pulling back and not aggressively pricing to be able to win the deals. And so as we get into larger transactions, as Steve outlined on the call, a, we are thrilled to be winning them and b, we are very much making plenty of money from a servicing standpoint to be paid both for our risk, as well as our cost of servicing a loan. But the entire, if you will, market place not just Walker & Dunlop but across the lending landscape, everybody is seeing net interest margin come down and it's -- we are not, if you will, outside of that in the sense that to win deals that are having multiple bidders on them, you are having to sharpen your pencils, you are having to win where you can, and we are seeing some fee compression on the larger deals.

Okay. So it sounds like lower expenses are factoring into the equation, but at the same time ROEs might becoming like coming down across the industry in general for your competitors as well. Is that a fair conclusion?

Well, so Amy what you will see is following -- if you look at the cost reductions that we put into platform back in November of 2013, we scaled ourselves down, and we are operating with that human resource base that we scaled down to at that time. As origination volumes start to ramp back up, we are watching our hiring very closely. What you will get at some point as origination volumes expand is a place where we get real economies of scale, particularly if we continue to do larger deals that don't require more human resources to underwrite them. So you are going to get the economies of scale at some point if you continue to do larger deals.

The issue with it is that as with any enterprise that is on a growth trajectory, you are going to have to figure out what that right point is from a staffing standpoint. So if you look at on a deal by deal basis, you will likely see fee compression because that $100 million financing is not earning the same servicing fee that it earned two years ago. So on a deal by deal basis you will see some compression there. But we should be able to see and as you saw in our Q2 numbers, we should be able to get some margin expansion across the platform if we get real economies of scale as origination volumes grow.

Okay, great, thank you. And just one more follow up. It looks like Freddie interim loan portfolio repayment activity picked up this quarter. Did that pick up in repayment activity increased or impact the other income line item at all?

No. So what I mentioned Amy is prepayment fees increased. So if you look at historically prepayment experience we've had over the last six quarters, it's been relatively consistent. What's changed is last year a lot of our prepayments were in the HUD portfolio, for which we don't receive a prepayment fee. And this year the prepayments have been more in the Fannie and Freddie portfolios and we do receive a fee in that -- in all cases, those fees have offset the impairment in the mortgage servicing right that we have also recognized.

Okay, great, thanks. I missed that. And then just to get a feel for the -- can you give us an idea of what the weighted average life was for the loan that that repaid and then what the average age, weighted average life is for the remaining loans in that portfolio?

Yes. The loans for -- that have been generated, the prepayment fees, a lot of our primary servicing portfolio, not out of the interim loan portfolio. So in the main servicing portfolio, our $40 billion portfolio, the amount of loans have paid off early have not impacted the growth in that portfolio, nor it has changed the average servicing fees or weighted average life of those assets. They are still at 10 years and 24 basis points in average fee.

On the ILP loans, we expect actually a fair amount of turnover in that portfolio, which is designed to be such, because those are generally two year, outside three year loans. And our expectation is the average life is only going to be probably 18 months duration. We have designed that portfolio to be able to do the permanent financing on those assets and we did a 100% of the permanent take out which means all of the $58 million that paid off in that portfolio in the second quarter we either placed with Fannie, Freddie, or HUD.

Okay, great. Thank you for taking my questions.

NO problem.

Our next question comes from Brandon Dobell of William Blair.

Thanks. Maybe some color on where your, I guess you could call it producer or headcount stands now? Either on a year-on-year basis maybe compared to where you finished 2013 at? And how should we think about the -- I guess the organic growth in that headcount for the balance of this year?

Brandon, we are currently at 65 and that's up, I believe, from 61 at the end of 2013.

Okay.

So net four adds. And it's -- we are out in the marketplace as all of our competitors adding, trying to add the very best origination talent. And it's -- I think as we mentioned in the script, the ability for us the year bring on full teams or acquire firms is something that we have been very focused on, and we will continue to be focused on.

That's good segue into the -- your comment towards the end, they really about non-multifamily properties. Maybe a little bit color on timing and strategy, is that going to be an organic effort? Is there a particular, I guess, mode of operation you plan to take, maybe it's a geography you are already really comfortable in, multifamily side or with a particular set of clients? Do you have assets or money in multiple asset classes so you can cross-sell your way into dealing with their office or retail properties? I guess just a little more color on strategy and timing to get into non-multifamily that will be helpful.

