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Walker & Dunlop Inc  (NYSE:WD)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Walker & Dunlop's Third Quarter 2018 Earnings Conference Call and Webcast. Hosting today's call from Walker & Dunlop is Willy Walker, Chairman and CEO. He is joined by Steve Theobald, Chief Financial Officer and Kelsey Duffey, Assistant Vice President of Investor Relations.

Today's call is being recorded and will be available via webcast on the company's website. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. (Operator Instructions)

It is now my pleasure to turn the floor over to Kelsey Duffey. Please go ahead.

Kelsey Duffey -- Assistant Vice President, Investor Relations

Thank you, David. Good morning, everyone. Thank you for joining Walker & Dunlop's third quarter 2018 earnings call. I have with me this morning, our Chairman and CEO, Willy Walker; and our CFO, Steve Theobald. This call is being webcast live on our website and a recording will be available later this morning. Both our earnings press release and website provide details on accessing the archived webcast.

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.

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'll now turn the call over to Willy.

William Walker -- Chairman, Chief Executive Officer

Thank you, Kelsey, and good morning and thank you for joining us. Q3 marks another successful quarter for Walker & Dunlop as the investments we have made in growing our company and the strength of our underlying business model produced strong financial results in a very competitive market. Walker & Dunlop's brand is one of the very best commercial real estate finance companies coupled with the investments we've made to scale our platform, generated the third highest transaction volume in the company's history and record adjusted EBITDA by a wide margin.

I'm going to turn the call over to Steve to talk through our quarterly and year-to-date financial results, and then I will discuss what we are seeing in the market today and our outlook for the business. Steve?

Stephen Theobald -- Chief Financial Officer

Thank you, Willy, and good morning, everyone. As Willy mentioned, Q3 represents the third highest transaction volume in our history and another quarter of successful execution toward the achievement of our long-term strategic goal to become the premier commercial real estate finance company in the United States.

Our total transaction volume in Q3 was $7.7 billion, an extremely strong quarter given rate movements and the typical summer slowdown in commercial real estate lending activity. Strong growth in the servicing portfolio helped generate revenues of $185 million, up 3% from Q3 2017. As a reminder, in the third quarter of last year, we closed the largest transaction in our company's history, a $1.9 billion Freddie Mac financing for Greystar's acquisition of Monogram Residential.

Even in a quarter with no large notable deals impacting our volumes, we generated $1.17 of earnings per diluted share and record adjusted EBITDA of $58.3 million, up 10% and 30% respectively from Q3 2017. Our business model continues to generate huge amounts of cash with 10% growth in adjusted EBITDA in the first three quarters of 2018. We are benefiting from the investments we made last year to add bankers and brokers to the platform, which is most apparent in the record $2.5 billion of brokered loans we originated in Q3. As we have grown our capital markets footprint over the past several years, brokered volumes have steadily increased as a percentage of our total transaction volume, a trend we expect to continue in the future.

We originated over $2 billion of loans with Freddie Mac, the second highest Freddie Mac originations in our history after Q3 2017. Fannie Mae originations were also strong at $1.7 billion, up 22% year-over-year. Investment sales volume of $882 million was down 6% year-over-year, however, our Q4 pipeline is very robust and we continue to see a strong demand for multifamily properties in the marketplace. The three investment sales teams we have hired this year in Boston, Southern California, and most recently Dallas will contribute to continued growth in our volumes over the coming years.

Our HUD volumes were down 25% in the quarter but HUD volumes are inconsistent and our team continues to build its pipeline and process deal flow at a strong pace. We just learned that we ranked number three in HUD's 2018 lender ratings, which accomplishes one of our long-term growth objectives to be a top three lender with Fannie, Freddie and HUD.

Q3, 2018 gain on sale margin of 146 basis points was below our forecast range of 160 basis points to 190 basis points, but in line with Q3 2017. In the third quarter of 2017, the large, mostly floating rate Greystar transaction was responsible for pushing the gain on sale margin below our target range while the Q3, 2018 gain on sale margin was impacted by two distinct factors. First, 36% of our financing volume this quarter was brokered loans, where we don't record non-cash mortgage servicing revenues. Second, as treasury rates have risen, spreads have compressed, putting downward pressure on our Fannie Mae servicing fees, leading to a decrease in the MSR income that we generate on Fannie Mae loans.

As we've stated in the past, we do not control the mix of our originations or how the market price is Fannie Mae servicing. But given the level of margin compression that has persisted into October and the expected strength of our fourth quarter brokered originations, we are updating our forecast range for gain on sale margin to 150 basis points to 180 basis points for Q4. Q3 operating margin was 27%, bringing year-to-date operating margin to 29%.

On the expense side, we continue to incur costs associated with adding bankers and brokers onto the platform. With 16 net additions year-to-date in 2018, most of them joined the company in the past four months and all of them came to us via our recruiting efforts versus acquisition. This is an important distinction, because in acquisition, we are bringing over an intact firm with a pipeline of business. Whereas the bankers we recruit have to leave their existing pipelines behind.

