Walker & Dunlop Inc (WD) 2015 Q1 法說會逐字稿

Welcome to Walker & Dunlop's first quarter 2015 earnings conference Call and Webcast. Hosting the call today from Walker and 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 11.30 AM Eastern time. The dial in number for the replay is 800-839-2434.

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, Kevin. Good morning, everyone. Thank you for joining the Walker & Dunlop first quarter 2015 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 this 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 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 diluted earnings per share and adjusted EBITDA 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 statements regarding future and financial operating results, involve risks, 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 SEC. With that, I will turn the call over to Willy.

Thank you, Claire. Good morning and thank you all for joining us. Today we have the pleasure of reporting record operating results for the first quarter 2015. As Steve will run through in just a moment our financial results are outstanding by all measures. The economic drivers we spoke about in our last earnings call proved to be incredibly strong tailwinds for our business as we achieved the highest quarterly loan originations in our history.

I want to begin by congratulating and thanking all of my colleagues at Walker & Dunlop for an outstanding quarter. We have spent the last five years acquiring companies and hiring commercial real estate finance experts to create a national lending platform to capitalize on the 2015, 2016 and 2017 commercial loan maturity cycle. The first quarter of that 12-quarter cycle just ended and our Q1 results demonstrate the value of the investments we have made.

Our quarter-over-quarter loan originations grew by 175% due to competitive pricing from the GSEs, significant new investment in US commercial real estate and the continued low interest rate environment. Record loan originations, EBITDA and diluted earnings per share come from having built a scaled lending platform with some of the very best real estate finance professionals in the industry who are meeting their clients' needs in an exceedingly active market.

This is a successful start to the year beyond our loan origination and financial results. We repurchased 3 million shares of our stock from Fortress Investment Group in March, deploying $47 million of capital and what appears to be another very well timed repurchase.

Fortress has been a great partner over the past 2.5 years. They are still the majority shareholder in our CMBS joint venture and we just did a huge financing on one of their many commercial real estate investments. We expect to keep partnering with Fortress in many ways in the coming years.

We also just announced our entry in the investment sales arena with the acquisition of Engler Financial. Walker & Dunlop investment sales will provide us with the additional revenues and client touch points going forward. And we plan to scale the investment sales platform rapidly.

With that I'll turn the call over to Steve to discuss our financial results.

Thank you, Willy. And good morning, everyone. Let me spend a few minutes going through the numbers starting with our key operating metrics where we achieve record results across the board. Diluted earnings per share were $0.66, up 214% over the first quarter of 2014, driven by the robust origination activity and overall revenue growth during the quarter.

As extraordinary as EPS was this quarter and it was, our focus is never on just one quarter's results but on our performance over the long run. To illustrate slide four shows our trailing fourth quarter adjusted EPS trend which for the past year has shown steady growth and was $2.03 per share for the trailing fourth quarter ended March 31, 2015, an all-time high.

Slide four also illustrates our trailing fourth quarter return on equity which showed the same positive trend. For Q1, return on equity of 19.6% far exceeded our target of low to mid teens due to the record income generated during the quarter. The buyback of the Fortress shares did not have much impact in this number but will have a positive effect going forward. And combined with the strong start to the year and a positive operating environment in front of us, we believe our return on equity for the year should be towards the upper end of target.

Operating margin at 32% came in well above of our target of mid 20% as we benefited from the fact that we originated over $4 billion in loans in the first quarter of the year when our commission rates are at their lowest, and as we continue to manage growth in our fixed expenses.

Moving now to volumes, slide five provides information on our loan originated during the quarter. As Willy mentioned, the strong demand for commercial real estate financing drove the significant year-over-year increase in originations from $1.6 billion last year to $4.3 billion in this year's first quarter. The strength in GSE deal flow that we saw in the second half of last year continued into the first quarter. As Fannie and Freddie were a combined 77% of our first quarter volumes.

Originations with Fannie Mae increased 197% and originations with Freddie Mac increased 442%, making Freddie the largest component of our volume for the second quarter in a row. Our brokered originations increased 83% year-over-year as we benefited from the strength of the market and our investments in growing our capital market platform.

Average transaction size for the quarter as shown on slide six increased 76% to $23.3 million and was impacted by the origination of two large portfolios totaling approximately $1.1 billion, with $670 million going to Freddie Mac and $402 million going to Fannie Mae. As we have said in the past it is very difficult to predict when or if a large transaction will happen. And we were fortunate enough to have two hit in the same quarter.

In addition, we continue to see strong demand from borrowers for floating rate loans based on the attractiveness of the spread and the prepayment flexibility offered by these products. As 45% of our Q1 GSE volumes were floating rate.

