Earnings Call Transcript - WD Q2 2021

Kelsey Duffey, Vice President of Investor Relations

Good morning, everyone. I'm Kelsey Duffey, Vice President of Investor Relations at Walker & Dunlop, and I would like to welcome you to our second quarter 2021 earnings conference call and webcast. Hosting the call today is Willy Walker, Walker & Dunlop Chairman and CEO. He is joined by Steve Theobald, Chief Financial Officer. Today's webcast is being recorded, and a replay will be available via webcast on the Investor Relations section of our website. 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 during the call today. Please also note that we will reference the non-GAAP financial metric adjusted EBITDA during the course of this call. Please refer to the earnings release posted on our website for a reconciliation of this non-GAAP financial metric. Investors are urged to carefully read the forward-looking statements language in our earnings release. Statements made on this call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe our current expectations, and actual results may differ materially. Walker & Dunlop is under no obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise. We expressly disclaim any obligation to do so. More detailed information about risk factors can be found in our annual and quarterly reports filed with the SEC. I will now turn the call over to Willy.

Willy Walker, Chairman and CEO

Thank you, Kelsey, and good morning, everyone. Walker & Dunlop's second quarter performance reflects our ongoing investments in people, brand, and technology to change our competitive positioning in the commercial real estate lending and services market. We increased total transaction volume by 90% to $13.5 billion, generating total revenues of $281 million, an 11% increase from the second quarter of 2020, diluted earnings per share of $1.73, and adjusted EBITDA of $67 million, which is up 37% compared to Q2 2020. These figures highlight the transformation of Walker & Dunlop from a mortgage-focused specialty finance firm to a wider technology-enabled financial services company. We took Walker & Dunlop public in 2010 as one of the top agency multifamily lenders in the country. After ten years of investment in people, brand, and technology, we have evolved into a significantly more diversified financial services company that delivers greater relevance to our customers every day. The total transaction volume of $13.5 billion in Q2, up 90% from Q2 2020, illustrates our customers' desire to work with us and our team's capability to cater to their needs with the right capital and services. When the market faced challenges in 2020, W&D was there to provide necessary countercyclical capital. As market conditions improved and both capital and sales transactions rebounded, W&D excelled in meeting our clients' needs. The contrasts between Q2 2020 and Q2 2021 are stark, showing a shift from pandemic lows to a rapidly recovering economy. In both quarters, Walker & Dunlop effectively addressed our clients’ requirements and achieved impressive financial performance. At the end of 2020, we introduced a five-year strategic plan known as the Drive to '25, aiming to double revenues from $1 billion to $2 billion. Our goals include increasing annual debt financing volume to $65 billion, multifamily property sales volume to $25 billion, growing our servicing portfolio to over $160 billion, assets under management in our fund management sector to $10 billion, and launching three new businesses in small balance lending, appraisals, and investment banking. These growth initiatives reflect our ambition to position W&D as a more diversified technology-driven financial services enterprise, and our Q2 results signify progress toward these objectives. To achieve our goal of $65 billion in debt financing volume over the next five years, we are actively recruiting top bankers and brokers in the industry and investing in technology. Notably, 22% of our Q2 total transaction volume came from new clients, while 55% of the loans we refinanced were sourced from competitors. Our new clients are a result of collaborative efforts across deal teams, branding, and technology. Since we began tracking new clients last year, we have successfully onboarded 660 new clients, generating $15 billion in transaction volume. The refinancing of competitors’ loans demonstrates our technology’s value in empowering our skilled bankers and brokers. Since we started reporting on new refinances last year, we have shifted $16 billion in loans from the competition. The total commercial real estate finance market is anticipated to be $486 billion in 2021. We originated over $10 billion in loans during Q2, which included a record debt brokerage volume of $6.3 billion and $4 billion in lending through Fannie, Freddie, HUD, and our balance sheet. Our Q2 debt brokerage volume of $6.3 billion marks a substantial increase from $1.9 billion in Q2 2019, and a 320% increase from $1.5 billion in Q2 of last year. Our financing of $10 billion in Q2 positions us at an annual run rate exceeding $40 billion, putting us on track to reach $65 billion by 2025, aiming for over 10% market share in total commercial real estate lending in the U.S. We are also significantly expanding our small balance lending for multifamily properties, a segment primarily led by major banks like JPMorgan and Wells Fargo. In the first half of 2021, we grew our small balance loan volumes by 45% compared to 2020. The recent acquisition of TapCap, a technology platform capable of quickly generating loan quotes for small multifamily properties, is expected to further enhance this growth. By automating our loan underwriting processes, launching TapCap, growing our reputation as the leading multifamily lender in the U.S., and leveraging our top-tier personnel and technology, we aim to disrupt the banks and capture market share. Our multifamily investment sales business is gaining significant momentum. We have increased our broker count across seven major MSAs in the past year, utilized the brand and technology from our lending operations, and witnessed substantial volume growth. The fundamentals for apartment sales remain exceptionally strong, with research from Zelman, the advisory firm we recently acquired, indicating a 14th consecutive monthly increase in buyer demand to its highest index score since September 2015. Our sales activity reached $3.3 billion in Q2 2021, reflecting a 648% increase compared to Q2 2020 and a 203% increase from Q2 2019. One of our main competitors in this arena, CBRE, recently reported a 152% year-over-year volume increase but our multifamily property sales platform