Q3 2022 Walker & Dunlop Inc Earnings Call
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This morning, we posted our earnings release and presentation to the Investor Relations section of our website <unk> serve as a reference point for some of what Willy and Greg will touch on during the call. Please also note that we will reference the non-GAAP financial metrics adjusted EBITDA and adjusted diluted earnings per share during the course of this call.
Please refer to the appendix of the earnings presentation for a reconciliation of these non-GAAP financial metrics.
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 1095.
Forward looking statements describe our current expectations and actual results may differ materially Walker and Dunlop is under no obligation to update or alter our forward looking statements, whether as a result of new information future events or otherwise and we expressly disclaim any obligation to do so more detailed information about risk factors can be found in our annual and quarterly.
<unk> filed with the SEC I will now turn the call over to Willie.
Thank you Kelsey and good morning, everyone.
<unk> delivered exceptional service to our clients during a volatile and challenging third quarter.
$17 billion of total transaction volume was very strong and this thanks to our people brand and the use of technology and everything we do.
I've been CEO of Walker Noah for 15 years I've seen a lot of the housing boom and bust the great financial crisis dramatic regulatory changes new administrations of pandemic.
And I've watched this amazing company deal with adversity adjust and continue growing.
<unk> shareholders should be confident in three things.
Number one our scaled lending partnerships with Fannie Mae Freddie Mac and HUD provide our clients with much needed countercyclical capital during times of market dislocation.
Number two our business model, which includes consistent servicing and asset management fees, along with escrow income that expands as rates rise has consistently outperformed in down markets.
And number three our disciplined credit culture on loans, we originate as well as our own balance sheet will allow us to expand while others contract over the coming months and years.
We have no greater insight than anyone else on how the markets will evolve over the coming quarters.
But we are better positioned than any competitor firm in our industry to continue providing solutions to our clients maintain our exceptional team and continue investing towards our five year growth plan to drive the 25.
$17 billion of total transaction volume in Q3 generated total revenues of $316 million down only 9% from Q3 of last year.
In this rising rate environment every deal whether a sale or refinancing is under pricing pressure spreads on our agency lending remained compressed as we worked closely with Fannie Mae and Freddie Mac to make deals work for our clients.
Good news, we closed a lot of financing in Q3 Bad news, we saw a steep decline in our non cash mortgage servicing rights revenue and net income.
This pricing pressure is solely due to interest rate increases and it will abate the moment rates stabilize.
To underscore this point in Q3 of last year, the capital markets were flooded with competitors' lending at tight spreads and low rates and our average gain on sale margin was 165 basis points this year and a quarter when competitors withdrew our average gain on sale margin was 123 basis points down.
25%.
That pricing compression is due to the 10 year treasury jumping over a 100 basis points during the quarter and our need to adjust prices to meet our clients' needs.
When the fed stops dramatic rate increases at every meeting spreads on our agency lending should normalize and our average gain on sale margin will recover.
Our scaled and enduring partnerships with Fannie Mae and Freddie Mac provided much needed counter cyclical capital to the multifamily market during the quarter.
Year to date lending volume with the Gse's is $13 billion and as you can see on slide four $9 billion of volume with Fannie Mae is 17% market share keeping us on track to be finished largest lending partner once again.
Two additional comments on pricing deals to win.
First we added $1 8 billion of loans to our servicing portfolio in Q3, and the average servicing fee increased from $24 six basis points to $24 seven basis points as payoffs had lower average servicing fees than the new loans, we added.
Second we get paid for our risk via our servicing fees, so tighter servicing fees would hopefully correspond to lower risk.
<unk> average loan to value on the risk sharing loans. We originated in Q3 was 57% down from 61% last year we.
We feel extremely good about the loans credit quality and customer service, we delivered in Q3.
And as soon as rates stabilize our servicing fees and capitalized MSR should revert to historic averages.
Cash revenues and earnings continued to grow in Q3, adjusted EBITDA expanded to $75 million.
Up 4% year over year, while adjusted EPS, which strips out the impact of noncash items was up 5% to $1 55.
These numbers are reflective of Wmd's terrific business model.
As banks debt funds and see MBS lenders pulled out of the market in Q3, our capital markets Group had a surprisingly strong quarter was $6 6 billion of debt brokerage volume.
Similarly, as multifamily sales volumes fell precipitously off 17%. According to RCA, our property sales team close to $5 billion of volume down only 5% from last year.
These numbers are truly exceptional in comparison to our competitors published numbers for Q3 and show the ability of our bankers and brokers to deliver for our clients in challenging markets.
We expect to see softening in both of these executions in Q4, but feel very good about our team's ability to continue growing market share in 2023.
All of our teams excelled for our clients in Q3.
According to Bain <unk> company. The most relevant question determined customer service is would you recommend this product or service to a friend.
