Walker & Dunlop, inc (WD) Q2 2021 Earnings Call Transcript

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Walker & Dunlop, inc (WD -1.02%)
Q2 2021 Earnings Call
Aug 6, 2021, 2:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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. [Operator Instructions]

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 Chief Executive Officer

Thank you, Kelsey, and good morning, everyone. Walker & Dunlop's second quarter performance reflects our continued investments in people, brand and technology to fundamentally 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, up 11% from the second quarter of 2020, diluted earnings per share of $1.73 and adjusted EBITDA of $67 million, up 37% over Q2 2020. Those numbers directly reflect the transformation of Walker & Dunlop from a mortgage-centric specialty finance firm into a broader technology-enabled financial services company. We took Walker & Dunlop public in 2010 as one of the best agency multifamily lenders in the country. Ten years later, thanks to our investments in people, brand and technology, we are a dramatically more diversified financial services company that is more relevant to our customers every day. Q2 total transaction volume of $13.5 billion, up 90% from Q2 2020, reflects W&D's customers' desire to work with us and our team's ability to meet their needs with the appropriate capital and services.

When the market dislocated in 2020 and countercyclical capital from Fannie, Freddie and HUD was needed, W&D was there to meet our clients' needs. And as the market recovered and both capital and sales transactions returned, W&D met our clients' needs in spectacular fashion. Q2 2020 and Q2 2021 could not be more distinct quarters from the depths of a pandemic to an economy roaring back. And in both quarters, Walker & Dunlop met our clients' needs and generated fantastic financial results. At the end of 2020, we announced a five-year strategic plan called the Drive to '25, with the overreaching goal of doubling revenues from $1 billion to $2 billion by increasing annual debt financing volume to $65 billion, multifamily property sales volume to $25 billion, our servicing portfolio to over $160 billion, assets under management in our fund management business to $10 billion and starting three new businesses in small business lending -- small balance lending, appraisals and investment banking. All of these growth initiatives and investments are designed to make W&D a broader, more diversified technology-enabled financial services company, and our Q2 results reflect our rapid progress toward achieving these goals.

In order to grow our debt financing volume to $65 billion over the next five years, we are recruiting the very best bankers and brokers in the industry and investing in technology. Two proof points on the value of our investments are 22% of our Q2 total transaction volume came from new clients to Walker & Dunlop and 55% of the loans we refinanced were taken away from competitors' portfolios. New clients are a combination of deal teams, brand and technology working seamlessly together. Since we started reporting on new clients to Walker & Dunlop last year, we have brought in 660 new clients and $15 billion in total transaction volume. Refinancing loans held by our competition is a result of insightful technology being put in the hands of our talented bankers and brokers. Since we started reporting last year on refinances that are new to Walker & Dunlop, we have refinanced $16 billion of loans away from the competition. The total commercial real estate finance market is projected to be $486 billion in 2021. We originated over $10 billion of loans in Q2, which included record debt brokerage volume of $6.3 billion, along with $4 billion of lending with Fannie, Freddie, HUD and on our balance sheet.

As you can see on this slide, our debt brokerage volume of $6.3 billion in Q2 '21 is up dramatically from $1.9 billion in Q2 2019 and up 320% from $1.5 billion in Q2 of last year. $10 billion of debt financing in Q2 places us at an annual run rate of over $40 billion, well on our way to $65 billion by 2025, which would give us over 10% market share of total commercial real estate lending in the United States. Another area of our business we are expanding dramatically is small balance lending on multifamily properties, a market dominated by our big bank competitors, JPMorgan and Wells Fargo. We grew our small balance loan volumes by 45% for the first half of 2021 over 2020 and the recently announced acquisition of TapCap, a technology platform that can size and generate a loan quote on small multifamily properties in minutes, will accelerate this growth. As we continue automating our loan underwriting processes, launch TapCap, expand our brand as the largest multifamily lender in the United States and combined our best-in-class people and technology, we will disintermediate the banks and gain market share. Our multifamily investment sales business has the momentum of a freight train. We have added brokers in seven major MSAs over the past year. leverage the brand and technology from our lending businesses and watched our volumes explode. The market fundamentals for apartment sales are exceedingly strong with Zelman, the research and advisory firm we just acquired, reporting in its recent apartment transaction survey, the June buyer demand increased for the 14th consecutive month to the highest index score since September of 2015. Our sales activity of $3.3 billion in Q2 '21 is up 648% over Q2 2020 and up 203% from Q2 2019.