is outpacing that growth, focusing on the largest commercial real estate asset class in the U.S. We have a robust pipeline for the remaining year, with $6.6 billion in listings currently marketing or closed for Q3 and Q4. By bringing in more top brokers like the recent addition in Denver, incorporating Zelman's market research into our marketing, and applying our data insights to identify sales opportunities, we expect to achieve our 2025 target of $25 billion in annual multifamily investment sales. Central to our lending and investment sales operations is valuation, determining property worth to set loan sizes or sales prices. Our automated appraisal initiative, Apprise, is another example of how technology can scale a new business and capture market share from established competitors. The global commercial real estate appraisal market generates $9.8 billion in revenue with around 14% profit margins. Currently, CBRE holds approximately 7% market share, generating over $650 million annually. We entered the appraisal sector last year after automating much of the appraisal process alongside our tech partner, GeoPhy. We completed 50 appraisals in Q1 of 2020, which increased fivefold to 250 by Q1 of 2021, and grew another 48% in Q2. With significant technology investments and hiring of appraisers, we anticipate ongoing growth in this area, reinforced by our product being faster, cheaper, and better than competitors. Our technology-driven approach will also allow us to achieve significantly higher margins compared to others in the field. As we scale our services in debt and property brokerage and invest in technology-oriented operations like small balance lending and appraisals, we aim to solidify Walker & Dunlop's position as a more diversified, technology-enabled financial services provider. This evolution will not only drive our growth but also enhance our cash earnings. Our Q2 revenues last year totaled $253 million, consisting of 64% cash revenues and 36% noncash mortgage servicing rights. This year, our Q2 revenues of $281 million were composed of 78% cash and only 22% noncash mortgage servicing rights. The shift towards cash revenues has contributed to our adjusted EBITDA rising to $67 million, a 37% increase from Q2 2020. By expanding cash-generating service businesses such as debt brokerage, property sales, asset management, servicing, and appraisals, we plan to augment cash revenues and enhance the valuation multiple that investors apply to Walker & Dunlop. Our debt brokerage business has seen a compound annual growth rate of 22% over the last five years. A relevant comparison is our former competitor, HFF, prior to its acquisition by JLL in 2019, which traded at 17 times trailing earnings. Similarly, our multifamily property sales business has grown at a 32% compound annual growth rate over the past five years, compared to Marcus & Millichap's 2%. Marcus & Millichap currently trades at over 32 times trailing earnings. We foresee Walker & Dunlop's valuation shifting away from being viewed as a specialty finance company toward being recognized as a firm in technology and real estate services as we progress. While our service-driven businesses continue to grow substantially, we still play a significant role as a lender and will keep creating important mortgage servicing rights. Both Fannie Mae and Freddie Mac brought over a considerable amount of business from 2020 into 2021, then halted lending. Although we anticipated their return in Q2, they are just now starting to price and secure business at unprecedented levels. With nearly 60% of their annual lending capacity remaining, we expect to generate substantial mortgage servicing rights from our Fannie Mae and Freddie Mac lending as the year progresses. Additionally, our HUD business has demonstrated significant growth with over $600 million of origination volume in both Q1 and Q2, showing that with effective team and leadership, HUD volumes can become consistent and valuable over time. To establish ourselves as the largest multifamily lender in the U.S. by the end of 2020, Walker & Dunlop had to surpass JPMorgan, Wells Fargo, and CBRE in the lending rankings. These three large global firms, together with JLL, hold significant market share in commercial real estate lending and services. Despite their substantial workforce and established market presence, they could not prevent Walker & Dunlop from advancing in the rankings due to our people, brand, technology, and focus. We will leverage our relatively small size, which totals only 1,100 employees, along with our strong brand and the synergy between our people and technology, to innovate more efficiently and succeed. Our revenue-per-employee metric significantly exceeds that of our larger competitors, underscoring the strength of our business model and the potential for continued investment. By entering new business areas currently dominated by larger competitors, we can broaden our service offerings and better address our clients' needs. For instance, banks such as JPMorgan and Wells Fargo are major players in affordable housing by providing loans for affordable properties and purchasing tax credits. While Walker & Dunlop is already a substantial participant in the affordable lending sector, we aim to enhance our technological capabilities to capture market share from the larger incumbent lenders. The growth within our multifamily property sales division is remarkable. As we expand into other commercial real estate asset classes like office, retail, hospitality, and industrial, we will siphon business from large global service providers such as JLL and CBRE. Similarly, while our appraisal business currently focuses exclusively on multifamily properties, our increased engagement in non-multifamily property sales and debt financing will allow us to apply our technology-driven principles to appraisals across all asset classes. Moreover, Wells Fargo, JPMorgan, and Morgan Stanley feature extensive research and investment banking capabilities spanning various sectors, including commercial real estate. Our recent acquisition of Zelman grants us access to one of the top research platforms in the industry and an investment banking team that will be expanded to include commercial real estate. Walker & Dunlop possesses a tremendous opportunity to capitalize on our existing market presence, relatively small size, and commitment to technology to broaden our offerings and outperform large incumbent service providers. I will now turn the call over to Steve to provide a detailed examination of our second quarter and year-to-date financial results, after which I will return with additional thoughts.