As expected, these new hires have contributed little in terms of revenues to-date, but they're building their pipelines and we fully expect to ramping their production volumes in 2019 and beyond. These additional hires may mean we don't achieve our full-year operating margin target of 30% in 2018, but the aggressive investments in growing our sales force will lead to operating margin expansion in the future. It's a pattern we are very familiar with and we feel very good about where we are in the cycle and the opportunities that exist for us to continue growing origination volumes.

We remain optimistic about the market for a number of reasons, not the least of which is the continued strong performance of multifamily. With a limited supply of entry-level single-family homes and slowing multifamily deliveries, vacancies remain at historically low levels, supporting continued rent growth. All the while, underwriting standards remain conservative with our own Q3 originations coming in at an average LTV of 66% and debt service coverage ratio of 1.41 times, consistent with previous quarters .

Our servicing book continues to exhibit strong credit metrics with just two defaulted loans in our at risk portfolio. Third quarter return on equity was 17%, down from 20% in Q3 2017 as shareholders' equity has grown substantially from $711 million to $901 million over the past year. With year-to-date ROE of 18%, we expect return on equity for the full-year will come in slightly below our 20% to 25% target range. We ended the quarter with $165 million in cash and cash equivalents, and an additional $79 million in unrestricted cash being used to fully fund short-term interim loans at the end and it's since been repaid. Our strong financial position, combined with compelling rates and tight spreads led us to the decision to refinance our senior secured term loan. We planed to raise $250 million, a level at which we feel very comfortable, given our cash generation capabilities and sustained financial performance. Upon closing the debt refinance, our debt to adjusted EBITDA will be a modest 1.2 times based on the trailing 12 months ended September 30, 2018, giving us substantial additional borrowing capacity in the future should the opportunity arrive. Both S&P and Moody's have reaffirmed our ratings with this transaction and Moody's has put us on a positive outlook.

The offering is going well and we expect the transaction to close in the week of November 5. We intend to allocate the additional capital raised after paying-off the existing term loan toward investing in strategic acquisition opportunities, growing our asset management platform, increasing our balance sheet lending capabilities and supporting our dividend payments and share repurchase activities. We will continue to prioritize allocating our capital to investments in the business that will fuel future growth, and the term loan will increase our ability to pursue opportunistic acquisitions without worrying about financing contingencies.

We remain active in the M&A space and recently signed a purchase agreement for a mortgage banking platform in a major market. The acquisition is scheduled to close in the next several days and we will add five bankers and brokers with historical annual brokered originations between $700 million and $1 billion. The firm also services roughly $2 billion of loans on behalf of life insurance companies that we expect to add to our servicing portfolio by the end of the year. We will also use the debt proceeds to co-invest in future funds raised by JCR Capital, the alternative asset management firm we acquired earlier this year. JCR recently closed its fourth fund with capital commitments of just over $300 million, bringing our total assets and committed capital under management to $1.1 billion.

With an objective to grow our AUM to $8 billion to $10 billion by 2020, we are very focused on raising additional funds through JCR. We're trying to feed those future funds with capital commitments of 5% to 10% and we will need cash to make these co-investments over time.

We had a successful quarter originating $186 million of bridge loans into the Blackstone JV, and for our own balance sheet. We have seen an uptick and request from some of our larger borrowers for short-term financing solutions that don't really fit the profile of the JV because of their short maturities. We've done a few of these transactions on our balance sheet, and raising additional money right now puts us in an even stronger position to accommodate these requests going forward. The ability to use our capital in this manner deepens the relationship with our customer and enables us to capture more deal flow.

Finally, we will continue to return capital to shareholders in the form of share repurchases and quarterly dividend payments. During the third quarter, we used $4 million of our $50 million share repurchase authorization to buyback stock, and investors should expect us to continue our share repurchase activity going forward. In addition, our Board of Directors authorized a dividend of $0.25 per share payable to common shareholders of record on November 16, 2018. This brings our annual dividend total to $1 per share, representing a modest payout ratio of 15% of trailing 12 month net income, a level from which we can comfortably increase while continuing to retain capital for growth.

Before I turn the call back over to Willy, I want to mention the recent decision we made to bring in-house the entirety of our servicing platform at the end of next year once our current co-sourcing arrangement ends. As the seventh largest commercial loan servicer in the country, we felt that it is the right time to fully in-source to gain full control over the technology and operations for this important part of our business. We will be taking the next year to implement, convert and training our people on the new system. This will result in approximately $2.5 million of incremental costs over the next year as we operate redundant platforms. But once converted, we expect to realize annual cost savings of roughly $1 million compared to our current operations.

We have an incredibly strong financial position today with the servicing portfolio that continues to generate significant amounts of cash to support our future growth. We feel optimistic about the current macroeconomic and demographic fundamentals supporting the multifamily market and are confident in our team's ability to continue executing on our business strategy to deliver strong shareholder returns.

I'll now turn the call back over to Willy.