The answer to that question on a scale of negative 100 to positive 100 is your net promoter score.
The average net promoter score in the financial services industry is 44, Walker and Dunlop net promoter score is 91 over two <unk> the industry average.
Beyond providing exceptional customer service, we continue to use technology to identify and attract new clients to Walker and Dunlop in Q3, 69% of our refinancings, where new loans to Walker and Dunlop and 30% of our total transaction volume was with new clients.
Rising rates and economic headwinds may curtail business volumes in the short term for Walker and Dunlop service level and use of technology position us exceptionally well to continue to outperform going forward.
We built or acquired complementary businesses and affordable housing research small balance lending and appraisals over the past three years Zelman.
Zelman and align our two major 2021 acquisitions contributed nearly $30 million in revenues in Q3 and are both on budget for 2022.
Hindsight is always 2020 vision, but it speaks volumes about wmd's M&A strategy that our two largest recent acquisitions, we're not pro cyclical such as expanding our banking or broker operations, but rather enduring consistent business models that perform in good and bad markets and <unk> the loss.
<unk> technology investment we've ever made is focused on accelerating the growth of our small balance lending and appraisal businesses.
All of these investments get us very excited about <unk> future growth.
Our servicing portfolio grew to $121 billion.
Up 6% over Q3, 2021 and generated $76 million of income on the quarter.
89% of the servicing fees in our portfolio are prepayment protected and as Greg will explain in a moment. The escrow is inside that portfolio are more and more as rates rise.
When the great financial crisis in 2008 and pandemic in 2020 hit our first concern was credit.
<unk> suffer significant loan losses.
The answer was no due to <unk> credit culture, and the strength of multifamily as an asset class today as we look at our portfolio and the fundamentals of multifamily the answer is no once again.
We have an exceedingly clean book, thanks to our team and credit discipline, we have no credit exposure to office retail or other commercial real estate asset classes. We have no credit risks on construction loans, we did not make nor carry credit risk on any CLO loans.
And the weighted average debt service coverage ratio and our at risk servicing portfolio currently sits at 232 times.
Let me put that into context, our minimum debt service coverage ratio on new loans is 125 times and the overall portfolio. Currently sits at 232 times credit is not a concern.
I will now turn the call over to Greg to discuss our Q3 results and financial outlook in more detail and then I'll come back with thoughts about 2023 and beyond Greg.
Thank you Willy and good morning, everyone.
Our $17 billion of transaction volumes this quarter generated total revenues of $316 million down 9% from the third quarter of last year and diluted earnings per share of $1 40.
37% compared to last year.
As a result of the spread and pricing dynamics really just described are noncash MSR revenues dropped 38%, despite nearly flat Fannie Mae volumes.
The decrease in MSR revenues caused our operating margins and return on equity to fall below our target ranges at 17% and 11% respectively.
Our value proposition includes navigating challenging markets on behalf of our clients and closing the deal that works for them and this quarter, we were able to deliver for our clients when they needed us most.
Importantly, our agency lending grows our servicing portfolio and increases our long term stable cash revenues, which occurred yet again this quarter as the servicing portfolio increased to $121 billion.
As a result, our cash revenues expanded and our adjusted EBITDA grew 4% to $75 million and drove 5% growth in adjusted earnings per share to $1 55 this quarter.
A further benefit of our servicing portfolio is a $3 billion of escrow earnings we hold.
Sharp increases in short term rates disrupted transaction volumes, but dramatically increased our escrow earnings.
This quarter escrow earnings increased nearly 800% to $18 million compared to only $2 million in the year ago quarter.
Another contributor to growth in adjusted EBITDA and adjusted EPS is the acquisitions of Alliance <unk> Zelman.
On a combined basis. These businesses generated nearly $30 million of primarily cash revenues this quarter highlighting the benefit of the investments we made in the stable subscription revenues of Zelman.
The assets under management at Alliance.
In the first quarter of 2022, we introduced segment financial results to provide more transparency into our operating structure and overall financial performance.
As shown on slide seven our capital market segment.
Which drives transaction volumes generated revenues of $183 million this quarter down 27% compared to last year.
Expenses for the segment fell 8% largely due to lower variable commissions from lower transaction related revenues.
Which helped produce breakeven adjusted EBITDA for the segment this quarter.
A little more than 60% of compensation costs are variable for this segment mitigating expected declines in transaction related revenues for the rest of this year.
We are confident our team will continue to deliver strong GSE and HUD volumes due to the counter cyclical nature of the capital, but recognize our debt brokerage and property sales teams will face pressure as liquidity from banks and other executions pullback.
Our long term outlook for our capital markets team remains unchanged. Despite the headwinds and we will continue making investments to sustain our long term growth objectives for this segment.