One of our largest competitors in this space, CBRE, recently announced that their global property sales platform, which covers all commercial real estate asset classes, saw 152% volume growth from Q2 '20 and 27% growth from Q2 2019. It is great to see our multifamily property sales platform, which is focused on the largest commercial real estate asset class in the United States, growing significantly faster than the competition. We have an exceedingly strong pipeline for the remainder of the year, with $6.6 billion of listings that we are either currently marketing or have already closed for Q3 and Q4. And as we add more top brokers to our team, like the group we just added here in Denver, integrate Zelman's market research into our marketing materials and apply our database insights to uncover sales opportunities, we will achieve our 2025 goal of $25 billion in annual multifamily investment sales. At the core of our lending and investment sales businesses is valuation. What a property is worth to determine the size of the loan or the sales price. Our automated appraisal business, Apprise, is another example of where our focus on technology will scale a new business and pull market share from our largest competitors. The global commercial real estate appraisal business is a $9.8 billion revenue market, with profit margins around 14%.

Today, CBRE has roughly 7% market share generating over $650 million of annual revenues. We entered the appraisal business last year after automating the majority of the appraisal process with our technology partner, GeoPhy. We did 50 appraisals in Q1 of 2020 and grew that number five times in Q1 of 2021 to 250. In Q2, we grew our quarterly volume by another 48%. After a significant amount of investment in technology and hiring of appraisers over the past 12 months, we expect to see continued growth in this business due to our product being faster, cheaper and better than the competition. And our technology-based approach will allow us to generate significantly higher margins than the competition. As we continue growing our services business, like debt and property brokerage and invest in our technology-enabled businesses like small balance lending and appraisals, we will continue building Walker & Dunlop into a broader, more diversified, technology-enabled financial services company. This transformation will not only propel our growth forward, but generate more cash earnings.

As slide seven shows, our Q2 revenues a year ago of $253 million were comprised of 64% cash revenues and 36% noncash mortgage servicing rights. Due to growing our services businesses, such as debt brokerage and property sales, our Q2 2021 revenues of $281 million were 78% cash and only 22% noncash mortgage servicing rights. As you can see on the right side of this slide, the shift in revenues drove our adjusted EBITDA to $67 million, up 37% over Q2 2020. By expanding our cash and carry services businesses, such as debt brokerage, property sales, asset management, servicing and appraisals, we will increase cash revenues and expand the multiple that investors use to value Walker & Dunlop.

As you can see on slide eight, our debt brokerage business has grown at a compound annual growth rate of 22% over the past five years. The closest pure-play comp to this business is our old competitor, HFF, prior to being acquired by JLL in 2019, for 17 times trailing earnings. Similarly, we can compare our multifamily property sales business to Marcus & Millichap.

As you can see on slide nine, over the past five years, Walker & Dunlop has grown our multifamily property sales business at a compound annual growth rate of 32% versus Marcus & Millichap's 2%. Marcus & Millichap is currently trading at over 32 times trailing earnings. We expect Walker & Dunlop's valuation to trend away from specialty finance companies and toward technology and real estate services firms as we move forward. While our services businesses, such as debt and property brokerage, continue to expand dramatically, we are still a major lender and will continue generating significant mortgage servicing rights. Fannie Mae and Freddie Mac both carried over a significant amount of business from 2020 to begin 2021, and then they hit the brakes. We thought they would reenter the market in Q2, but are just now seeing them price and win business at historic levels. With almost 60% of their annual lending capacity still in hand, we should generate significant mortgage servicing rights from our Fannie Mae and Freddie Mac lending in the back half of the year. And our HUD business has simply been on a tear, originating over $600 million of origination volume in both Q1 and Q2 and proving that with the right team and right leadership, HUD volumes can become more consistent and valuable over time.