William Walker -- Chairman, Chief Executive Officer

Thank you, Steve. As, Steve's remarks demonstrate, Walker & Dunlop's operating and financial results thus far in 2018 have showcased the profitability and durability of our business model as we continue to execute on our strategic growth initiatives. Before I discuss those growth initiatives in more detail, I want to give some color to the current market dynamics.

The Federal Reserve's reinterest rate hikes so far this year with an additional rate hike expected in December, have done little to dampen investor's general enthusiasm for commercial real estate. GDP growth, job creation and increased consumer spending are all positive. And as inflation worries mount, commercial real estate assets have become increasingly attractive, yet investors are not getting overly bullish on the sector due to how late in the cycle we are and rising interest rates. But the current economic environment is defying historic cycles, and if you look below the surface, the cost of borrowing has an increase in line with rate increases.

For example, we looked at two nearly identical seven-year fixed-rate loans on two phases of a multifamily development project that we financed in December 2016 and October 2018. As slide five shows, the loan terms on these two transactions, we rate locked the loan on Phase I almost two years ago when the seven-year treasury was at 2.40%, the investor spread was 1.82% and the all-in coupon to the borrower was 4.22%.

We rate locked Phase II earlier this month with the seven-year treasury at 3.09% and investor spread of 126 basis points, and an all-in coupon of 4.35%. So the seven-year was up by 69 basis points, the investors spread was down by 56 basis points and the cost of borrowing increased by only 13 basis points to the borrower. This tightening of credit spreads has allowed all-in borrowing costs to remain relatively stable and made investment sales activity continue forward without significant changes to cap rates.

Logic would have it that investors spreads can only compress so much, and that at some point rising rates will translate into cap rate adjustments. But with the amount of equity capital having been raised for commercial real estate, it will take a significant softening of the macroeconomic environment to make cap rates adjust dramatically. The overall market conditions and macroeconomic trends that underpin commercial real estate, and more specifically multifamily housing are very strong.

GDP growth is driving existing and sort of businesses to look for office space. A robust economy is driving strong business travel and occupancy rates at hotels. And while the Amazon effect is still having a huge impact on the retail sector, there are plenty of companies that have adapted their physical store presence and online offerings to interact with their customers where and how they want. This type of robust economic growth would typically drive a large number of renters to start looking for their piece of the American dream, a detached single-family home. Yet, rising interest rates, huge amounts of student debt and a dearth of entry-level single-family housing is keeping large numbers of Americans in rental housing.

As you can see on slide six, deliveries of new multifamily properties peaked in 2017, and with a limited competitive bid from single-family, the fundamentals of multifamily properties should remain very strong. This is a major shift from the last expansionary economy of the early 2000s and it will pay long-term benefits to owners of multifamily properties. Walker & Dunlop was the fourth largest lender on multifamily properties in the United States in 2017 with nearly 8% market share. And we will continue building our company and market share with the support of these positive market dynamics.

Let me go from the macro outlook to W&D's long-term growth initiative, called Vision 2020. The long-term growth strategy we established in 2016 is focused on generating $1 billion in revenues by the end of 2020, and I'm pleased with the progress we've made this year to achieving that goal. In a choppy market underscored by rate increases and two significant sell-offs in the equity markets, year-to-date we have been able to originate $19 billion in total transaction volume, while adding 16 new bankers and brokers and closing on our next acquisition later this week.

All of this has us well on our way to our goal of originating $30 billion to $35 billion in debt financing on an annual basis by the end of 2020. We have gained a huge amount of momentum in our multifamily investment sales business with the addition of teams in Boston, Dallas and Los Angeles this year, and our current growth rate has us on target to meet our 2020 goal of $8 billion to $10 billion of annual investment sales volume.

Our servicing portfolio just crossed $80 billion and we will cross $100 billion by 2020 given the current pace of our loan originations and minimal run-off in the portfolio over the next two years. The final component of this strategy is to build an $8 billion to $10 billion asset management business. We acquired JCR in Q2 of this year, recently closed Fund 4 oversubscribed and have now crossed the $1 billion in AUM mark. We plan to organically grow AUM from $1 billion to over $3 billion over the next two years at JCR and we will focus on additional acquisition opportunities to add AUM in pursuit of our 2020 goals. While achieving Vision 2020, we will require a huge amount of work and the integration of several acquisitions, we know how to get there and plan to do just that. But I also think it's important to keep in mind the fantastic core economics of our business today.

As you can see on slide seven, steadily increasing servicing fees, a lift in escrow earnings and growth in brokered originations have driven a 10% increase in year-to-date adjusted EBITDA to a $160 million, and a 30% increase over Q3 2017.

I'd first like to focus on the growth in the servicing portfolio shown on slide eight, which continues to drive steady increases in cash servicing fees. Our servicing portfolio cross the $70 billion dollar mark during Q3 of last year. And our total originations in the 12 months leading up to that milestone were $23.3 billion. We just crossed the $80 billion mark with loan originations of $23.8 billion over the past year. So while origination volumes were essentially flat, we added $10 billion of loans to our servicing portfolio which are almost entirely prepayment protected, have a weighted average life of 10 years and will generate annual servicing revenues of $25 million, and over $200 million of high margin revenues over the life of those loans.