Our Sam segment includes the performance of our servicing activities and asset management businesses.
On slide eight revenues for our Sam segment grew 40% this quarter were $39 million due to increased servicing fees escrow earnings and revenues from alliance.
The growth in revenues generated 69% growth in operating income and 30% growth in adjusted EBITDA.
The revenues within our sand segment, our resilient and growing.
Our loan servicing portfolio is generating over $300 million of annual recurring revenues and the prepayment protected duration of the portfolio is nearly nine years.
Our long term strategy to grow our assets under management is paying dividends as our $17 billion of assets under management earned $83 million of revenues year to date.
Lastly, short term rates continue to increase and escrow and other interest income will continue to drive growth in cash and adjusted EBITDA.
Our corporate segment represents the corporate G&A of our business and also includes our corporate debt expense.
As shown on slide nine the net loss for this segment decreased $3 4 million or 11% this quarter, while adjusted EBITDA increased 3% from the year ago quarter.
A few things to highlight.
Total compensation costs were down $10 million as we made downward adjustments to our company bonus and performance based equity accruals. This quarter on our revised outlook for 2022, which I'll explain in a moment.
Those downward revisions were offset by a $7 $5 million increase in interest expense on our corporate borrowings as our term debt is indexed to silver.
During the quarter, we also restructured our legal entity organizational chart and repatriated the intellectual property acquired from <unk> earlier this year the.
The impact of which was an overall reduction in future tax liabilities of about $6 million.
Or approximately <unk> 20 of diluted EPS, which reduced our consolidated annual effective tax rate to 14% this quarter.
This was a onetime benefit of the restructuring.
Our annual effective tax rate will return to its normal level of about 27% next quarter.
Year to date total transaction volumes are up 27%, but operating margin and return on equity remained below our target ranges at 22% and 14% respectively due.
Due largely to the declines in noncash revenues, we began experiencing in the second quarter.
Our year to date diluted EPS is $5 13 down.
Down 10% compared to the same period last year.
Year to date, adjusted EPS is up 10%, reflecting our business's ability to generate cash even as the transaction market slowdown.
Over the last 90 days rapid increases in interest rates and fears of a global recession impacted transaction volumes and caused servicing fees on new loans to remain at lower levels.
We expect servicing fees on new loans to remain at current levels for at least the rest of 2022, and we do not expect transaction activity for our brokerage and investment sales transaction executions to rebound until interest rates stabilize.
As shown on slide 10, we are now projecting diluted EPS will be down between 15% and 20% this year.
Notably year to date personnel expense as a percentage of revenue is 48% in line with last year.
Our variable costs will adjust downward in line with any decline in transaction revenues in the fourth quarter.
And that coupled with the strength of our servicing and asset management revenues gives us confidence that we will deliver growth in adjusted EBITDA in 2022 in the mid to high single digits.
We are not making any adjustments to our ROE or operating margin targets, but expect to perform at the lower end of the ranges.
As we look ahead.
We reviewed our operating costs and have been actively reducing expenses based on our outlook for slower transaction volumes next year. These.
These reductions will largely impact our G&A costs, and most will not be realized until next year.
We are not immediately reducing head count, but we have significantly curtailed our planned new hires and begun more selectively backfill positions.
As you can see on slide 11, we operate an efficient business generating over $900000 of annualized revenue per employee at the top of our peer group by a wide margin.
Importantly over half of our compensation costs are variable, causing compensation expense to naturally adjust downward for any declines in transaction revenues.
We are in a service business and we believe that our people and culture differentiate us as reflected in the net promoter score Willie outlined.
We do not intend to disrupt the quality of that service by reducing head count and we believe our business model and access to counter cyclical capital allow us to invest in our people to not only continue growing market share in the coming months could take advantage of the opportunity when transaction volumes rebound in 2023.
We ended the third quarter with $152 million of cash on the balance sheet in line with the end of Q2.
We prioritize investing in the business this quarter and use capital to pay down principal on our outstanding debt Fund.
<unk> co investments to grow our asset management business bring on three new property sales teams and fund obligations under our purchase agreement with Alliance give.
Given the number of opportunities to invest nearly $50 million back into the business this quarter and our desire to maintain a strong cash balance we did not repurchase shares.
We continue to generate a healthy amount of cash to fund our operations and invest in the business and yesterday, our board approved a dividend of <unk> 60 per share again this quarter payable to shareholders of record as of November 25, 2022.
We will have returned nearly $100 million of capital to shareholders. This year through a combination of share repurchases and dividends and we continue to prioritize this closely with investments in the business.
We face a challenging macro backdrop and several of our operating metrics like diluted EPS operating margin and ROE will remain under pressure in the near term due to lower servicing fees on new loans and lower transaction volumes.
Our ability to generate cash and growth in adjusted EBITDA is not tied to lower to the transaction markets are.