Steve Theobald, Chief Financial Officer

Thank you, Willy, and good morning, everyone. Q2 demonstrated the breadth and diversity of our platform's capabilities as increases in overall transaction volumes generated strong cash revenues and meaningful progress towards our long-term growth plan, Drive to '25. We continued to invest in people to support future growth, expand our market, and advance our technology initiatives to differentiate our execution and insights from the competition. I'm going to focus my initial remarks on the first half of the year, as that time period truly exhibits the transformation of the company that Willy just described in going through the Q2 results. During the first half of the year, we generated total revenues of $506 million, up 4% from a very strong first half of 2020. Year-to-date diluted EPS of $3.52 is up 2% over the first half of 2020. Year-to-date total transaction volume of $22.6 billion has been driven by record debt brokerage and property sales volumes, which helped increase cash origination and property sales revenues by a combined 28% year-over-year to $215 million. At the same time, the growth in our servicing portfolio, which ended the second quarter at $112 billion, with a weighted average servicing fee of 24.5 basis points, generated $135 million of cash servicing fees in the first half, up 20% over the same period last year. The strong growth in our cash revenues propelled our adjusted EBITDA to $127 million for the first half of 2021, up 13% over the same period last year, as shown on the right-hand side of this slide. What we control at Walker & Dunlop is the team we put on the field every day and their capabilities to meet our clients' needs. In 2020, our clients needed capital during uncertain times, and W&D met those client needs, primarily with the countercyclical capital of Fannie and Freddie. And our 2020 financial performance, particularly our noncash mortgage servicing rights, grew in spectacular fashion, generating record amounts of revenue. This year, transaction volumes increased by over 90% quarter-on-quarter, generating record amounts of cash origination fees and property sales revenues. The transaction volume and mix of revenue so far in 2021 is a reflection of Walker & Dunlop's enhanced positioning in the market as the go-to provider of financing and capital, regardless of the execution, and demonstrates the successful diversification of our business over the last few years. And while our results prove we aren't just an agency lender anymore, we did end 2020 as the second-largest GSE lender in the country, with a combined Fannie Mae and Freddie Mac market share of 12%. Year-to-date, our GSE market share has held strong at 11%. And based on Fannie Mae's recently released midyear lender rankings, we've maintained our position as Fannie's #1 partner, with our 2021 deliveries outpacing the second-ranked lender by 32%. However, because of the year-over-year decline in Fannie and Freddie's overall production, our noncash mortgage servicing rights revenues are off by 24% year-to-date, putting us behind pace to achieve double-digit earnings growth for the year. In our last call, we signaled an increase in Fannie and Freddie activity after the slow start to the year. And as you can see on this slide, our applications with Fannie and Freddie, which are a strong leading indicator of future rate lags, have increased significantly over the past 3 months, particularly in July, reflecting the GSE's steadily increasing appetite for deal flow as we move into the third quarter. This recent application activity gives us greater confidence that both agencies are back in the market and focused on lending the over $80 billion they have remaining to deploy this year. With the tremendous growth in transaction volume continuing, and the increasing competitiveness of Fannie and Freddie as we enter Q3, we are on track for flat to 5% earnings growth on the year. However, the current strength of our pipeline and market fundamentals hold. We still have the ability to once again