Sure. So, Brandon, as you well know two years ago, before we launched our balance sheet lending program and before we got into the CMBS space, the only risk we took from the lending standpoint was on our Fannie Mae DUS business. And as much as we took credit risk on that, I believe that many people sat there and said, they understand the GSE business but as a broad real estate lending platform, they are pretty focused just in the GSE space and just -- they just take risk in the Fannie Mae DUS space. Two years later, after launching both our balance sheet lending as well as the CMBS platform, we now have a much broader, more diversified platform that is underwriting assets both for our balance sheet as well as for CMBS execution. I think that opens the opportunity for us to and raise capital from third parties or use our balance sheet to lend on non-multi asset.

The other piece that I would say from a market color commentary standpoint is that when I go out to meet with clients and we are pitching our capital markets execution, the differentiator there is long-term relationships and the capabilities of our finance people in accessing capital, underwriting the deals, and finding the appropriate deal for the client. But to be perfectly blunt about it, it is not nearly as compelling a story as when we try and sell our multifamily execution, where we are the largest Fannie Mae DUS lender, third largest Freddie Mac seller/servicer and are doing things for our clients that nobody else can do. And as a result of that, we are very focused on trying to create similar type of differentiators for other asset classes. So whether that be hospitality, office, retail, potentially industrial -- those asset classes as well have huge refinancing volumes in 2015, 2016 and 2017. And as much as we have a very, very established brand reputation and execution capability in multifamily, there is lots of opportunity for us to expand out into other asset classes. So it's the combination of the growth in the platform from an underwriting and risk taking on non-multi assets as well as having seen how compelling our positioning is in the multifamily space of controlling the underwriting process, the pricing process, and the delivery process that makes us very keen on creating those other lending executions.

Okay, that makes sense. I want to touch on just -- I think just one bullet point on the slide about the servicing portfolio and the third party valuation versus the book value, that the delta between those two numbers, what's the driver behind that? And if rates move up and down is there a big impact on how that spread between third party valuation and book value would look?

Brandon, there is some impact of interest rate as you know because of the prepayment protection in the agency portfolio.

Okay.

There's not as much impact of interest rates. They do tend to be a bigger impact on the HUD portfolio.

Okay.

The actual prepayment history in the HUD portfolio, and the reason being -- when we book an MSR on those, we are only factoring the servicing fees during the time in which there is a yield maintenance payment embedded in the loan, which typically on a 35 year HUD loan is going to be ten years.

Okay.

So obviously there is, from a pure prepayment theory perspective, a lot more years of servicing income coming on those assets. And so those are little more prone to the valuation on an interest rate perspective. The other, I guess, delta -- and this is less about interest rate and quarter-to-quarter movement -- but, yes, we do service loans for life insurance companies and others that we don't have any MSR recorded for.

Okay.

There is a portion of the fair value that's associated with that servicing as well.

Okay. And then final one for me. The increase in the average deal size, I guess kind of double-edged sword there. How do we think about that dynamic for the balance of this year and I guess maybe the -- probably more importantly, as you think about the increase in refinancing opportunities in 2015. Does that larger deal size trend continue? Does the refinancing opportunity have the same impact on average fees? If it is -- for these deals -- if it's really refinancing or as opposed to origination-driven, I guess I am trying to figure out how to think about those two dynamics, refinancing opportunity versus a larger loan size as you work through this year but mostly in the next year.

I honestly wish I had a clear answer for you. I really do. I would say this that if you look at the deals that we did in Q2, we have at W&D, a number of, if you will, ten ton gorilla originators who have very large clients, who have done -- the majority of their financing with this originators. And with those originators, you get on average larger deal size. What has changed is that many of what I would deem are second-tier originators have stepped up to start working with larger client. And those larger clients have confidence in them to work with them on the larger financings. And so if you look at the distribution of deal flow and our origination sales force, what you are seeing is that next tier of originators doing larger deals, which is fantastic. It means to say they got client relationships with larger developers, owners, and operators. And they have got their confidence to get the ability to work on larger transactions.

I do not know as I -- let's just say that in my mind right now I am thinking about Originator X who has created a new relationship with Borrower Y, I don't know what Borrower Y's 2015 refinancing volumes looks like as it relates to average deal size?

Yes.

But I do believe that since that group of originators has stepped into that type of client relationship that we are going to see the trend. In another words, we are going to continue to see larger deal size, and as Steve said on the quarter-on-quarter we move from $11.x million for average deal in Q2 of 2013 up to $14.x in Q2 of 2014. That's a pretty significant quarter-on-quarter jump. And on the agency side, doing over 60% of our deal flow on $20 plus million deals shows that we are -- we are right there on the very biggest and the most competitive deals, which we love doing because those borrowers have a lot of deal flow. And they control a lot of market share. So us being one of the largest providers working with a largest operators? That's great.