To become the largest multifamily lender in the United States at the end of 2020, W&D had to jump over JPMorgan, Wells Fargo and CBRE in the lending league tables. Those three large global firms, along with JLL, have significant market share in the commercial real estate lending and services arena. All four firms employ tens of thousands or hundreds of thousands of employees. And while they have big brands and market presence, they couldn't stop W&D from jumping over them in the league tables due to our people, brand, technology and focus. We will use our relatively small size, we only have 1,100 people, brand and combination of people and technology to innovate faster and win. As you can see from this slide, W&D revenue per employee dwarfs our larger competitors, underscoring the strength of our business model and opportunity for us to continue investing. Entering new businesses that are currently dominated by our larger competitors will expand our product offering and allow us to meet more of our clients' needs. For example, banks such as JPMorgan and Wells Fargo are major players in the affordable housing market, both by lending on affordable properties and buying tax credits.

W&D is already a large player in the affordable lending business. But as we add technology to scale in this space, we will take business from the large incumbent lenders. The growth in our multifamily property sales business is dramatic. And as we look to expand into other commercial real estate asset classes, such as office, retail, hospitality and industrial, we will take business from the large global service providers like JLL and CBRE. Similar to our property sales businesses, our appraisal business is focused solely on the multifamily industry today. But as we shift toward non-multifamily property sales and grow our non-multifamily debt financing volumes, we will apply the same technology-driven people and process to appraisals on all commercial real estate asset classes.

Finally, Wells Fargo, JPMorgan and Morgan Stanley all have scaled research and investment banking capabilities that cover every sector, including commercial real estate. Our recent acquisition of Zelman provides us with one of the best research platforms in the industry, along with an investment banking team currently focused on the single-family housing market that will be expanded to include commercial real estate. W&D has a massive opportunity to leverage our existing market presence, relatively small size and focus on technology to broaden our product offering and meet the large incumbent service providers, and we plan to do just that.

I will now turn the call over to Steve to discuss our second quarter and year-to-date financial results in more details, and then I'll be back with some further thoughts. Steve?

Stephen Theobald -- Executive Vice President and 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 toward our long-term growth plan, Drive to '25. We continue 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 in the first half of the year as that time period truly exhibits the transformation of the company that Will 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 originations 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 a 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, as shown on slide 12, 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 number one 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 relapse, have increased significantly over the past three 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 earning 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 objective. 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 head cap 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 two 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 six 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 holds 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 Chief Executive Officer

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, Chief Executive Officer, Andy Florence, 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 10 times 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 10 times. 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 on 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 two 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 advisor 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 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 five-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.

Questions and Answers:

Kelsey Duffey -- Vice President of Investor Relations

[Operator Instructions] Our first question is coming from Steve Delaney of JMP. Steve?

Steve Delaney -- JMP -- Analyst

Thank you, Kelsey. Good morning, everyone. I hope your all safe and well. Obviously, we were maybe a little too aggressive on bottom line EPS at $2.05. But I do note that on a six-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. It's all 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 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? Thanks.

Stephen Theobald -- Executive Vice President and Chief Financial Officer

Sure, Steve. Thanks for the question, and I appreciate you being on the call this morning.

Steve Delaney -- JMP -- Analyst

Sure.

Stephen Theobald -- Executive Vice President and Chief Financial Officer

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 do emissions on the mortgage servicing rights directly.

Steve Delaney -- JMP -- Analyst

Yes.

Stephen Theobald -- Executive Vice President and Chief Financial Officer

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.