We generated a $112.1 million of total revenues in the quarter as shown on slide seven. The 73% increase over Q1, 2014 was largely driven by origination fees and MSRs which grew 100% and 125% respectively. Gain on sale margin of 167 basis points was down from the prior year but flat to the fourth quarter 2014, as product margins held steady for the second straight quarter. It remains highly competitive lending environment. But the benefits of scale enable us to expand operating margin even as gain on sale margins have declined.

Servicing fees continued to grow and during the first quarter increased 15% over Q1 last year as we saw a $7.2 billion increase in the servicing portfolio over that same time period. Net warehouse interest income grew year-over-year due to the strong increase in loans held for sale and the growth of our interim loan portfolio.

Other revenues of $7.4 million increased 106% driven almost entirely by fee income earned from loan prepayments and an increase in earnings from our CMBS joint venture. Fees received on prepayments were $4.7 million in Q1, 2015.

As you will see from slide eight, total expenses for the quarter were $76.7 million. Personnel costs, our largest driver of expenses, were up 63% given the strength of our originations and financial performance which drove up commission expense and bonus compensation. This increased variable compensation 156% year-over-year. However, personnel expense as a percentage of revenue declined from 38% to 36% given the strength of our revenue growth and management of fixed personnel costs.

Finally, adjusted EBITDA was $35.4 million for the first quarter compared to $19.8 million in the first quarter last year. On a trailing four quarter basis we have generated adjusted EBITDA of just over a $100 million, a dramatic increase from just $63 million a year ago as illustrated on slide nine.

With the repurchase of shares from Fortress, we have now fully deployed the net proceeds of our 2013 term loan. Our strong cash flow generation and the capital received from the term loan have allowed us to return $82 million to shareholders through share repurchases while growing our interim loan program, acquiring Johnson Capital and Engler Financial and supporting our CMBS platform.

All of these investments are now benefiting our company and shareholders through higher returns and profitability. Our continued strong financial performance and adjusted EBITDA generation give us the ability to raise additional debt to support future acquisitions and growth opportunities as they arise, greatly enhancing our financial flexibility.

With that let me turn it back over to Willy.

Thanks, Steve. This is an outstanding first quarter for Walker & Dunlop and our shareholders. Over the last several years we scaled our GSE and HUD platforms through the acquisition of CW Capital, grew our capital markets group with strategic new hires and the acquisition of Johnson Capital, and established alternative products through our CMBS joint venture and balance sheet lending.

We built this platform to take advantage of the unique market opportunity presented by the refinancing wave and it is great to see those investments rewarded early in this refinancing cycle. The 2015 GSE scorecard allocated $60 billion of capital to Fannie and Freddie for market rate multifamily lending.

Having finished 2014 at 12% market share with Fannie and 10% market share with Freddie, holding market share constant we have produced $6.6 billion of GSE lending in 2015 for Walker & Dunlop. Having originated $3.4 billion with the GSEs in the first three months of the year, we are well ahead of schedule.

If you turn to slide ten, it shows that in the first quarter we captured 9.2% of Fannie's originations and 16.7% of Freddie's. Our combined market share of the $20.4 billion deployed by the GSEs was 12.9%, a fantastic accomplishment reflecting the value of being one of the GSEs very largest partners.

With at least $40 billion left to lend over the next nine months, we are focused on capturing our share of the GSEs remaining capital and ending this year yet again as a top partner with them both. After an 83% increase in our capital markets originations from Q1 2014, we feel very good about achieving our established goal of originating $3 billion to $5 billion of brokered loans this year.

Our CMBS conduit recently added two new originators to the platform and closed $96 million of business in the first quarter, generating almost $1 million of net income to Walker & Dunlop for our minority ownership stake. Although $96 million of volume is below expectations, we are seeing great growth in the conduit pipeline and are thrilled with the profitability of our first three securitizations.

Our balance sheet lending operation generated $1.9 million of interest income in Q1. And right now we project to generate $8 million to $10 million of interest income on the year. We launched this program in 2011 and has become both a hugely strategic and profitable line of business.

Given the GSEs strong start to the year, there has been significant discussion about when they will hit their lending caps. This issue is being actively discussed by the GSEs and the industry with the Federal Housing Finance Agency and is our expectation that FHFA make some adjustments to the cap. But as the GSEs have raised pricing over the past several weeks to slow down originations, several things have happened.

First, GSE quote that were outstanding have been accepted, making Q2 GSE volume strong. Second, Walker & Dunlop CMBS platform is now pricing on top of or inside the GSEs, adding significant volume to our CMBS pipeline. Very few of our GSE competitors have their own CMBS platform. And we plan to take advantage of this product offering at W&D.

Third, our balance sheet lending which had a slow first quarter is more active than ever given the need for interim financing and the GSEs reduced appetite for it.

Fourth, Walker & Dunlop's capital markets group has never been larger and never had access to more capital, providing our multifamily customers with access to third party capital to finance their deals. Fifth, our HUD group now has the opportunity to work on standard market rate multifamily re-financings.