achieve double-digit earnings growth, something that has been a hallmark of ours since we went public in 2010. On all other metrics, we are reaffirming our initial 2021 targets, including double-digit growth in adjusted EBITDA, which is on track for a record year due to the strength of our overall transaction volumes. Personnel expenses increased by 32% in the quarter driven by increases in bulk commissions expense, which were up 59% due to the significant increase in cash origination and property sales fees and fixed personnel-related expenses, up 19% due to the substantial hiring we've done over the last year. We continue to invest heavily in future growth, with a focus on increasing our production teams, expanding our brand and technology capabilities, and supporting our new business initiatives and our path to achieving our Drive to '25 objectives. To illustrate this point, year-over-year growth in salary expense saw the highest increases in small balance lending, investment sales, Walker & Dunlop Investment Partners, marketing, and IT, reflective of the fact that we are making investments in new initiatives and technology as well as continuing to add bankers and brokers and their support staff to the platform. All of these investments and the lower mortgage servicing rights revenues drove personnel as a percentage of total revenues to 47% for the first half of 2021, higher than our historical average, which is in the low to mid-40% range. We are in an investment stage this year, and our addition of headcount to support our emerging businesses is driving this expense ratio up, as is the fact that a higher percentage of our revenues are coming from cash origination fees on which we pay commissions. With higher agency volumes forecasted in the second half of the year, we expect personnel costs as a percentage of revenue to trend downward from current levels over the next 2 quarters. Second quarter operating margin was 26%, bringing year-to-date operating margin to 29%, within our target range of 29% to 32% for the year, reflecting the fact that our scaled business model can support significant growth investments while remaining very profitable. Q2 return on equity was 18%, bringing ROE to 19% for the first 6 months of the year, also within our annual target range of 19% to 22%. For the second consecutive quarter, we lowered the loss forecast used to determine the allowance for risk-sharing obligations, resulting in a $4.3 million or $0.10 per share benefit to provision for credit losses in Q2. The strong credit fundamentals we described in our last earnings call, including very few loans in forbearance, no pandemic-related defaults in the portfolio, and the extremely healthy debt service coverage ratio of our at-risk portfolio, still hold true today. We believe that the macroeconomic trends underpinning the multifamily industry today, continued growth in GDP, rising property values, low interest rates, and declining unemployment levels set it up for continued performance for the foreseeable future. Given these dynamics, we feel very comfortable with the $60 million allowance for credit losses that remains in place to cover future losses in our portfolio. We ended the quarter with nearly $330 million of cash on the balance sheet. During the second quarter, we closed on the acquisition of TapCap, and we continue to pursue a number of acquisition opportunities that directly align with our Drive to '25 strategy. Yesterday, our Board of Directors approved a quarterly dividend of $0.50 per share payable to shareholders of record as of August 19, 2021. The servicing portfolio continues to grow, along with the related cash revenue streams. Our strong cash flow and existing cash position give us significant financial flexibility as we continue to pursue growth opportunities and invest heavily in our people, brand, and technology, a combination of which will continue to differentiate us in the market and drive growth in revenues and earnings. Thank you for your time today. I'll now turn the call back over to Willy.