Steve Delaney -- JMP -- Analyst

Okay. Great. That's very helpful. And then on slide 13, Willy, it's pretty dramatic. We've been tracking the delivery volumes month-to-month. And it seemed like things were -- they were trying to be cautious and stay not get ahead of a $70 billion annual run rate. But can you just talk a little more about what this acceleration in May, June and July? Is this all driven by sort of internal policy practice at the GSEs? Or is there any borrower behavior reflected here that there's a pickup in just acquisition activity? Just I guess what I'm pointing to is on the GSE volume. Was that more internally dictated by the GSEs themselves? Or was it market-driven based on borrower demand? Thank you.

Willy Walker -- Chairman and Chief Executive Officer

Sure, Steve. A couple of things. First of all, as you do and as many other analysts do, the monthly GSE volumes are all public information.

Steve Delaney -- JMP -- Analyst

Yes.

Willy Walker -- Chairman and Chief Executive Officer

And so I would say, as you were talking about your model and your model update, I would just pause it that a lot of models should have probably been updated seeing what the slow delivery levels were that the agencies were publishing May and June. And I'm expecting a number of models would have been adjusted accordingly, had people have been tracking what the agencies were getting as deliveries and saying, Walker & Dunlop is good for 11% or 12% of this. Looked at where Fannie is. Look at where Freddie is, that means that my model is now out of line as it relates to what they're going to do in Q2. As it relates to the pickup in activity, all a function of pricing. It's Fannie and Freddie. If you look at the $6.3 billion of brokerage that we did in Q2, the biggest outliers it relates to where we place that debt was with debt funds. Debt funds were extremely active in the market in Q2. They priced underneath life insurance companies. They priced underneath CMBS, and they won a tremendous amount of business. And what was so rewarding for us to see is that as debt funds came into the market and had the most competitive bid, we were able to match up the financing for the client with the most competitive source of capital. And as you well know, when the agencies want to be in the market, they win. And as you also know, the agencies have an annual cap that they've been very good at getting to. So that slide that Steve showed, as it relates to where their volumes went to, as you know very well on our last earnings call, we thought Fannie and Freddie were coming back in.

So if you look at that slide, you can see that in the month of March, they started to tick up a little bit and then they basically flatlined for May and June, right? So April, they started to uptick a little bit. And then for May and June, they fell back down. You can see that dramatic pickup in July as it relates to site applications. And as I said in my script, we've rarely seen a more robust agency pipeline. I would put a quick caveat on that, though, and that Freddie just raised pricing by 20 basis points a day before yesterday. So while our Freddie pipeline is extremely strong right now, we'll see how competitive they are in the market by raising pricing by 20 basis points. But a lot of it, I think, has to do with a, where they were on pricing?; b, the competitiveness of the debt funds, which I would expect to start to migrate toward other commercial real estate asset classes to chase yield. So as Fannie and Freddie reenter the market and put competitive bids against those debt funds, I'm quite certain that the debt funds will sit there and say, "I don't really like the spreads on where I am on multi right now. I'm going to go look for an office property or a retail property that is recovered from the pandemic and get better spread, because the competitive landscape there is dramatically different than what it is on multifamily when the agencies are active."

Steve Delaney -- JMP -- Analyst

Thank you, guys, for the comments. Very helpful.

Willy Walker -- Chairman and Chief Executive Officer

Good bye, Steve.

Kelsey Duffey -- Vice President of Investor Relations

Thank you, Steve. Our next question is coming from Jade Rahmani at KBW.

Jade Rahmani -- KBW -- Analyst

Thank you very much. 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 Chief Executive Officer

Yes, Jay, that's absolutely correct.