And finally, Walker & Dunlop's warehouse lenders have approached us about extending our warehouse lines in Q3 and Q4 to allow us to lock rate on deals that we will deliver to the GSEs or other sources of capital in 2016. All of this is very positive for Walker & Dunlop and demonstrates the value of our investments in capital markets, CMBS and balance sheet lending operations over the past several years.

The profit profiles of all these executions differ and ultimately we have limited control of where our deal flow goes. However, we started the year with the goal to gain market share with the GSEs, deliver a low to mid-teens ROE, deliver a mid 20s operating margin and grow earnings per share at double digit rates. Those goals were established with an understanding that the GSEs would have $60 billion to lend outside of their affordable buckets and if the demand for commercial real estate financing would be strong. None of that has changed.

As a result, our fantastic start to the year makes us confident that we are on track to achieving those goals whether the caps are raised or not. The rest of 2015 along with 2016 and beyond provide W&D with huge opportunities to continue originating large volumes of business with the GSEs and other sources of capital to meet our clients' ever growing financing needs.

GE recently announced that it is exiting its financing and commercial real estate lending businesses. One area that GE provided significant capital to was a seniors housing space, an area we've clearly defined as a market opportunity and one where we just originated a $670 million financing for a new senior investment group, the largest financing ever done by Walker & Dunlop. We have the expertise in seniors housing to be a major player and GE's departure from this business represents a significant opportunity for us to recruit talented mortgage bankers.

This also represents an opportunity for our HUD lending operations, as HUD continues to be one of the largest providers of capital to seniors housing.

We announced recently our entry into the investment sales business by acquiring a 75% interest in Engler Financial Group. Engler is based in the Southeast, has an exceptional reputation with multifamily owners and developers and will create broader and more meaningful relationships with our collective clients. We will be making meaningful capital investments in this new business line and believe that the combination of our market position and relationships in the multifamily industry and Engler's decades of investment sales experience provide a fantastic opportunity to build a nationally recognized investment sales platform with the same commitment to best in class customer satisfaction that is made our company so successful over the last 77 years.

We have grown revenues at a compound annual growth rate of 19% over the past three years and grew revenues 73% in Q1 2015 over Q1 2014. We have grown adjusted EBITDA at a 70% compound annual growth rate over the last three years and grew at 79% in Q1 2015 over Q1 2014. We have built the platform we aspired to build to take advantage of the refinancing wave that is upon us.

We have the brand, national footprint, market leadership position and real estate finance experts to fully take advantage of the next three years of increased transaction volume. And behind the platform and the people is a business model that is sound, highly profitable and enduring due to the $46 billion servicing portfolio that will generate over a $100 million in revenues in 2015 and beyond.

It is clear we are off to a fantastic start. We have assembled an outstanding team of professional to capitalize on this financing cycle and our first quarter results reflect the success of our efforts. We still have much work to do in order to achieve our goals this year, but I would like to thank and congratulate my colleagues at Walker & Dunlop once again for their efforts this quarter and the strongest financial results we have ever produced.

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

(Operator Instructions) Thank you. Our first question is coming from Steve DeLaney with JMP Securities. Your line is now open.

Thanks. Good morning, everyone and congratulations on a great quarter. Willy, I just want to start. The obvious thing is the volume. First quarter, I guess we need to think out of the box because some of us are just ingrained in thinking that first quarter commercial real estate lending is always going to be the lightest of the year. There's obviously some different dynamics going on especially multifamily.

I'm just wondering if you could talk a little bit about the borrower mentality early in the year and this kind of surprisingly large level in 1Q pretty much flat to 4Q. Are people concerned about GSE running out of capacity? They want to get their deals done. They are worried about rates rising. What is your sense of sort of the borrowers' mentality and why business was so strong in 1Q? Thanks.

Sure, Steve. Good morning and thanks for getting up early to join us. I would say a couple of things on what we saw in Q1. And I say couple of things we didn't see.

The first thing is specifically to your question of people thinking that the GSEs would run out of money being a driver, in Q1, not whatsoever.

Okay.

So that was not at all a driver. I would say that in the first month of Q2, it has clearly been a driver of people saying -- I'll take that financing, let's go. But in Q1 specifically to your question, it was a very, very active acquisitions market in Q1. And that's reflected in the numbers of HFF and CBRE and those firms that have scaled investment sales platforms.

The second thing is that surprisingly, as Steve pointed out, we did significantly more floating rate financing in Q1 2015 than we have done previously, which would say to you that borrowers are not concerned about a rate increase. And although they may be concerned about a rate increase, they clearly all opted to go with floating rate. And as Steve said, that's due to the spread between fixed rate and floating rate, and I would also say the prepayment flexibility that floating rate loans have today versus a fixed rate loan which has call protection on it.