Willy Walker, Chairman and CEO

Thank you, Steve. As you just heard, our business model, financial results and extremely strong cash flow and cash position of nearly $330 million are allowing us to continue investing in people, brand and technology to make Walker & Dunlop the most technologically sophisticated financial services company in the commercial real estate industry. We know our action and technology is the best in the industry, not only from the financial proof points of new clients and new loan refinancings, which I mentioned previously, but from talking to bankers and brokers we recruited from competitor firms. "You are well ahead of the competition," is a direct quote from a multifamily property sales broker who decided to join Walker & Dunlop after being actively recruited by and seeing the technology of five of our large competitor firms. And while it is nice to know that we have superior technology to our large-scale banking and real estate services competitors, we must do more. In CoStar's recent earnings call, CEO, Andy Florance, spoke of a refinancing tool that CoStar is developing for their clients. We built that tool at Walker & Dunlop four years ago, have done $16 billion in financing volume over the past six quarters as a result of that tool and are improving upon it every day to make it more insightful for our clients, bankers and brokers. CoStar also pointed out the volume they are doing on their 10x sales platform and highlighted three large deals that ran through the platform to make the case that stabilized properties and not just distressed properties can be sold on 10x. We have the people and technology at Walker & Dunlop to sell $4.7 billion of multifamily assets in the first half of 2021 and don't need to wait for a distressed market to see dramatic growth in our sales business based off of our current strong pipeline for the second half of 2021. We have a unique opportunity at W&D to combine our large market presence, relatively small number of employees and technology to meet our customers' needs and accelerate our growth. Our brand continues to expand, thanks to the terrific work of our bankers, brokers, and marketing team. The Walker webcast attracts fantastic guests and is being watched somewhere between 60,000 and 100,000 times per week on replay via W&D's YouTube channel and our podcast driven by Insight. We don't charge for the webcast nor do we promote or advertise anything about Walker & Dunlop. The webcast has been viewed nearly 2 million times, and the growth of our brand is reflected in the astounding 90% growth in total transaction volume in Q2. We will continue producing the Walker webcast to share insights and ideas about the world we live in and expand the Walker & Dunlop brand. As Steve mentioned, our lending pipeline with Fannie and Freddie has rarely been stronger, and the change in leadership at the Federal Housing Finance Agency, FHFA, is welcome news. Acting Director, Sandra Thompson, knows the GSE's multifamily businesses exceedingly well, and we expect FHFA to review several actions taken by former FHFA Director, Mark Calabria, such as reducing the GSE's annual lending limits from $80 billion to $70 billion each as well as the 52-week rolling average measurement of the caps. Most fundamentally, however, new leadership at FHFA should return the organization to regulating the GSEs and not trying to run them. As a massive amount of capital continues to search for asset-based investments, we feel extremely good about the outlook for the commercial real estate industry and Walker & Dunlop. Our transaction volume and revenue growth in Q2 is emblematic of the team and capabilities we have built as we have scaled W&D from being a small family-owned company into one of the largest commercial real estate financial services companies in the world. With that growth, we have become a trusted adviser to our clients with the capabilities of meeting more and more of their needs. And as we continue to expand our cash and carry services businesses, such as debt brokerage, property sales, asset management, servicing, and appraisals, we will increase cash revenues as well as the multiple that investors use to value our earnings. Steve stated earlier that we have visibility to flat to 5% EPS for 2021, and given the investments we are currently making and the tremendous growth we are seeing in our debt brokerage and property brokerage businesses, that will be a very successful year. This company has grown earnings per share at a compound annual growth rate of 30% since we went public in 2010, 30%. And the people, brand, and technology that make Walker & Dunlop what it is are more relevant to our customers today than ever before. We remain focused on expanding into new businesses, applying people and technology at every opportunity, and achieving the Drive to '25. We had James Kerr, author of the book, Legacy, on the Walker Webcast yesterday. What was most exciting to me, as I read Kerr's book about the extraordinary culture that defines the most successful rugby team of all time, the New Zealand All Blacks, is that many of Kerr's observations about the All Blacks can be said about Walker & Dunlop. We have a deep history that is known and precious. We have a track record of exceptional performance. We have a reputation of establishing bold, highly ambitious 5-year growth plans and achieving them. And we have an exceptionally talented group of professionals that live the Walker way, tenacity, caring, collaborative, insightful, and driven to deliver exceptional services to our customers and returns to our shareholders. I want to congratulate the W&D team for all we accomplished in Q2, and thank all of the analysts and investors who joined us for the call this morning. I'll now turn the call over to Kelsey to open the line for any questions. Thank you.