So that's a bit of a, I guess a double-edged sword right? The average deal size goes up, compresses some of the fee metrics you see, but it probably puts you in conversations with a lot and broader opportunities, especially given the different capital raising platform you have now as opposed to couple of years ago. So couple of years ago being in those conversations wouldn't have helped that much, because you couldn't put them into the inter-loan fund or that CMBS conduit or whatever. But it sounds like now that you are there, their large deal size maybe isn't a big of an issue because it provides more opportunities for you. Is that the way to think about it?

I think that's exactly right. That's exactly it.

Okay. Great. Appreciate it. Thanks.

Thanks, Brandon.

(Operator Instructions) Our next question is from Jason Weaver, Sterne Agee.

Hey, good morning. Thanks for taking my question. I want to start off with the HUD lending business. What can you say about any efforts you might make for aligning that capacity in overhead of that business with fluctuating and -- excuse me, with the large fluctuation and demand?

Jason, as you can imagine we work very diligently to do a couple of things. One, to make sure that the origination sales force isn't focused solely on HUD originations because they do come across originations for Fannie, Freddie and other executions, is point one. Point two is that from an underwriting standpoint, underwriters on HUD understand how to underwrite HUD loans. They also in many instances know how to underwrite Fannie and Freddie loans. And so there is some, if you will, flex capacity there to move resources from one execution to the other.

The other piece I would put on it is that we didn't talk about it on the call, but we are doing a significant amount of refinancing of our HUD portfolio. HUD has an interest rate reduction program going on right now where we're refinancing a large portion of our portfolio, and making fees on that. We do not count that in our origination volume numbers, but it is adding economics to our HUD team. And that is requiring time, effort and capacity to process those IORs. And so as much as our HUD team is off from a volume standpoint significantly, from an actual budget standpoint if not off as significantly just because of the IRR activity.

Our HUD management team is incented on bottom line performance not top-line volume, so they are managing the cost structure in line with the -- both the origination and the refinance opportunity that they are seeing today.

Okay, thank you. Could you just talk a little bit about how you view the effects on margins from new entrants, such -- as we heard Regions Financial just entered the DUS lending business, and I expect a lot of other banks will be doing that as well.

So as I said previously, Jason, there are 25 Fannie Mae DUS lenders and 25 Freddie Mac seller/servicers. It's always been and always will remain a very competitive market. I would put forth you that there are only a few competitors who can really go after the big borrowers and effectively compete for their business. And that really is a group of probably the top five in both Fannie and Freddie. The top five DUS lenders and the top five seller/servicers are our real competition. That's not to say that there is not some historic relationship with someone. You use the example of Regions Bank, I am certain that there is somebody who has done lots of construction financing with Regions Bank and hasn't launched to any relationship with them but some time in the next couple of years will come along say, I want to do my DUS execution with Regions because I have a long standing relationship with Regions and I would like to use them.

But we have seen a lot of very powerful, very big financial services institutions come into this space and some have been successful and some have not been successful. We feel very well-positioned from our track record relationship with the agencies and access to deal flow to remain one of the very biggest, and it's always going to be competitive landscape. So if you said that DUS license was retired and went away, it wasn't going to change our world, and if you say that it has been acquired by Regions or anybody else, I don't think it changes our world that much either.

Fair enough, understood. And one more quick one. Post- the release of the scorecard, do you have any new thoughts on what's the previous question last quarter regarding GSE affordable housing targets and the attendant impact on multifamily business industry-wide?

So affordable is a very important component of the FHFA scorecard. And both Fannie and Freddie have significant affordable housing targets. And as I think we've mentioned previously, Fannie from whether they aggregate deal, flow generally speaking doesn't have a hard time getting to their affordable target, whereas Freddie because of types of deal they focus on, is always working very hard to make it to their affordable housing targets, but as you know has always made them.

And so the bottom line there is that we know that the affordable space is a space that both the agencies are focused on. We are doing as much deal flow in that space as we can. I believe that we were the third largest affordable originator for Fannie Mae in 2013. And one of the other ways that Freddie has moved towards affordable is to enter the manufactured housing space. And FHFA has allowed Freddie to get into the manufactured housing space. We were Fannie Mae's largest manufactured housing originator in 2013. We have a very large client base in manufactured housing. And so the fact that the Freddie is now in that space and we were one of the few lenders selected in the pilot program and they now opened up that to everybody in the manufactured housing space. That's net positive to us. It provides us with another capital solution for our manufactured housing clients.

Okay. Thank you for taking my questions.

Sure.

And it appears that we have no further questions at this time. I would be happy to return the conference to Mr. Willy Walker for any concluding comments.

Great. And thank you all for joining us today. And we will be talking to many of you in the near future. Thanks. Have a great day.

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