The third thing I'd say is the most active buyers right now are the funds. And so funds being very active out there are, a, looking for prepayment flexibility; b, are looking for the ultimate spread delta, if you will, between fixed rate and floating rate due to their promote structure and being really shorter term holders of these assets than, if you will, longer term holders who are going to buy and put it away with long-term debt. So those are the major drivers in Q1.

Yes. And your comment about acquisitions strikes me. I'm thinking a lot of that might have been tax driven, right. I mean if the funds are the buyers and you had individuals, family offices, et cetera selling, they have been tax motivated to sell in 1Q versus 4Q. Just a thought on that.

But I guess combination of this acquisition market being very strong and the fact that you also had these two very large deals a little over $1 billion or 25% of volume. I mean can you give us some thoughts about as we look forward to 2Q and 3Q? Is this a level roughly $4 billion a quarter just in a rough range? How should we feel about the potential for the next couple of quarters relative to 1Q?

So Steve, we as you know are not giving origination guidance anymore. So I'm not going to walk you through what our projections are on two, three and four.

Okay.

We are very clear in saying that our strategy has been to build this platform and scale this platform to take advantage of the refinancing wave that everybody has seen coming for 2015, 2016 and 2017. And as we said in our earnings announcement this morning, Q1 is clearly reflective of that refinancing wave having hit. And that's not just a comment about Walker & Dunlop's Q1. You look at all of our competitor firms, they all had good Q1s. And I think almost all of them beat analyst expectations in Q1.

So we are not the only one out there benefiting from this. We may have benefited more than others in Q1. But we see a fantastic opportunity in front of us. And we've built a fantastic platform to take advantage of it, but Q1 this was somewhat of anomaly as far as the volumes.

I've already said in my prepared remarks that we see Q2 as being strong. And as it relates to the rest of this year into 2016 and 2017, we think there is a fantastic opportunity for W&D to continue to grow. And we reiterated the, if you will, financial drivers that we laid out at the beginning of the year as it relates to ROE, operating margin and double-digit EPS growth.

That is very helpful. Thank you, Willy. And just one quick thing finally just shifting over to strategic and talking about loan brokerage and property sales, Engler acquisition. I mean these obviously are high ROE, capital-light businesses that warrant a much higher PE than probably just the traditional real estate finance business.

Looking out as you try to scale these businesses going forward are there any internal targets for -- in terms of say a percentage of revenue over the next couple of years that we might look to see this business grow to in terms of how meaningful they can be to your blended revenue mix? Thanks.

Sure, Steve. I would say this. We clearly, when we announced the acquisition of Engler, put out that we want to build a national platform and we are very focused on doing just that. But it's also -- we're two weeks into it.

I would say that investors in W&D can look back to when we said we wanted to get into the CMBS space and the launching of our conduit and we wanted to get into the balance sheet lending space and the launch of our balance sheet lending, that we have been very successful at starting up these new businesses, attracting great talent to manage those businesses, putting capital to them. And both our balance sheet as well as CMBS platform are becoming meaningful percentages of both revenues as well as net income.

And so we do have targets for what we want to do with Engler and quite honestly we are in a period of time right now when there is a huge amount of investment sales activity out there. And we know that that will not last forever. But we're not giving any guidance right now on percentage of revenues we would get out of investment sales.

Okay, great. Thanks for your time and comments this morning, Willy.

Thank you, Steve.

Our next question comes from Jade Rahmani with KBW. Your line is now open.

Thanks for taking the questions. Regarding the GSE cap issue, if the GSEs emphasize affordable on manufactured housing to work around the caps, how is WD positioned in that respect?

So Jade on the manufactured housing side we are a very significant originator of manufactured housing to both Fannie and to Freddie. We were actually Freddie's largest manufactured housing seller servicer in 2014. So we have access to a lot of deal flow there.

On the affordable side, we have a number -- we have a lot of loan originators who focus on affordable. Most of that deal flow traditionally has gone to HUD.

And the one thing I would say as it relates to winning on affordable deals, because of the Community Reinvestment Act and because commercial banks are very focused on lending to meet their CRA requirements, winning affordable deals against commercial banks is very difficult. And just in Q1 we had a number of deals that we lost to commercial banks by pretty wide margin.

And so one of the things that both GSEs are somewhat challenged with is that to win deals against the commercial banks given commercial bank's cost to funds and desire for affordable housing loans to meet CRA requirements is a -- if you will a steep curve.

So we will continue to focus on it. And I know that both Fannie and Freddie are very focused on it. But how much they can actually do as a percentage of their overall originations is to be determined.

Thanks. That's very helpful. Regarding the competitive environment, do you have concerns about the level of competition and deteriorating underwriting standards? For example, is the floating rate mix evidence of aggressive pricing on the part of the funds you described? What's your view of the competitive environment?