Unlike many banks and specialty finance companies that originate short-term loans that are constantly running-off their portfolio, we have the wonderful advantage of generating long duration assets that have a very limited run-off in a rising interest rate environment. Given the hiring we have done this year and the acquisition we are about to close, we remain very focused on growing transaction volumes to add even more servicing to the portfolio over the coming years.

Related to our $80 billion servicing portfolio is over $2 billion of escrow deposits. As short-term interest rates have jumped up in 2018, our year-to-date escrow earnings have grown to $29 million, a 110% increase from the same period in 2017. As interest rates continue to increase, so will escrow earnings, providing a meaningful boost to the adjusted EBITDA and cash flow.

Finally, as Steve discussed, our brokered loan originations have been increasing due to the investments we have made to grow this part of our business. Because we book only cash origination fees on our brokered loans, as these volumes increase, the cash component of our gains from mortgage banking activities will increase. It is our expectation that cash origination fees, servicing fees and escrow earnings will all continue to grow nicely and drive additional growth in EBITDA as we move toward achieving Vision 2020.

Walker & Dunlop is recently ranked on Fortune Magazine's list, a fastest growing public companies based on three-year growth rates in revenues, earnings per share and total shareholder return. This is our second consecutive year to rank in the top 1% of the over 4,000 publicly traded companies on US exchanges, due to our sustained financial performance. We are also just named one of Fortunate Magazine's Best Places to Work, the sixth time we have appeared on that list. Great places to work and fastest growing companies don't always go together, and we are extremely proud of the people, culture and financial performance we've been able to build and sustain at Walker & Dunlop.

I'd like to thank all 703 of my fellow W&Ders for all they do every day to make Walker & Dunlop so successful, and I'd like to thank our shareholders for your continued investment and trust in our company.

With that, I'll ask the operator to open the line for any questions.

Questions and Answers:

Operator

The floor is now open for questions. (Operator Instructions) We'll take our first question from Steve DeLaney with JMP Securities. Please go ahead. Your line is open.

Steve DeLaney -- JMP Securities -- Analyst

Good morning, and thank you for taking the question. Regarding the pending acquisition, I didn't hear you reference a specific geographic market, and I assume that maybe due to of that, just trying to be confidential on this until it actually closes. Is that correct? And will you -- do you intend to press release the closing of that acquisition? Thanks.

William Walker -- Chairman, Chief Executive Officer

Definitely, yes.

Stephen Theobald -- Chief Financial Officer

Yeah.

William Walker -- Chairman, Chief Executive Officer

Definitely, yes. Major MSA, Steve, and it should --

Stephen Theobald -- Chief Financial Officer

The press release is drafted and ready to go.

Steve DeLaney -- JMP Securities -- Analyst

All right, great. Yeah. No sense telling the competition, you're in the process of doing something and inviting other bids. So got that.

So when I look at the quarter, my -- as analysts, we put numbers up there and we don't always hit them and so we start scratching our head. But we're not really settle back and look at the quarter, my take -- big picture is that volume and margins look pretty solid but it really comes in terms of EPS, it really seems to come down to some of these expenses. And I understand the hiring of the producers and impact that might have on the personnel line, but I'm curious about this, almost $3 million increase year-over-year and other operating expenses. If you could comment on that, since that was a 25% increase year-over-year. Thanks.

Stephen Theobald -- Chief Financial Officer

Yeah, Steve. I think -- I would say, in our business, we have people and people-related costs. So as we are increasing headcount, things like office expense go along with that. So, I think there is an element of that, that is included in there. I think we are historically and remain highly focused on managing those costs to minimize the impact that, that has on the overall P&L. And I think everyone should expect us to continue to stay very focused on that as well.

Steve DeLaney -- JMP Securities -- Analyst

Okay. You have added some offices for sure, but I'm not hearing that there's anything in there regarding this technology in sourcing effort, anything like consulting fees or anything significant in there are yet related to that.

William Walker -- Chairman, Chief Executive Officer

That's right. We just signed the new contract for the technology piece of this a few weeks ago. So the project will be starting this year -- in Q4 and really pick up speed in 2019.

Steve DeLaney -- JMP Securities -- Analyst

Yeah. Okay. And next thing would be the provision for credit losses on your Fannie Mae book. It just struck me looking at the model. I mean, like in 2017 you had like literally nothing. Two quarters in a row here, we've had a charge in excess of $0.5 million. I am just curious if there -- is there a trend building there in terms of some things going on in the market or is this more coincidental?

Stephen Theobald -- Chief Financial Officer

I'd say, it's more coincidental, Steve. This quarter we did have, I mentioned two loans that are now in default, the second one just happened this quarter. So part of the provision expense was to make sure we felt comfortable with this specific reserve around that loan. But otherwise, there is no other trend or pattern of concern going on in the portfolio at this point.