Kelsey Duffey, Vice President of Investor Relations

Our first question is coming from Steve Delaney of JMP.

Steven Delaney, Analyst

Obviously, we were maybe a little too aggressive on bottom line EPS at $2.05, but I do note that on a 6-month basis, your $114 million still works out to an annualized 19%, which is at the bottom end of the range you had in your 2021 goals. I think just looking at our model this morning, we were too light on personnel expense. And it's a saying that growth comes at a cost, and I think it appeared to me anyway that the near-term cost of your growth and your hiring has likely been in that personnel line. We were at 44% of revenues and your $141 million was 49%. Steve, you made some comments on which I appreciated. I think you indicated that you would expect that percentage to trend down in the second half. We're currently at 47% in our model for what that is worth. Could you just, when you say trend down, give us some idea relative to the 49%, what you might expect or what you would suggest to us that we consider using?

Steve Theobald, Chief Financial Officer

Sure, Steve. Thanks for the question, and I appreciate you being on the call this morning. Yes. I think in terms of the overall trend, it's really a function of expectation that we're going to be booking more mortgage servicing rights in the second half of the year. And as you know, we don't pay commissions on the mortgage servicing rights directly, so that is what we're expecting to happen that will drive that overall percentage down. So I think it could turn a full percentage point or two over the next two quarters.

Steven Delaney, Analyst

Okay. That's very helpful. On Slide 13, the delivery volumes month-to-month show a notable change. It appeared that there was caution not to exceed a $70 billion annual run rate. Could you elaborate on the acceleration observed in May, June, and July? Is this primarily due to internal practices at the GSEs, or does it reflect any borrower behavior indicating an increase in acquisition activity? Specifically, I'm curious if the GSE volume was primarily influenced by the GSEs themselves or if it was driven by market demand from borrowers.

Willy Walker, Chairman and CEO

Sure, Steve. Firstly, as you mentioned and as many analysts do, the monthly GSE volumes are publicly available. I would suggest that many models should have likely been updated to reflect the slow delivery levels reported by the agencies in May and June. I anticipate that numerous models would have been adjusted accordingly, especially for those tracking agency deliveries and noting that Walker & Dunlop accounts for 11% or 12% of this market. Considering where Fannie and Freddie are, it's clear that some models may now be misaligned regarding their expectations for Q2. The increase in activity is primarily driven by pricing. In Q2, we executed $6.3 billion in brokerage, with debt funds being notably active. They were able to offer competitive pricing compared to life insurance companies and CMBS, capturing a substantial amount of business. It was gratifying to see that as debt funds entered the market with the best bids, we matched our clients with them effectively. When the agencies are active, they tend to dominate the market, and they have annual caps that they usually reach. Referring to the slide Steve presented about their volumes, it's important to note, as we mentioned in our last earnings call, that we expected Fannie and Freddie to return. In March, we observed a slight increase in their activity, but it plateaued in May and June. After a slight uptick in April, their activities decreased again in May and June, but we saw a significant rise in July regarding signed applications. In my earlier comments, I highlighted that our agency pipeline is quite strong. However, I must note that Freddie just increased pricing by 20 basis points recently. This may affect their competitiveness in the market, even though they currently have a robust pipeline. The situation is influenced by their pricing position and the competitiveness of debt funds, which I expect will start shifting toward other commercial real estate asset classes in search of higher yields. As Fannie and Freddie reintegrate into the market and offer competitive bids against those debt funds, I believe the funds might evaluate their current spreads in multifamily investments and consider seeking better opportunities in sectors like office or retail, which have shown recovery from the pandemic, as the competitive dynamics differ significantly from multifamily.

Kelsey Duffey, Vice President of Investor Relations

Our next question is coming from Jade Rahmani at KBW.

Jade Rahmani, Analyst

As the company's revenue sources diversify and Walker & Dunlop reduces its share of earnings that historically have come from the GSEs since the other business lines are growing faster, the right way to look at earnings might be on a cash earnings basis, backing out the net MSR gains. And so if you did it that way, I assume that cash earnings is going to grow double digits this year because that would be in line with the double-digit growth expectation you have for adjusted EBITDA. Is that a correct assumption?