So the actual underwriting on the deals we are doing today, Jade, is very good. If you look at our Q1 2015 versus Q1 2014 LTV and debt service cover, both of them -- LTV went from 68% to 70%, debt service cover from 1.47 to down 1.45. So quarter-on-quarter the type of loan that we are doing, we'll do 70% loans at a 1.45 debt service cover for the rest of our lives and be very good from a credit standpoint.

The question really comes in what kind of a rate environment are we in 10 years from now when these loans need to be taken out? And quite honestly if you could tell me the answer to that I'd love to know it. But we are I believe underwriting with very good and conservative estimates as it relates to where interest rate will be and what type of spread we would have to apply to those interest rate projections to be able to refinance out all of the loans that we are originating today. And we feel good about those estimates.

But that's quite honestly right now given we are in such a low interest environment, that's really the question. What's your exit rate and what's the financing market look like 10 years from now when we need to refinance all this paper?

On the CMBS business do you have goals you could talk about regarding quarterly volume or at least the steepness of ramp? Sounds like 2Q you would expect CMBS volumes to be up strongly. And also are you seeing any push back from banks, securitizers or even BP's buyers regarding the contributions to securitization from the non-securitizer?

So on that question yes. As you well know, a number of the securitizers, aggregators, have gotten pressure from the BP's buyers as well as the A buyers to, if you will, reduce the number of contributors that they have. We are very pleased to have two partners to contribute to and feel very good about the quality of our collateral. And given the profits we made off of our modest contributions in Q1, I think that's reflective of the fact that we have fantastic collateral that has gotten premium pricing.

On your question is it relates to volume, we have not given guidance as it relates to how much volume we are doing. But per my comments previously, the overall CMBS market is extremely active as you know. And I believe the projections are that through May there will be over $45 billion originated to CMBS conduits.

So there's a lot of deal flow going to conduits in 2015. And given our access to deal flow through our brokerage network as well as our multifamily origination network, we do think that our volumes will increase nicely in Q2.

Thanks for taking my questions.

Sure.

Our next question comes from Charles Nabhan with Wells Fargo. Your line is now open.

Good morning. And thank you for taking my question. If we were to assume the status quo for the GSE lending caps through 2015, given some of the pricing adjustments that have been made in the past month or so, do you anticipate a smoother allocation in volumes over the course of the year? Maybe if you could just touch on your expectations for trajectory assuming flat lending caps?

So, Charles, if you look at what was done in Q1 by the two of them, Fannie did $10.5 billion, Freddie did $10 billion, so that's $20.5 billion in the first quarter. As I mentioned, when they raised pricing all of the outstanding deals, most everybody jumped at the deals before pricing moved or as pricing moved. So during the month of May -- excuse me -- April there was sort of surge as it relates to people taking what was out there.

So what you had is a compression of Q2 where the pipeline for Q2 really came crashing in during the month of April and will probably out there in May and June as well.

And so what they're going to be dealing with is depending upon what FHFA does and how much cap they still have for Q3 and Q4, they will do one of two things.

First of all, they will figure out how they're going to allocate capital and that allocation of capital is going to be on their biggest borrowers are, who their most loyal clients are, who their biggest seller servicers on the Freddie Mac side or who their biggest partners on the Fannie Mae dust program. So there will be I believe some if you will segmentation of the market as it relates where they are putting out capital. And they will continue to focus on affordable small loans and affordable housing.

And then the final piece to it as I alluded to in our prepared remarks, they will sit there and also figure out how much deal flow they want to take and can take on the caps in 2015 and how much they want to work with us to rate lock in 2015 and carry over for delivery in 2016. And I think a lot of that's going to be pretty dynamic to what does FHFA do for the rest of 2015 and then also what's the 2016 scorecard look like.

And so right now, we're in a wait and see mode but relative to our day-to-day operations around W&D and what's going right here, it's very much business as usual right now.

Okay. And if could switch gears to expenses. I was wondering if could comment on the cost structure as you continue to -- as you scale the Engler business and you add personnel in key areas such as CMBS. Could you comment on any rationalization efforts you might have going on within the core business that might offset some of those additional expenses?

Yes. Chuck, at this point I think given the growth we've had in the platform, I think we feel like we're operating pretty efficiently at the moment. To the extent that there are investments to be made, and there will be investments that we make in the investment sales side to grow that platform, I think we'll be using the same disciplined approach there that we have in the investments we've made on our lending platform when we're looking at either acquiring groups of producers or hiring folks and recruiting them individually. So I think we've been pretty successful historically at getting people onto the platform in a way that's economically good for them and good for us and we'll continue to take that same approach as we build the investment sales platform.

Okay, great. Thank you.

Our next question comes from Cheryl Pate with Morgan Stanley. Your line is now open.