Steve DeLaney -- JMP Securities -- Analyst

Okay. And my last, I'll close out with this if I could on page 11 of your deck. The growth has certainly been there, especially when you look back over the last year or two both on volume and in revenue. Margins obviously, year-to-date this year is more challenging and I'm just curious if -- are we enough -- moving to a new norm or do you -- with sub-30% operating margin, sub-20% ROE or do you think a 30%, 20% kind of level on those two important metrics is -- is that still achievable at some point as we move forward?

Stephen Theobald -- Chief Financial Officer

Yes, I think we are still focused on certainly keeping operating margin at 30% or higher, Steve. And I think, again that's a function of -- last year, most of our net new bankers and brokers on the platform came via acquisition, which has a very different P&L profile and they start generating revenue right away, as you know, versus this year's, all been recruiting. So I think that's been part of the challenge on that.

And then on the ROE, I think long-term, we still believe this is a 20% ROE business. One thing to keep in mind is, we have a big positive adjustment to equity back in Q4 of last year related to the change in the tax law and the tax rate. So our equity balance has grown pretty significantly in the last 12 months as a result of that.

Steve DeLaney -- JMP Securities -- Analyst

And does that come into your thinking on the buyback?

Stephen Theobald -- Chief Financial Officer

I mean, certainly, the buyback, I think the buyback is, in my mind, Steve, a separate decision as I walk through various ways we expect to deploy capital. I think our view on the buyback hasn't really changed, which is -- our primary objective is to reinvest into business to continue our growth. But when the opportunity arises to repurchase our stock at what we think are widely attractive prices, we'll do that.

Steve DeLaney -- JMP Securities -- Analyst

Thanks very much for the comments this morning.

William Walker -- Chairman, Chief Executive Officer

Steve before you hop up the line, just two quick things. One, I would -- your comment at the beginning of your question as it relates to the overall margins and performance of the platform, I have been looking at our competitor firms as they have been filing. And as you well know, the margins in our business and the underlying financial performance stands above most of our competitor firms by quite some proportion. And so even though these numbers that Steve went through have come down from where we have been historically performing, they are still extremely strong numbers relatively speaking.

The second thing I'd say is that, as it relates to loan origination volumes, I think 2017 was noteworthy. In that we did a number of what I would call mega transactions which drove the top line of both origination volumes as well as revenue in 2017 and that was the first time that shareholders got to see that W&D was really in that top, top tier of firms that we're out working with big sponsor groups to finance mega transaction. We have been in the hunt and in the mix and did on several large transactions this year, and unfortunately haven't won those. And one of the things that I find to be so reassuring is that, even though we haven't done a big mega transaction, A, we've been at the dance (ph) if you will; and B, the core business has continued to move forward in the smaller transaction volume that is sort of the machine that Walker & Dunlop has built up.

And so we will have our big transactions that will drive the -- if you will, outperformance that we saw previously. And at the same time, the core day-to-day business of being one of the premier providers of financial services in the commercial real estate industry is very much there and reflective of our Q3 performance.

Steve DeLaney -- JMP Securities -- Analyst

Got it. Thanks to that additional color, Willy.

William Walker -- Chairman, Chief Executive Officer

Okay.

Operator

We'll take our next question from Jade Rahmani with KBW. Please go ahead. Your line is open.

Jade Rahmani -- KBW -- Analyst

Thanks very much. I wanted to ask a bigger picture question about the company. Considering the servicing portfolio is now over $80 billion, generating over $200 million in annual servicing fees and we estimate about over $125 million of cash flow, how has your thinking changed around the optimal capitalization of the company, considering this growth. I'm just thinking if there might be a better way to finance the MSR.

You talked about leverage at 1.2 times debt to EBITDA, which compares favorably to CRE brokers, but the cash flow consistency of Walker & Dunlop should be much higher considering the servicing portfolio. One of your peers Arbor Realty is actually structured as a REIT, whereas probably half of their income is coming from the GSE multifamily business. So I just wanted to see if you can make any comments about that?

William Walker -- Chairman, Chief Executive Officer

Yes. I think, Jade, as we've discussed in the past, we are a C-Corp. I think for a reason and I think the flexibility that's provided to us as being a C-Corp is perhaps an intangible benefit that we don't often talk about. But I think we still I have a view that too much of our income would not be good REIT income. And therefore, I think that structure would not really work for us. From a long-term perspective, I think our strategy is really more oriented toward not being a REIT than it is -- REIT don't (ph).

Jade Rahmani -- KBW -- Analyst

And just in terms of leverage, the other aspect of the question. I mean, does it make sense for the company to increase its leverage, reduce its equity base as a result of the strengthening cash flows. Is there too much equity in fact in the company, and so that increases the accretion potential of share buybacks.