Jade Rahmani -- KBW -- 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 Chief Executive Officer

Well, as I just said, Jade, I think that the debt funds -- look, they all have tons of capital, right? The issue with it is, do they stick focused on multifamily as the agencies reenter? Or do they move to other asset classes? At the end of the day, they're going to want to deploy capital, and we have the team to be able to deploy that capital. So in our world, a great scenario is that the agencies come back in and we place a lot of debt with the agencies. And at the same time, the debt funds remain competitive on other asset classes, and we place a lot of financing on other asset classes with the debt funds. And so I think that the most noteworthy thing is the growth in that broker volume. We've made investments, as you well know, over the last several years to add bankers and brokers to Walker & Dunlop. And Q2 was emblematic of those investments really paying off, and the growth -- we tried to go back and show not only growth off of Q2 2020, which, as you well know, was a very unique as we headed into the pandemic, but we backed up to Q2 2019 to show the explosive growth off of a very normalized quarter from two years ago. And as you could see, going from -- I can't remember the number, I think it was $1.3 billion or $1.6 billion two years ago to over $6 billion this quarter, that shows the return on those investments that we've made and the value of that team to meeting their clients' needs.

Jade Rahmani -- KBW -- Analyst

And looking at that business as well as 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 Chief Executive Officer

So I always appreciate conservatism. We've tried to give people -- obviously, the numbers are the numbers, right? And we did give you a view into our investment sales pipeline. One of the things I think that's super important to keep in mind right now is that this market is being driven by investment sales. We think we have the very best finance team in the market. But if you talk to our big clients what is driving their decisions as it relates to where they're financing assets, it's where they're getting Fed assets. So if you have the investment sales and you're working on the investment sales, chances are you're going to finance that transaction. And so as Kris Mikkelsen has gone and built what I think is the very, very best multifamily investment sales team in the country, and we've seen our volumes really grow dramatically.

And as I said, I think -- I can't remember exactly the number, but we've got over $6 billion of listing agreements and deals we've already done in Q3 and Q4, that drives financing decisions. And so I think one of the biggest changes to how I feel from our competitive positioning is, in the past, we were always viewed as a finance company that was really the best at just financing. And now that we've got real scale in our investment sales business, how our clients view us is far more strategic. It's less of great, you're really good at financing, go do that. Many people view that product as a commodity, to be honest with you, even though our bankers are every day making huge difference in the way that properties are financed. But they view that side of it a little bit more as a commodity, whereas if you have access to deal flow, if you have the product, they focus on you and they focus on the firm much more. And I think that has a lot to do with the 22% growth in our transaction volume in Q2 is that clients are looking to W&D to do more and more.

Jade Rahmani -- KBW -- Analyst

And then just lastly related to Steve Delaney's question. In terms of the margin outlook, as some of these other business areas take hold, do you anticipate any diminution in the way -- the range in which margins have been running? The 2Q adjusted EBITDA margin was 30.3%, which was in line with 30% that we were modeling and the operating margin was also fairly close, do you think that there is operating leverage in the business that could allow for margins to sustain themselves or even potentially expand?

Willy Walker -- Chairman and Chief Executive Officer

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 use to just generating these outsized returns. And to be honest with you, Jade, I don't think we got a lot of credit. If you look at us and comp 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 in getting business the old-fashioned way. What we have consciously decided to do is not to 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.

Stephen Theobald -- Executive Vice President and Chief Financial Officer

Yes. And I'd just add to what Willie 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 Willie 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.

Jade Rahmani -- KBW -- Analyst

Thanks for taking the questions.

Willy Walker -- Chairman and Chief Executive Officer

Thank you.

Stephen Theobald -- Executive Vice President and Chief Financial Officer

Thank you.

Kelsey Duffey -- Vice President of Investor Relations

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

Willy Walker -- Chairman and Chief Executive Officer

Henry, is your...

Henry Coffey -- Wedbush Securities -- Analyst

[Speech overlap] How about now?

Willy Walker -- Chairman and Chief Executive Officer

Now, we got you. Good morning.