Hi, good morning. And congratulations on a great quarter. Just a couple may be little bit longer-term type questions. Just thinking through the ROE and the operating margin targets that you had, and as you think about how the business has transitioned to some larger deal sizes and things like adding on the investment sales, is there upside to those targets when you think about that over more of a medium term timeframe?

Good morning, Cheryl. That's a good question. I think as Steve said in his remarks, large deals are tough to predict on when we will get them. I will say I'm very pleased that we were successful in winning the two large deals we did in Q2. And there are a lot of large deals out there right now.

I mean one of the big things that is very much in both the GSEs volumes as well as the CMBS volume across the industry, there are big portfolios that are trading hands, needing refinancing. And so there are a lot of big deals out there. And as you can see by our average deal size having grown as much as it did in the quarter, we are seeing more and more large opportunities.

To translate that right back into an adjustment on our operating margin, I will tell you at least I am hesitant to do so. And that is just that what you really saw in Q1 is that we got to a volume of originations that basically pushed all the scale through the system and got you to the type of operating margins that we did.

And so one big deal in a lower volume quarter would not allow you to achieve that same kind of operating margin. So it was two big deals coupled with great, if you will, normal deal flow. And then getting the leverage out of the platform is what really drove the operating margin up into the 30% range. You want to add anything to that?

That and the fact that first quarter our commission rates are at their lowest level for the year because our producers are starting over in their commission split. And so as we go through the year that percentage will increase, so the variable cost side of equation will increase as we go through the year just naturally.

Right.

Great, that's helpful. And then just secondly you guys have obviously grown the servicing portfolio very successfully over the last few years. And I think we can see a dramatic increase when we look at the trailing 12-month adjusted EBITDA data that you presented.

Just wondering when you sort of think about the opportunities for capital deployment and obviously there have been several successful acquisitions in terms of growth opportunities. Just wondering given the stability of the servicing portfolio about your thoughts to things like perhaps a dividend over time as well.

So, Cheryl, there are fantastic opportunities for us to continue to reinvest our capital in the business and continue to grow it. And whether that's continuing to scale our balance sheet lending, whether it is deploying more capital into the CMBS lending operation, continuing to grow the Engler platform across the country or any number of other opportunities to continue broaden and diversify the platform.

Right now we feel that the capital that we are generating is much better served being invested into the business rather than being returned to shareholders. But you raise an issue that, as you can imagine, given the consistent cash flow that is kicking off of the servicing portfolio is one that we've obviously looked at. But right now it is the Board and Management's view that we have lots of opportunities to continue invest capital.

And as you have seen just in the last year of our opportunistic share buybacks in March of 2014 and then again in March of 2015, we've been pretty good at figuring out when to buy back stock when we thought it was cheap and putting that capital to work to benefit our shareholders and so I think that adds up to almost $85 million that we have deployed if you will in returning capital to our shareholders by doing those buybacks.

Okay, great. Thanks very much, guys.

Our next question comes from Jason Stewart with Compass Point. Your line is now open.

Hey, good morning, thank you. Willy or Steve, either, on the recent increase in rates from the GSEs, how should we think about that impacting margin going forward for that business?

Recent what rates? Sorry.

Increase in pricing from -- yes.

The increase in pricing? No. It's -- I mean it doesn't hurt.

And just remind us how that will flow through if early 2Q volumes are being hit at rates offered in late 1Q? Is that an impact that we should expect to see later in the year or 2Q?

No. I mean I'd say, Jason, that I mean you won't see the -- I mean given the volume of business we are doing right now, first of all on the Freddie side as you know servicing fees are fixed there.

On the Fannie side you will -- as pricing widens we will probably pick up at the margin, if you will richer servicing fees as we and they widen out. And if we continue to win deals, it will be richer servicing, but you won't see that flow through our financials. That's not going to materially move the gain on sale margin on the quarter or move the servicing portfolio one way or the other just on a quarter shift to doing a couple of hundred million dollars at increased servicing fees.

So it will be nice on that book of business but it is not going to move our numbers. Steve -- you concur with that Steve?

Yes. I think the only place just Willy mentioned that you would see it, Jason, is in the MSRs because I don't think from an origination fee perspective you're seeing any difference right now. So to the extent that our Fannie servicing rates are little bit higher with the increase in pricing, we will get a little bit of benefit all things being equal in the MSRs that we book in the second quarter.

Right.

Okay, fair enough. And then just conceptually as we think about -- I think the floating rate product is relatively more competitive today from the GSEs than it was say year or two ago. If we go back to a steeper yield curve how that interplay works with banks and GSEs and whether you think that business is going to be more competitive through different curve shapes, the GSEs, first it's the banks, any kind of color as we think through that potential interplay would be helpful to me.