William Walker -- Chairman, Chief Executive Officer

So I'd put forth that, Jade, Steve in his comments as you heard, walk through in very specific detail where we plan to allocate capital. And number one in all of that is to continue to grow the business, that is always been our focus and we will continue to make the investments to continue to grow the platform. As you mentioned in your note this morning, the value of the servicing portfolio is right now about 60% of our market cap. And so, there is a -- there is a very valuable asset in our servicing. One of the things that I think investors hopefully will realize is that, this quarter shows that shift to cash fees, cash servicing fees, escrow income and cash origination fees.

And as you have for quite some time in your analysis of us backed out the mortgage servicing rights and gone with just cash EPS, and we beat your cash EPS number this morning quite handily because of that shift. And so, it's my hope that the market starts to give us more credit for the origination platform than it has in the past. You have highlighted in your questions as well as in your notes, the value of the servicing portfolio.

And I would also reiterate Steve's point earlier, which is just that, we will -- we have a Board mandate of $50 million of payback authority. We constantly at every Board meeting revisit that authorization. And as Steve also said, we've just declared our $0.25 dividend for the quarter and we will look at our quarterly dividend payment and how much we are paying out at the appropriate time.

Jade Rahmani -- KBW -- Analyst

Yeah. I mean, just looking at the various sectors I cover, it's striking to me that Rialto was sold for $340 million. There are BPs (ph) buyer and a fund manager of BPs Securities. The $857 million fair value of servicing doesn't even include potential recapture of that business and they're sitting on $165 million of cash. That means, the platform, the market is ascribing about $500 million of equity value. It seems like a striking comparison and there is potential ways to unlock this value to be accretive for shareholders.

Stephen Theobald -- Chief Financial Officer

Well. Yeah, I totally understood. And as the largest individual shareholder in the company, you can guarantee that I'm looking at it and that we as a company are looking at just that. But I would go back to it. Our outlook is to continue to grow this company and to achieve our Vision 2020. Doing things of financial engineering to benefit shareholders in the short-term is just that benefiting shareholders in the short-term. We are very long-term focused and we are very focused on executing on that business plan, because that long-term is what will drive shareholder value.

Jade Rahmani -- KBW -- Analyst

Thanks. So, I think that's the right approach. In terms of the 2019 outlook, is there a trend basically that growth is going to come from lower margin businesses considering: A, the spread compression you mentioned on Fannie Mae new servicing fees, as well as the fact that brokered loan business asset management investment sales are growing faster or projected to grow faster than the GSE multifamily business.

William Walker -- Chairman, Chief Executive Officer

Yeah, a couple of things. First of all, this has been part of the strategy for quite some time. We built up a very, very strong market presence in our agency business and our HUD business. And then we said, OK, that is only going to grow so far, we can only gain so much market share there, even though we believe we still have market share to gain and we continue to invest to grow that business. But we need to start to diversify the platform and grow our debt brokerage business, and then raise capital into an asset management platform to then be able to take that capital and feed into that brokerage distribution platform and be able to, if you will, mimic some of the long-term both revenue and margin that will come from being a lender and leveraging-off of our underwriting capabilities.

So we're doing exactly what we told investors we do, which is go out and build a nationwide brokerage platform on the debt side, we are also building out a nationwide platform on the investment sales brokerage side. And then in Q2, we bought the -- our first foray really into the investment management space by buying JCR. Adding that to the Blackstone Joint Venture, we're now over $1 billion of AUM and we will use both of those sources of capital to feed into that brokerage operation.

So what you're at right now is this sort of flexion point where we're making the cash origination fees off of the expansion from our brokerage business and we are now spooling up our asset management business that will provide a long-term, similar higher margin revenues. And so we're right at that flexion point now, where we are doing exactly we said we do. Go, build up the brokerage platform and then raise capital to feed into that brokerage platform. All the while, still continuing to focus on growing our Fannie, Freddie, and HUD origination platforms where we have fantastic, both market reputation, a defendable market position as one of the three very largest in that space, and the economics of those businesses are fantastic.

Jade Rahmani -- KBW -- Analyst

In terms of the competitive pressures on the MSR component of the gain on sale margin, how much of it is driven by movements in rates and how much of it is driven by, perhaps specific companies looking to grow and compete with Walker & Dunlop?

William Walker -- Chairman, Chief Executive Officer

Great question. I don't think you can as, -- as Mark Gibson said on the HFF call last night. There is a general trend in the market right now of that spread compression that we outlined in my comments, and that is just the market. That's the, -- the buyers of those securities being willing to accept a lower spread and lower return for buying those securities. With that said, Freddie Mac has been an extremely fierce competitor to Fannie Mae this year and Freddie has on every single deal driven the pricing down to a place where Fannie has had to accept lower overall spread. And we as a big Fannie partner have -- had to accept lower servicing fees.

Does that continue forward forever? No, it is not. In the past, both Fannie and Freddie, as you know Jade, come in and out of the markets. And both, if you will, drive the competitive bid in the market, Q3 was underscored by Freddie being wildly competitive in driving spreads down. And so, I think that there is a general market movement here, but we've seen this happen before. We've seen spreads and servicing fees come down in 2013 and 2014, and then gap way out in 2015 and 2016.