Henry Coffey -- Wedbush Securities -- Analyst

So -- Good morning and taking my questions. So if we kind of digest what you've been talking about with my two colleagues. The -- there was a big mix issue on volume, which affects -- which or limits the MSR component of revenue. Overhead was high for lots of reasons, one of which is that because of the cash component, you're paying more commissions and also as you discussed, you're investing in these businesses. But it was kind of a 50-50 split in terms of the miss or the -- however you want to talk about it. When we go to the last page of your press release, and we look at EBITDA, we see a whole different story. We see a business that's putting a significant year-over-year growth, up 10% sequentially, etc. I mean this last page is where all your investors focus. This last page is how we value the stock. Is it fair to not dismiss the EPS decline, but just sort of say there are a lot of moving parts? This was part of the equation and the EBITDA is growing like a weed.

Willy Walker -- Chairman and Chief Executive Officer

So a couple of things, and Steve can dive into your question in more detail, Henry, and I appreciate it. We take EPS very seriously. We told investors at the beginning of the year that we're going to have double-digit EPS growth. And as Steve said, we have line of sight to 0 to five, and I can guarantee you we're working every hour of every day to get to double-digit EPS growth. And the pipeline right now looks really encouraging. But what we don't want to do is disappoint investors and have expectations outsized what we actually produce. So we're trying to be as straightforward and transparent as we possibly can be. But I don't want to, in any way, say, we are sort of forgetting about EPS and focusing only on EBITDA. But as you are underscoring, this business when at scale, which we have in a $110 billion servicing portfolio and big businesses generating billions of dollars of cash transactions volume to generate cash origination fees is a cash cap. And we built it up that way.

I will tell you that as we sat there at the beginning of the year and thought about a normal year with the agencies, we said we can both invest in these new businesses and generate double-digit earnings growth because we're going to book a lot of mortgage servicing rights and keep moving forward. And unfortunately, the agency has decided to back off in the first half of the year. But as Steve pointed out, our market share is still right up there, and we're 30% ahead of number two with Fannie Mae year-to-date. So it's not like our team has left us or we're less competitive with the agencies, it's that the agencies weren't pricing competitively and you couldn't do business with them. So what's so great from my standpoint is we got the team on the field that sat there and said, "Okay, we can't do it with Fannie Mae or Freddie Mac, let's go do it with a debt fund. Let's go to a life insurance company. Let's go to a CMBS, and generated a huge amount of cash revenue and earnings."

And so yes, I think this quarter underscores the strength of our cash generation capability in the business. And at the same time, we also have a lot of confidence that the agencies come back into the market. And I would also say that the change in the FHFA director makes me quite optimistic about the 2022 scorecard and what Fannie and Freddie will be operating under next year. And there is a wholesale change in the attitude inside of Fannie and Freddie with the change in the regulator. As I said in my comments, the change from Dr. Calabria to Sandra Thompson has made it so that FHFA can go back to being a regulator and stop trying to manage the day-to-day operations of the agencies, which is fundamental -- it's a sea change as it relates to their ability on doing their business and not worrying about a regulator focused on all sorts of arcane and insignificant issues.

Stephen Theobald -- Executive Vice President and 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.

Henry Coffey -- Wedbush Securities -- Analyst

Yes. No. I mean, because of that MSR capitalization issue, it's -- I mean, this has happened before. This happen -- the last time this happened, the stock was at 35, and we've almost broken 112 a couple of times since then. Moving on to other topics. As with the change in director of leadership at the FHFA, you're most likely going to get more focus on duty deserved and more focus on affordable housing. That's my guess. It's an educated guess. That's all it is. That then takes you into areas potentially like single-family rental, single-family build to rent, manufactured housing. These are all -- these other products are all the cornerstones of putting people into affordable housing. Are you seeing a shift in that areas like manufactured housing, build to rent, etc, etc, in terms of the opportunities in the marketplace yet? Or how is that playing out?