I would only say there Jason, and it is a really good question, we're not seeing the banks be nearly as competitive as they were in 2013. And I think that's twofold.

One, I think that there was sense after the recession/financial crisis where banks really did almost no commercial real estate lending right after the crisis that in 2013 there was sort of a memo that went out to all of the commercial real estate lending groups at the commercial banks across the United States saying back up the bus, let's load up on commercial real estate. You are not seeing that today.

The second thing is back then there were almost no construction activity in the country. Today, there's plenty of construction activity in the country to take bank capital and deploy it in shorter term loans which is a space that they have owned and dominated for most cycles.

And then the third thing as you rightfully say, the agencies have very, very competitive floating rate product today. So banks -- right I mean there are clearly banks that want to take a deal down. And as I mentioned previously on the affordable space, they get very, very competitive because they need that type of deal flow. But the competitive threat from banks right now to the GSEs to conduits, to life insurance companies is not nearly as evident.

The final thing I would say is that Dodd-Frank, Basel III and the regulatory environment is making banks strongly reconsider whether they want to hold on to mortgage servicing rights for the long term. And that is making many of them stick with shorter term loans that are floating rate loans rather than going longer term fixed rate or even longer term variable.

Okay, that's helpful. Thank you.

Our next question comes from Brandon Dobell with William Blair. Your line is now open.

Thanks, good morning, guys. Willy on top of your comments about how you guys are holding the line on credit underwriting standards, maybe a different way to ask that question -- are you guys seeing an increasing number or proportion of deals that you're not comfortable with? Meaning as the pie of deals getting bigger, you guys are obviously growing originations but the proportion of deals you are not willing to step into is starting to grow.

I honestly -- from my perspective, Brandon, and I sit on loan committee but I only see a small percentage of the loans that we actually do, I would say no to that question. If we got our Chief Credit Officer, Richard Warner, on the phone -- and we're obviously happy to do that if you want to have a follow up call.

Yes.

I think he probably would echo what I am saying but he also sees a whole lot more than I do.

But as I said previously that the real issue right now is not whether the loans we're doing are great loans to be doing for 2015. It is trying to project out and see where rates will be.

And then only other thing that I would say as any kind of concern in what we're seeing is there has been a tremendous amount of IO put on deals. IO is -- typically you'd get two or three years of IO and then IO moved out to five years, and over the last year across all capital sources there has been a lot of IO out there.

And so everyone feels really good and this makes perfect sense, right? Everyone feels really good about the cash flow of the actual asset performing today on an IO basis. The question is you got an IO loan, you got no amortization in it, what's going to happen seven or 10 years from now when that loan turns.

But I'd reiterate we feel very, very good about our risk portfolio. And as you know in many instances we are also originating loans where we are not taking risk and we feel pretty good about all that too.

Okay, got it, thanks. Maybe a question for Steve. As given the volume in the first quarter relative to how the commission multipliers or hurdles work, should we expect that the producers are now at a much higher commission level so Q2 through Q4 they're are going to be picking up more than they normally would in a kind of regular year? Or am I missing how the commission structures work for the calendar year?

Yes. So Brandon I am not sure I would use the term much higher, but certainly as we go through the year they do get to higher levels. I think if you look at our historical personnel expense as a percentage of revenue, you will see a fairly distinct pattern as we go through the year. And I think our expectation is we would have a similar pattern this year.

Okay, got it. And then finally on Engler, Willy, you mentioned the opportunity to really expand the platform there. How do we think about the investment necessary to do that and when you say significantly expand the platform, how do we think about the -- is it number of people or throughput capacity on investment sales deal with -- what do you think about how big this may get for you guys?

So we have a -- we would like to be in three big cities beyond their existing footprint by the end of the year. We will see if we can get there. But we would like to be in three MSA, new MSAs for that platform by the end of the year.

I think as it relates to hiring of talent, given our platform -- and this is multifamily focused right now, right. So given our brand in the multifamily space and our just the amount of financing we do in the multi space, we feel that there is a great opportunity for investment sales professionals who are on platforms that do not have anything close to Walker & Dunlop's client relationships or brand recognition in the multifamily space to jump from those platforms to our platform.

The second thing is that because we now have a platform to build off of with our brand and offices across the country, we don't necessarily need to go after the star brokers. There is a great opportunity for sort of the second or third tier people and teams of investment sales professionals to be able to come to W&D and leverage off of our access to deal flow, client relationships, financing platform and I believe really take their career to a whole different level.

So the strategy here is not go out and throw huge signing bonuses out at the star brokers at some of our big competitors and try and bringing those people across. Given the breadth of our platform we think we can grow this in a very cost effective manner with some really fantastic talent that may not be the headliners at other shops.

