Walker & Dunlop, Inc. (NYSE: WD) reported second quarter 2020 total revenues of $252.8 million, an increase of 26% over the second quarter of 2019 and a company record. Net income for the second quarter of 2020 was $62.1 million, or $1.95 per diluted share, both up 47% from the second quarter of last year. Second quarter 2020 adjusted EBITDA1 was $48.4 million, down 23% over the same period in 2019. Second quarter total transaction volume decreased 2% from the prior-year quarter to $7.1 billion, with debt financing volume up 8% and property sales volume down 59%. The Company ended the second quarter with $275.2 million of cash on the balance sheet.

Willy Walker, Chairman and CEO commented, "Our team transitioned flawlessly to a distributed work model during the second quarter and delivered record total revenues of $253 million, up 26% year-over-year, and diluted earnings per share of $1.95, up 47% year-over-year. Exceptionally strong Q2 total transaction volume of $7.1 billion brought W&D's market share2 of total commercial real estate lending in the United States during the first half of 2020 to an astounding 13.2%, nearly triple our market share for 2019. Walker & Dunlop's leadership position in the multifamily financing market is reflected in our record Q2 results and dramatic growth in market share, which should continue for many years to come as multifamily remains the dominant commercial real estate asset class. Record quarterly revenues pushed revenue per employee to over $1.1 million, while we added $5.2 billion of loans from originations to our servicing portfolio, a quarterly record, which pushed our servicing portfolio to over $100 billion at the end of July, accomplishing the first pillar of our ambitious five-year growth plan entitled Vision 2020."

Mr. Walker continued, "The investments we have made to attract the very best bankers and brokers to Walker & Dunlop, build integrated technology solutions and proprietary databases to better understand our clients' financing needs, and expand the Walker & Dunlop brand through the Walker Webcast, came together in Q2 2020 to generate exceptional results for our clients and investors."

Discussion of Results:

• Despite an economic slowdown since mid-March due to the spread of COVID-19, the multifamily housing market has remained resilient, as evidenced by our 8% increase in debt financing volume and 27% increase in Fannie Mae, Freddie Mac and HUD (collectively, the "Agencies") debt financing volumes.
• Our second quarter Agency volumes reflected an active multifamily financing market due to sustained demand for multifamily financing, tight spreads, and a low interest rate environment. The overall demand for our Agency loan products remained high despite the macroeconomic disruption caused by COVID-19. The Agencies are countercyclical sources of capital to the multifamily industry and are continuing to lend during the spread of COVID-19, just as they did during the great financial crisis of 2007-2010.
• Brokered volume was down in the second quarter of 2020, as many capital providers were more cautious or out of the market entirely as a result of uncertainty related to the COVID-19 pandemic, and financing on asset classes other than industrial and multifamily was limited across the industry.
• The decrease in principal lending and investing volume, which includes interim loans, originations for Walker & Dunlop Investment Partners, Inc. ("WDIP"; formerly known as JCR Capital Investment Corporation) separate accounts, and joint venture bridge lending, was primarily due to a year-over-year decrease in interim loans originated for our bridge lending joint venture and WDIP separate accounts as a result of uncertainty related to the COVID-19 pandemic. We did not originate any loans for our own balance sheet during the first half of 2020.
• Property sales volume declined as the overall commercial real estate acquisition market slowed in the second quarter as a result of the COVID-19 pandemic.

Discussion of Results:

• Our servicing portfolio continues to experience steady growth due to our significant debt financing volumes and relatively few maturities and prepayments over the past year.
• During the second quarter of 2020, we added $5.2 billion of net loans to our servicing portfolio, and over the past 12 months, we added $10.1 billion of net loans to our servicing portfolio, 83% of which were Fannie Mae and Freddie Mac loans.
• Only $4.1 billion of Agency loans in our servicing portfolio, with a weighted-average servicing fee of 25.6 basis points, are scheduled to mature over the next two years.
• The slight decrease in the weighted-average servicing fee was due primarily to a lower weighted-average servicing fee on our new Fannie Mae debt financing volume than on the Fannie Mae loans that have matured or prepaid over the past year. The increase in the servicing portfolio during the second quarter of 2020 included the addition of a $2.4 billion portfolio of Fannie Mae loans that had a weighted-average servicing fee of 10 basis points. The downward impact of the large portfolio was slightly offset during the second quarter by an increase in the servicing fee margin on other Fannie Mae debt financing volume.
• We added net mortgage servicing rights ("MSRs") from originations of $55.8 million in the quarter, a record, and $90.2 million over the past 12 months.
• The MSRs associated with our servicing portfolio had a fair value of $959.0 million as of June 30, 2020, compared to $874.0 million as of June 30, 2019.
• Assets under management (AUM) as of June 30, 2020 consisted of $1.2 billion of loans and funds managed by our registered investment adviser, WDIP, $0.6 billion of loans in our interim lending joint venture and $71 million of loans we manage for an affiliate of our joint venture partner. The year-over-year increase in AUM is related to both WDIP's fundraising activity over the past 12 months and growth in the interim lending joint venture.
• For most of the loans we service under the Fannie Mae DUS program and for loans under Ginnie Mae's program, should a borrower fail to make debt service payments, we are obligated to advance the principal and interest and guaranty fees, and we will be reimbursed by either Fannie Mae or Ginnie Mae. At the end of June, we had $5.9 million of outstanding advances under our Fannie Mae and HUD servicing agreements, compared to $2.9 million at the end of March. We are not obligated to make advances for any of the other loan types that we service.
• During the second quarter of 2020, we obtained a $100.0 million sublimit to an Agency warehouse line with one of our warehouse lending banks that can be used to fund our advances of principal and interest payments related to our Fannie Mae portfolio. The facility provides 90% of the principal and interest advance payment and is collateralized by Fannie Mae's commitment to repay the advance. We had a small balance of borrowings under this facility as of June 30, 2020.