Willy Walker -- Chairman and Chief Executive Officer

Yes. So your educated guess is a very educated guess. And so I would underscore educated there. I had a -- I spoke to FHFA last week, and they're still focused on duty to serve and affordability. I did underscore the need for their green lending programs to get back outside of the caps and said that if you think about the Mountain West basically on fire this summer, and the fact that water levels are at historic lows, the Fannie and Freddie green lending programs over the five years that they tracked the amount of conservation that they were able to achieved, they saved eight billion gallons of water. eight billion gallons of water. And so I said FHFA, at a time when everyone's focused on the environment, getting Fannie and Freddie back focused on it and pulling green lending out of the caps would be very healthy for 2022. We'll see whether that ends up happening, Henry. They said to me, "We want to stay focused on affordable." And I said, "Well, you can do both." So I do think that -- I mean we've done $17 billion of affordable lending over the last three years. We have a terrific affordable team.

Our team here in Denver just got an SFR listing to sell an SFR development. So your point about single-family rental. We're very much in that space. We just published and gave away our own proprietary data on SFR and BFR and published that three weeks ago. And we've gotten a huge amount of increase in inbounds from clients for having published that report and having a team that's focused on SFR/BFR. And then I would also say to you that in the affordable space, we're also very focused on what could we potentially do in the tax credit syndication space? Because that affordable space, and I mentioned it in my script, not only lending on affordable properties, but also syndicating tax credits is a great business and something that would be wildly accretive to what we're doing and focusing in that part of the market. So you're spot on. We've got the people. We've got the, if you will, brand in the affordable space, and we'll continue to expand upon it.

Henry Coffey -- Wedbush Securities -- Analyst

And then finally, you mentioned pricing. Every one of us gets the same question. How can we track Fannie, Freddie pricing? You said Freddie had raised their bid 20 basis points. Is there any public benchmark that we can turn to as outsiders to get a handle on that? I know we can watch the volume figures. The volume figures weren't that bad, but you're right, they weren't encouraging. Is there any benchmark we can use to say, "Oh, pricing is up." We can do that with residential mortgage. The challenge is doing it with multifamily.

Willy Walker -- Chairman and Chief Executive Officer

Yes. I would say, honestly, Henry, make friends with the CFO, one of the big institutional investors in multifamily, and call him or her on a consistent basis and say, "What are you seeing in the market?" It's very evident when the agencies lean back into business. Everyone knows it. But it's not published. It's not like we'll sit there and say, you well, spreads have come down to X. But if you do call Michael Lascher at Blackstone and say, "Hey, Michael, who's the most competitive source of capital in the market right now?" When the agencies are in it, you'll know exactly the answer. And when the agencies are out of it, he'll also know it.

Henry Coffey -- Wedbush Securities -- Analyst

I'll leave him a voice mail. I'm sure you all call me back right away. A little guy in Nashville wants to talk to you.

Willy Walker -- Chairman and Chief Executive Officer

Maybe Steve will talk to them. He's more charming than I am.

Henry Coffey -- Wedbush Securities -- Analyst

Great. Thank you. Look, this happened before stock tripled since then. I'm sure everybody will digest this well, but I do agree and appreciate your comments, your questions and your folks.

Willy Walker -- Chairman and Chief Executive Officer

Thanks, Henry.

Stephen Theobald -- Executive Vice President and Chief Financial Officer

Thanks, Henry.

Kelsey Duffey -- Vice President of Investor Relations

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

Willy Walker -- Chairman and Chief Executive Officer

So it's a beautiful morning here in Denver. It's great having Steve across the office from here in Denver. You're getting the north and the south view of Downtown Denver. As I said at the top of -- at the end of my prepared remarks, congrats on the W&D team for a fantastic Q2. And as the numbers that Steve and I put out to everyone today, Q3 is looking very healthy and appreciate everyone participating today in the call. And I hope everyone has a great day. Thanks very much.

Stephen Theobald -- Executive Vice President and Chief Financial Officer

Thanks, everyone.

Duration: 58 minutes

Call participants:

Kelsey Duffey -- Vice President of Investor Relations

Willy Walker -- Chairman and Chief Executive Officer

Stephen Theobald -- Executive Vice President and Chief Financial Officer

Steve Delaney -- JMP -- Analyst

Jade Rahmani -- KBW -- Analyst

Henry Coffey -- Wedbush Securities -- Analyst

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