Okay. And final one given the nearly $5 million in prepayment fees this quarter and your comments about the refinancing wave kind of starting here in earnest. Should we expect that number to stay at this kind of level, go up? I know there is a component of that number that's driven by kind of floating rate and how the funds exit out of properties, but just trying to get a better feel for how we look at that repayment fee income number going forward relative to the first quarter.

It is really good question and an impossible one to answer (multiple speakers)

If you look -- I mean the last kind of three quarters we've had roughly the same amount of prepayment fee income. Does that make a trend for the rest of the year? I don't know. Like I said it's really hard to predict.

Okay. All right, guys. Thanks a lot.

Thank you.

Our next question comes from Jon McCullough with WHV Investment Management. Your line is now open.

Thanks for taking my question. Just to ask the refi wave question little bit differently. Is there any reason why we should expect maybe the refis to be pull forward significantly so the waves are just bigger but there are not many of them? I am just trying to think of what's -- how long can the trend be and kind of what you are guys thinking?

So it builds, John, over the three years. So if you look at the refinancing volumes 2015 is a huge step up from 2014, 2016 is bigger than 2015 and 2017 is bigger than 2016. So -- and those are annual volumes so we haven't broken it down on a quarter-by-quarter basis.

So the thought of things being pulled forward, you are not at a rate right now that would tell you the tons is being pulled forward. To the contrary, it is sort of hit and it is being redone. I think the amount of investment sales activity was probably the delta in Q1. So, should you have deterioration in investment sales activity, you'd get back to a little bit sort of sitting right on top of the refinancing wave.

And then I would also say that as it relates to rates, back to Steve DeLaney's question at the very, very beginning, if everyone was freaked out about rates going up, we wouldn't have had as much variable rate financing in the first quarter. And so I think a lot of people are out there thinking that rates might move at some point.

But on the long bond, the other piece to all that is with the huge amount of foreign capital pouring into 10-year and seven-year US treasuries, even if Yellen and the Fed raise short-term interest rate, I think most people believe that the 10-yeas is going to stay begrudgingly low for quite some time because of the amount of foreign capital chasing any kind of return of sovereign debt.

And so as a result of that people don't feel quite now pressured to run and grab a loan that's going to price off of 2.10%, 10-year treasury. That may change and as rates start to move towards the end of the year and the 10-year may or may not move, you might see that. But right now what we are seeing from our borrowers is no great rush, it is just that they want to buy assets and refinance where assets as they come up fully financing.

That's very helpful. And then sort of just thinking about with the caps for GSEs, so here -- I'm on the West Coast -- so there has been a couple of big projects that come and so some of the units have been in the buildings that have been affordable housing, some of them have not have had a certain percentage of affordable housing, others have been just normal units. Does that fit affordable housing and does FHFA know that is not exactly kind of cookie cutter, that it's kind of -- it's not as easy to get the affordable housing that maybe they have to think about it little differently?

So, first of all, the definition of affordable is one that has been discussed at length with FHFA. And when and if they come out with modifications and we said previously we believe that they will, but when and if they come out with modifications to 2015 scorecard, from our understanding of the dialogue that has gone on, it is our thinking that they may make adjustments to what the definition of affordable is so that some of the projects that you just cited that may not have qualified under the affordable definition would then qualify under the affordable definition, given what is truly affordable housing, workforce housing and the FHFA's desire to have Fannie and Freddie really focus on both the affordable product and workforce housing and not necessarily the higher end type product.

And so I think when we see some adjustments to the scorecard that there will be something there where there is reclassification of what qualifies as affordable.

Okay. Appreciate it. Thank you so much.

Yes.

A follow up question comes from Jade Rahmani with KBW. Your line is now open.

Hi, thanks. Just on the Engler transaction, wanted to see if you would care to layout any parameters around how you think about annual accretion. For example, I think volumes averaged historically about a $1 billion per year. Commissions in that business are in the 1.5% to 2% range, so we can make our own operating margin assumptions. But I just wanted to see if you'd care to spell anything out.

Yes, Jade, it's Steve, I think for the kind of 2015, you know, I wouldn't expect a lot from it on the combination of, one, we acquired a pipeline and so part of the revenue from that pipeline will likely be offset by some amortization of pipeline intangible.

And secondly as we've discussed, we are going to be making some investments in that business. So we think at the margin it is going to be accretive, slightly accretive for this year. But I wouldn't expect a lot from a financial perspective in 2015.

How about going forward beyond 2015?

We will cross that bridge when we get to it. We have plans for the rest of the year and we will see how that goes. It is ongoing. As you point out, Greg has run very successful business. And we are excited to have him on the team.

Thanks for taking the follow up.

You bet.

And it appears we have no further questions at this time. I'll turn the floor back over to Willy Walker for any additional or closing remarks.

I'd just thank everybody for joining us this morning. Thank the W&D team for a fantastic quarter once again. And I hope all of you have a great day. Thank you.

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