Willy Walker, Chairman and CEO

Yes, Jay, that's absolutely correct.

Jade Rahmani, Analyst

Okay. Thank you very much. It's clear that W&D is gaining market share and that these initiatives in investment sales and the broker business are really gaining a lot of traction. You mentioned that the debt funds were the biggest growth driver in the broker business, do you view that as sustainable?

Willy Walker, Chairman and CEO

Well, as I mentioned earlier, Jade, the debt funds have a significant amount of capital. The question is whether they will continue to focus on multifamily as agencies reengage or shift to other asset classes. Ultimately, they will want to deploy that capital, and we have the capability to do so. Ideally, we would like to see the agencies return, allowing us to place a considerable amount of debt with them, while the debt funds stay competitive in other asset classes, leading to substantial financing opportunities with them as well. The key takeaway here is the increase in broker volume. We have made significant investments over the years to expand our team at Walker & Dunlop, and Q2 was a clear indication of the success of those investments. We aimed to illustrate this growth not only from Q2 2020, a unique quarter due to the pandemic but also by referencing Q2 2019 as a benchmark of normalcy. As indicated, we grew from around $1.3 billion or $1.6 billion two years ago to over $6 billion this quarter, showcasing the returns on our investments and the team's ability to meet client needs.

Jade Rahmani, Analyst

And looking at that business as well as the investment sales business, do you feel that these business lines have hit sort of a new baseline in production that could be sustainable? Or should we model some conservatism in those areas?

Willy Walker, Chairman and CEO

I always appreciate a conservative approach. We've tried to provide clarity around our numbers, and we've shared insights into our investment sales pipeline. It's crucial to understand that the current market is largely driven by investment sales. We believe we have the best finance team available, but when speaking to our major clients, it's clear that their financing decisions depend heavily on where they are securing Fed assets. If an investment sale is in progress, there's a good chance that financing will follow that transaction. Kris Mikkelsen has assembled what I consider the top multifamily investment sales team in the country, and we've witnessed significant growth in our volumes. I can't recall the exact figure, but we've secured over $6 billion in listing agreements and deals completed in the third and fourth quarters, which influences financing decisions. One significant shift in my perspective on our competitive positioning is that we were previously perceived primarily as a finance company that excelled in financing. With the scale we've achieved in our investment sales business, clients now view us as a more strategic partner. It's not just about being good at financing; many see that aspect as somewhat of a commodity, even though our bankers are consistently making a substantial impact on how properties are financed. What sets us apart now is the access to deal flow, which captures clients' attention and increases their focus on our firm. This shift likely contributed to the 22% growth in our transaction volume in the second quarter, as clients are increasingly looking to us for more business.

Jade Rahmani, Analyst

Regarding Steve Delaney's question about margin outlook, as other business areas develop, do you foresee any decrease in the margins we've been experiencing? The adjusted EBITDA margin for the second quarter was 30.3%, which aligns with our 30% forecast, and the operating margin was also quite close. Do you believe there is operational leverage within the business that could help maintain or even increase margins?

Willy Walker, Chairman and CEO

So I'll kick that to Steve after I just give you some quick thoughts on it. Ever since we went public, one of the big conundrums at Walker & Dunlop is that our business model and businesses are so profitable that anything we did to expand the platform and invest in other businesses would look dilutive to earnings because the core agency business was so profitable. And I think that investors and the market and we got to used to just generating these outsized returns. And to be honest with you, Jade, I don't think we got a lot of credit for it. If you look at us and compare us to the services firms, as you well know, almost on every metric, whether it's EBITDA margin, net income margin, return on equity margin, all that stuff, we far outperformed. And so I think one of the things that you're seeing here is that we're investing in these other businesses to continue to diversify the platform, and those are going to be dilutive to those margins, but it's going to make us a far more scaled diversified company. And so you're seeing two things happen right now: a, just the direct impact of doing so much cash and carry brokered business and less mortgage servicing right income in the quarter; and the other thing is you're seeing us invest. We have 52 people in our appraisal business today. And guess what, our appraisal business is not generating earnings for us right now. So that's wildly dilutive to earnings. We have put a huge amount of our small balance lending effort because that's half the multifamily market, and it's a market that we've never attacked. And I think one of the interesting things that investors have to keep in mind on that is, if we wanted to go out and acquire one of the existing small balance lenders out there, and there are a couple that are private and there are a couple that are public, we could clearly go and focus on that. But that's doing business the old-fashioned way. That's hiring a lot of bankers and brokers. That's going and meeting with clients face to face and getting business the old-fashioned way. What we have consciously decided to do is not go make some big acquisition in that space, but build the team from scratch and put a lot of technology to it. And that takes time, it takes investment, but we truly, truly believe that what we are going to end up with is a far more competitive offering to the market and to be able to take market share, not only from those smaller competitors that we could potentially go acquire today, but the big competitors like JPMorgan Chase and Wells Fargo.