So we're -- the best part of it for investors is that, we are a very big player in the market, we are getting access to the deal flow and we're putting up the overall origination volumes and revenues. And quarter-by-quarter, as Steve said, we don't control the mix as it relates to where the deals go and we certainly don't control, what kind of spreads we make on the deals that we are originating. But the market waxes and wanes, and this quarter was one where there was some significant tightening.

Jade Rahmani -- KBW -- Analyst

Okay. I think it was reported that this company Rentlytics that you've invested in several years ago was acquired by RealPage. Can you give any color on the anticipated gain, and whether that'll occur in the fourth quarter?

Stephen Theobald -- Chief Financial Officer

Yeah. Jade, it is a fourth quarter transaction. It closed couple of weeks ago here in October. I think we'll report a immaterial gain in Q4, but we'll talk about it in the queue.

Jade Rahmani -- KBW -- Analyst

You said material, not immaterial right?

Stephen Theobald -- Chief Financial Officer

Immaterial.

William Walker -- Chairman, Chief Executive Officer

He said, immaterial.

Jade Rahmani -- KBW -- Analyst

Immaterial, OK.

Stephen Theobald -- Chief Financial Officer

It was an immaterial gain.

Jade Rahmani -- KBW -- Analyst

Okay. Got it. Okay. Well, thanks very much for taking the questions.

William Walker -- Chairman, Chief Executive Officer

Thanks, Jade.

Operator

(Operator Instructions) We'll take our next question from Henry Coffey with Wedbush. Please go ahead. Your line is open.

Henry Coffey -- Wedbush Securities -- Analyst

Good morning, everyone. Just for a fun, I think, I'll turn the questions into a statement. You generated a ton of cash flow, which makes for a great business. You got a great 2020 plan and we think you should either be raising your dividend or buying back stock but I thought it'd be simpler if I made it as statement rather than a question and my colleagues are -- we all seem to be on the same page.

When you look at the long-term future and I heard this from a couple of other parties that there's probably more potential growth in brokerage than in GSE business. I don't know if that's an accurate statement or not, but it also sounds like there's more balance sheet requirement that may come with some of that. I know you have the funding capacity to do that, how does that affect your -- is that an accurate statement and it may be wrong, and how does that affect your capital planning?

William Walker -- Chairman, Chief Executive Officer

So, Henry, good morning and thanks for the -- thanks for the statement before the question, I concur. What I would put forth to you as it relates to growth in the GSE space. I think one of the reasons, quite honestly why investors have put somewhat of a cap on the multiple of Walker & Dunlop is because they only thought that we could grow the GSE business to a certain size and then you sort of cap out there.

What we've been able to do is, show that, that wasn't the case and we've been able to continue to grow both our GSE volumes as well as our HUD volumes. And we're very focused on continuing to do that, and don't see that there is some cap there at 12% market share with the GSEs that we can't take that up from there. And we plan to continue to focus on that.

With that said, given the relative size of our brokerage business to our GSE business, everything that we had there puts forth very significant incremental growth. And so there's a huge opportunity for us to continue to scale that business and add people to the platform. One of the reasons we've been so successful at bringing those people on to the platform is because they want to join the platform with as strong a GSE presence as we have. Because many, many of those brokers love being on a platform that you can walk into a meeting and say, we're number one with Fannie Mae and number three with Freddie Mac, and the client literally says, well -- well then I guess I need to be working with you on my multifamily financings.

To your question specifically as it relates to capital and balance sheet and how we are winning a lot of deal flow, what you have to remember is that, unlike many of our brokerage competitors, we are a lender. We have a huge underwriting group that understands credit and we have a track record of having made extremely good loans for over 30 years in the Fannie Mae DUS program of really looking at credit and assessing what we want to do.

And so when an opportunity comes in, where there is something that needs to be transacted on quickly, someone needs to take down an asset literally overnight. We had one of our large clients in Q3 call me and say, my preferred equity investor just backed out, I can't move forward with an acquisition. We really want to do this acquisition, but I just want you to know because Walker & Dunlop is both selling the asset as well as financing the purchase for us. And I asked the client, how big was the preferred equity investment? He told me. I said, can you give me the day and six hours later I called them back and said that, Walker & Dunlop would step in with preferred equity investment.

That's the type of stuff that we can not uniquely do, because there are others who will do it. But because we are both a broker, as well as a banker and we can move very quickly, that's a competitive advantage against the competition and that's not only what wins that deal, it wins that client's loyalty for a very, very long period of time. And so, specifically to your question, one of the things that Steve outlined in why we're raising additional debt capital is that, we want to have that on our balance sheet to be able to use that to do exactly what we did for that client.

And so, I think it's a competitive advantage. I think, we've used it very, very well and I would put forth that investors should be extremely comfortable given our credit background as well as our credit track record that we're making good loans, that are making investors a lot of money and meeting our clients' needs in a very, very short period of time.