Discussion of Results:

• The increase in loan origination and debt brokerage fees was the result of the 8% increase in overall debt financing volume and an increase in the volume of Agency loans as a percentage of overall debt financing volume.
• An increase in Fannie Mae debt financing volume, coupled with an increase in the weighted-average servicing fee on Fannie Mae loans, led to the increase in MSR Income.
• The increase in the volume of Agency loans as a percentage of overall debt financing volume led to the increase in MSR Income as a percentage of debt financing volume.
• The increase in the weighted-average servicing fee on Fannie Mae loans and an increase in HUD debt financing volume led to the increase in MSR Income from Agency loans as a percentage of debt financing volume.
• The $10.1 billion net increase in the servicing portfolio over the past 12 months was the principal driver of the growth in servicing fees year over year, partially offset by the slight decline in the servicing portfolio's weighted-average servicing fee.
• The increase in net warehouse interest income from loans held for sale ("LHFS") was due to a 110% increase in the average balance of LHFS outstanding and an increase in the net spread from 7 basis points in the prior year to 97 basis points in the current year.
• The decrease in net warehouse interest income from loans held for investment ("LHFI") was due to a smaller average balance of loans outstanding and a substantial decrease in the net spread. During the prior year, the Company held a large loan that was fully funded with corporate cash, resulting in an overall high net spread. During the current year, a much smaller balance of loans was fully funded with corporate cash.
• Escrow earnings and other interest income decreased due to a substantial year-over-year decrease in short-term interest rates, upon which our earnings rates are based, partially offset by a slight increase in the average escrow balance.
• The decrease in property sales broker fees was directly a result of the decrease in property sales volume year over year.

Discussion of Results:

• The growth in personnel expenses was largely the result of a 17% increase in average headcount and associated salaries, benefits, and annual bonus as we continue to scale our business through strategic acquisitions and organic hiring, and an increase in commissions expense driven by the increase in loan origination and debt brokerage fees.
• Amortization and depreciation increased primarily due to the growth in the average balance of MSRs outstanding year over year.
• The increase in provision for credit losses was primarily related to the manner in which the Company was required to calculate its allowances for credit losses. During the prior year, these allowances were calculated based on an incurred loss methodology. During the current year, as a result of the implementation of the current expected credit loss ("CECL") accounting standard, the allowances were calculated based on an expected lifetime credit losses methodology. The Company has not experienced a significant deterioration in the overall credit quality of the at risk servicing portfolio due to the COVID-19 pandemic.
• The decrease in the interest expense on corporate debt is related to the decrease in the average 30-day LIBOR upon which our long-term debt interest is based.
• The decrease in other operating expenses stemmed primarily from decreased travel and entertainment costs in the second quarter, a direct impact of COVID-19 pandemic-related limitations and travel restrictions.

Discussion of Results:

• The increase in net income was the result of a 47% increase in income from operations, as the growth in total revenues outpaced the growth in total expenses during the second quarter.
• The decrease in adjusted EBITDA was primarily driven by the increase in personnel expense and decreases in escrow earnings, interest income from LHFI, and property sales broker fees, partially offset by increases in loan origination and debt brokerage fees, servicing fees, and interest income from LHFS and a decrease in other operating expenses.

Discussion of Results:

• Our at risk servicing portfolio, which is comprised of loans subject to a defined risk-sharing formula, increased due to the significant level of Fannie Mae volume during the past 12 months. There were two defaulted loans in our at risk servicing portfolio as of June 30, 2020 which defaulted and were provisioned for during the first and fourth quarters of 2019. Both properties have been foreclosed on and final settlement of any losses will occur in the future upon disposition of the assets by Fannie Mae.
• Pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Fannie Mae instituted a mortgage forbearance program in April in response to the COVID-19 crisis. Under the terms of the forbearance program, borrowers impacted by COVID-19 can request that debt service payments be deferred for a period of up to three months, after which the deferred payments must be repaid over a 12-month period. As of June 30, 2020, we had granted COVID-19-related forbearance on 9 loans in our at risk servicing portfolio with an aggregate outstanding unpaid principal balance of $260.9 million.
• The allowance for risk-sharing as a percentage of the at risk portfolio increased due to the implementation of CECL during the current year and due to our forecast of an increase in short-term future losses as a result of the COVID-19 pandemic. The Company has not experienced a significant deterioration in the overall credit quality of the at risk servicing portfolio due to the COVID-19 pandemic.
• The on-balance sheet interim loan portfolio, which is comprised of loans for which the Company has full risk of loss, was $336.5 million at June 30, 2020 compared to $246.7 million at June 30, 2019. There was one defaulted loan in our interim loan portfolio at June 30, 2020, which defaulted and was provisioned for during 2019. All other loans in the on-balance sheet interim loan portfolio are current and performing as of June 30, 2020. The interim loan joint venture holds $624.1 million of loans as of June 30, 2020, for which the Company indirectly shares in a small portion of the risk of loss. All loans in the interim loan joint venture are current and performing as of June 30, 2020.

YEAR-TO-DATE 2020 OPERATING RESULTS

Total transaction volume for the six months ended June 30, 2020 was $18.5 billion, a 40% increase from the same period last year.

Total revenues for the six months ended June 30, 2020 were $487.0 million compared to $387.8 million for the same period last year, a 26% increase. The change in total revenues was largely driven by (i) a 25% increase in loan origination and debt brokerage fees which was largely related to an increase in debt financing volume, (ii) a 93% increase in MSR Income, which was attributable to the overall increase in debt financing volume, a substantial increase in Fannie Mae volume as a percentage of total debt financing volume, and a significant increase in the weighted-average service fee on Fannie Mae loan volume, (iii) a 7% increase in servicing fees related to growth in our servicing portfolio, and (iv) an 11% increase in net warehouse interest income as a result of a substantially larger average balance of loans held for sale and a sharp increase in the spread on these loans. Partially offsetting these increases was a 53% decline in escrow earnings and other interest income due to a substantial decline in short-term interest rates.

Total expenses for the six months ended June 30, 2020 and 2019 were $343.2 million and $274.7 million, respectively. The 25% increase in total expenses was primarily driven by an increase in personnel expense of 26% due to increases in (i) salaries and benefits expenses resulting from a rise in average headcount due to the continued growth of our business, (ii) commissions expense resulting from higher loan origination and debt brokerage fees and property sales fees due to growth in debt financing and property sales volumes, and (iii) bonus expense resulting from improved company financial performance year over year. Personnel expenses as a percentage of total revenues remained consistent at 40% year over year despite the increased expenses. Amortization and depreciation costs increased 9% due to an increase in the average balance of MSRs outstanding and an increase in write offs due to prepayments year over year. Provision for credit losses increased substantially year over year. During the first quarter of 2020, the Company recorded a provision expense of $23.6 million as a result of adopting CECL and due to the COVID-19 pandemic and its expected impacts on future losses in the at risk servicing portfolio. During the second quarter of 2020, the Company recorded a provision expense of $4.9 million related only to the increase in the Company at risk servicing portfolio balance. Interest expense on corporate debt decreased 34% as a result of a decrease in short-term interest rates year over year. Other operating expenses decreased 4% primarily due to decreases in travel and entertainment expenses as a direct result of COVID-19 impacts.

Operating margin for the six months ended June 30, 2020 and 2019 was 30% and 29%, respectively. The slight increase in operating margin was due to a 26% increase in total revenues and a 25% increase in total expenses.

Net income for the six months ended June 30, 2020 was $109.9 million compared to net income of $86.4 million for the same period last year, a 27% increase. The increase in net income was the result of a 27% increase in income from operations.

For the six months ended June 30, 2020 and 2019, adjusted EBITDA was $112.5 million and $129.3 million, respectively. The 13% decrease was largely driven by the increase in personnel expense and the decrease in escrow earnings, partially offset by increases in loan origination and debt brokerage fees and servicing fees.

For the six months ended June 30, 2020 and 2019, return on equity was 21% and 19%, respectively.

DIVIDENDS AND SHARE REPURCHASES

On August 4, 2020, our Board of Directors declared a dividend of $0.36 per share for the third quarter of 2020. The dividend will be paid September 8, 2020 to all holders of record of our restricted and unrestricted common stock as of August 21, 2020.

During the first quarter of 2020, the Company's Board of Directors approved a new stock repurchase program that permits the repurchase of up to $50.0 million of the Company's common stock over a 12-month period beginning on February 11, 2020. During the second quarter of 2020, the Company did not repurchase any shares. During the first quarter, the Company repurchased 0.2 million shares of its common stock under the share repurchase program at a weighted average price of $63.58 per share and immediately retired the shares, reducing stockholders' equity by $10.2 million. As of June 30, 2020, the Company had $39.8 million of authorized share repurchase capacity remaining under the 2020 share repurchase program.

Any future purchases made pursuant to the share repurchase program will be made in the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The repurchase program may be suspended or discontinued at any time.