Steve Theobald, Chief Financial Officer

Yes. And I'd just add to what Willy said, Jade, that if you go back to the Investor Day presentation in December when we rolled out our Drive to '25 strategy, we are anticipating over the course of time that we should be able to get some margin expansion out of the business as the investments that we're making in the areas that Willy just mentioned start to grow and get to scale and contribute to the bottom line that, all else equal, you should see some margin expansion as a whole company over time.

Kelsey Duffey, Vice President of Investor Relations

Our next question is coming from Henry Coffey of Wedbush Securities.

Henry Coffey, Analyst

If we analyze what you've discussed with my colleagues, there was a significant issue with volume, which impacts the MSR component of revenue. Overhead costs were high for several reasons, including the increased commissions due to the cash component, as well as ongoing investments in these businesses. The factors contributing to the miss were roughly balanced. However, when we look at the last page of your press release, the EBITDA tells a different story. It shows substantial year-over-year growth, a 10% sequential increase, etc. This final page is what investors concentrate on and how we value the stock. So, is it fair to acknowledge the EPS decline but also recognize that there are many factors at play and that EBITDA is growing rapidly?

Willy Walker, Chairman and CEO

We take EPS very seriously and informed our investors at the start of the year that we targeted double-digit EPS growth. We currently see a path to growth between 0 to 5, and I assure you we are working tirelessly to achieve double-digit EPS growth. The current pipeline appears promising. However, we do not want to disappoint our investors or set expectations that exceed our actual results. We aim to be as clear and transparent as possible. I want to emphasize that we are not neglecting EPS in favor of EBITDA. As you pointed out, our business has achieved scale with a $110 billion servicing portfolio and significant cash transaction volumes generating cash origination fees. We initially believed that we could both invest in new businesses and achieve double-digit earnings growth by booking a considerable amount of mortgage servicing rights. Unfortunately, the agency has opted to pull back in the first half of the year. Nevertheless, our market share remains strong, and we are 30% ahead of our nearest competitor, Fannie Mae, year-to-date. Our team has not lost its competitive edge; the issues arise from the agencies not pricing competitively, making it difficult to conduct business with them. The positive aspect is that our team quickly adapted, seeking alternative funding options like debt funds, life insurance companies, and CMBS, which generated substantial cash revenue and earnings. This quarter highlights our cash generation strength, and we remain confident that the agencies will re-enter the market. I also believe that the recent change in the FHFA director brings optimism for the 2022 scorecard and Fannie and Freddie's operations next year. The shift from Dr. Calabria to Sandra Thompson allows the FHFA to return to its regulatory role without interfering in the daily operations of the agencies, representing a significant change that will enhance their business capabilities.

Steve Theobald, Chief Financial Officer

Yes. And Henry, I'd just add to what Willy said. To me, the exciting part of all this is we did $13.4 billion of transaction volume in Q2, which demonstrates that we have become the go-to business and company to meet our clients' capital and financing needs. Whether the agencies are aggressive in a particular quarter or not, we did $13.4 billion of transaction volume, and that's the exciting part of it.

Kelsey Duffey, Vice President of Investor Relations

At this time, we have no further questions. I will turn it back over to Willy for closing remarks.

Willy Walker, Chairman and CEO

So it's a beautiful morning here in Denver. It's great having Steve across the office from me. You're getting the north and the south view of Downtown Denver. As I mentioned earlier, congratulations to the W&D team for a fantastic Q2. As Steve and I shared today, Q3 is looking very healthy. I appreciate everyone participating in the call, and I hope you have a great day. Thank you very much.

Steve Theobald, Chief Financial Officer

Thanks, everyone.