Henry Coffey -- Wedbush Securities -- Analyst

But I guess my real question was, how does that affect your capital allocation? If you had a $100 worth of capital and under a broker only model, you probably put $10 of that into the business and $10 of that into new hires and $80 of that into stock buybacks and dividends. And then, now under this model where you -- again if I'm wrong, just correct me. But I think there's more balance sheet commitment likely, does that change your --?

William Walker -- Chairman, Chief Executive Officer

Yeah. I mean, one of the things you have to remember is that we started using our balance sheet significantly for bridge loans and we created our Blackstone Joint Venture to move that collateral off and to basically both de-risk the balance sheet as well as increase the returns on our equity by partnering with somebody else.

So this quarter, we are at a 17% ROE, year-to-date, we're at a 19% ROE, we are very focused on our ROE and making sure that we're getting our investors great returns on their capital. So I would just put forth to you that, as Steve laid out, Henry, we're looking at: A, continuing to invest in the core business; B, using that to be able to support our loan origination activities; and C, looking at share buybacks and dividends as uses of that capital.

Henry Coffey -- Wedbush Securities -- Analyst

And then when you look at the business, I'm assuming 20%-30%, 20% ROE, 30% EBITDA margin is kindly the benchmark, how badly is that going to suffer next year with the investments you're making in servicing and new hires, and what are your thoughts around how those numbers fall out next year?

William Walker -- Chairman, Chief Executive Officer

We haven't given our 2019 guidance. As you know, at the beginning of the year, we are generally speaking, give a -- this is what we're looking at on the year and what we're trying to drive to, and we update those numbers as Steve just did today in this call. But I would put forth that we will continue to invest in the brokerage business and at the same time, as I said in response to the question that Jade had, spreads have come in. I don't think we're expecting spreads to gap back out where servicing fees are going to grow demonstrably. Steve gave you an adjustment to our gain on sale margin from the 160 basis points to 190 basis points range down to 150 basis points to 180 basis points range. And we feel very comfortable with that range as it relates to our gain on sale margin.

Henry Coffey -- Wedbush Securities -- Analyst

Thank you.

Operator

And next we'll take a follow-up from Jade Rahmani with KBW. Please go ahead.

Jade Rahmani -- KBW -- Analyst

Thanks. Just wondering if you've heard anything on the FHFA, what direction that might be headed and any anything on the outlook for the GSEs in 2019?

William Walker -- Chairman, Chief Executive Officer

So Jade, as you know, we follow it really closely. I would put forth that what we are advocating for is that the Trump administration select someone to be the next FHFA Director who comes from industry and has experience in the capital markets, given that Fannie and Freddie contribute paper to the second largest bond market in the world. And therefore, that person who is going to be their regulator should have a private sector background and experience in the capital markets.

Beyond that, trying to sort of guess who that person is going to be is, well, it's a guessing game and so there's no reason in guessing. And I put forth from conversations that I've had that whomever they put in there will likely be an acting Director for a period of time before they get a permanent Director in, and there's nothing that I'm seeing or hearing that has me concerned with the direction that FHFA is going to take as it relates to Fannie and Freddie's multifamily businesses.

And at the same time, we've made the investments in the platform to expand our business out. This quarter being a perfect example, it says that, FHFA can nip and tuck at the agencies on what their annual allocation is going to be or what their green (ph) program will be or what volumes, they'll be able to do in various lending programs, and then will react to it. We have enough scale and enough market presence to be able to do so and we also have the ability to raise capital around any area that Fannie or Freddie might be asked not to do additional lending in.

So, one area for example Jade is pre-stab loans. Fannie and Freddie have been big suppliers of capital in the pre-stab space, about 5% of their deal flow last year was for pre-stabilized loans. If the regulator will make the decision to pull Fannie and Freddie out a pre-stab deals, we have our joint venture with Blackstone, as well as our own balance sheet to step in and do pre-stab deals. So that's something that we are perfectly aligned toward that if the regulator came out and said, we want Fannie and Freddie, only to be lending on stabilized assets and not pre-stabilized assets, we could step in with our own capital and Blackstone's capital and be able to meet the market there.

So those types of shifts to what Fannie and Freddie are doing don't concern us too much, because we've got the scale and the access to capital to be able to meet with the market needs.

Jade Rahmani -- KBW -- Analyst

Thanks very much.

Operator

And there are no further questions at this time. So,I'll turn the floor back to Willy Walker for any additional or closing remarks.

William Walker -- Chairman, Chief Executive Officer

Great. I thank everyone for joining us this morning on the call and I would reiterate my thanks to all of my colleagues at W&D for a fantastic quarter. I wish everyone a happy Halloween, and again thanks for joining us this morning. Have a great day.

Operator

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

Duration: 54 minutes

Call participants:

Kelsey Duffey -- Assistant Vice President, Investor Relations

William Walker -- Chairman, Chief Executive Officer

Stephen Theobald -- Chief Financial Officer

Steve DeLaney -- JMP Securities -- Analyst

Jade Rahmani -- KBW -- Analyst

Henry Coffey -- Wedbush Securities -- Analyst

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