Our servicing portfolio provides over $300 million of annuity like cash flows.
And as shown on slide 12, our escrow earnings are growing and fully hedge our floating rate debt.
As fed funds has now reached 4% our escrow earnings will generate between $100 million and $115 million of annualized revenues more than offsetting increases in floating rate debt expense and providing between $55 million and $70 million of annualized operating income.
We also have a healthy balance sheet with $711 million of corporate debt and we continue to maintain a strong cash position.
Our corporate debt to adjusted EBITDA has declined from two four times at year end to just over two times today.
Largely from the continued growth in adjusted EBITDA.
We have a resilient and diversified business model that will continue to generate strong cash flow despite the uncertain macro environment.
We remain focused on managing cost to operate an efficient platform, while investing in our business to create long term profitable growth.
I will now turn the call back over to Willie.
Thank you Greg.
Walker Nellix Accessional business model generates strong cash flows and up and down markets.
If you look back at our performance coming out of the GSC and pandemic. After initial market overreaction WMD wildly outperformed the competition due to our access to counter cyclical capital focused business model and disciplined credit culture.
If you look at slide 14, with WMD and dark flu after getting hit harder in the market sell off in the S&P CRE services providers and mortgage originators WD recovered quickly in 2020 and move dramatically higher than the market and the competition.
This was due to our access to counter cyclical capital, which not only provided needed liquidity when the market dislocated, but also in its aftermath when the competitive landscape was deserted.
Remember that Walker and Dunlop surpassed Jpmorgan and Wells Fargo in 2020, as the largest provider of capital to the multifamily industry.
Then fast forward to 2021, when the investments we made in debt and property brokerage rebounded when youll see why <unk> business model is so powerful and unlike 2021 when the fed funds rate was at zero and this higher interest rate environment. We will continue generating high margin revenues on our escrow balances.
When I joined Walker and Dunlop and 2003, we had a $6 billion servicing portfolio today that portfolio is 20 times bigger at 121 billion and as Greg just mentioned it generate $76 million in revenue in Q3 at.
Add to that our asset management business, which is currently making first trust preferred equity and JV equity investments, while many competitors sit on the sidelines and you see the WD strategy of building long term durable revenue streams come front and center.
And our affordable housing platform alliance as a market leader in the much needed and focused on area of affordable and workforce housing.
Even in this elevated rate environment with a potential for a recession in 2023, we reiterate our confidence in achieving our five year drive to 'twenty five growth plan.
Can we get to $65 billion of annualized debt financing, we've done $54 billion of debt financing over the past four quarters, where we get to $25 billion of multifamily investment sales, we've done $26 billion over the last 12 months.
$160 billion servicing portfolio and.
In a higher rate environment existing loans get stickier, and our bankers and brokers have shown time and again how to take market share.
The new businesses of small balance lending appraisals affordable debt and equity research and investment banking add significant cash revenues and will accelerate the growth of our scale banking and brokerage businesses.
Reaching our revenue target of $2 billion is highly achievable.
And while GAAP EPS is pressured in 2022 due to lower noncash mortgage servicing rights a return to normalized servicing fees and msr's in conjunction with increased escrow asset management and servicing income will push us over $13 a share by 2025 and our current modeling.
Yesterday, we celebrated Walker and Dunlop 85th anniversary 85 years since my grandfather, and Great Uncle started this company we have weathered many economic cycles at WMD. My family has lived through all of those cycles and tried to provide consistent visionary leadership throughout and as we weather the current economic headwinds it is very key.
Clear that WMD is exceptionally well positioned.
I'd reiterate the three points I made to open this call WD has access to counter cyclical capital, which will allow us to continue meeting our clients' needs <unk>.
<unk> business performs in both up and down markets.
And our conservative lending and corporate debt structure positions us very well in times of uncertainty and opportunity Walker.
<unk> people brand and technology are World class, we will continue winning with our clients with our partners and for our investors I will now turn the call over to Kelcey to open the line for questions.
Your line is now open for questions. At this time, if you have a question on the phone. Please press star nine or if you're on your computer. Please click the raise hand icon at the bottom of your webcast screen.
Our first question is coming from Jade Rahmani at kw Jamie.
Jade, we can't hear you you're on mute.
Still nothing Jade.
Okay.
I think you just came through Jade try now thank you very much sorry about that yes, okay on the transaction volume outlook.
Quite impressive performance in the quarter.
Was wondering if you could give any fourth quarter update on how things are trending you said you don't expect things to pick up the Fannie Mae volumes in particular were extremely strong and also broker loan volumes were much stronger than some of the performance. We've seen elsewhere. They were up 3% year on year.
Just on those two line items, maybe can you provide any comments.
First of all Jay Thanks for joining us this morning.
It's a look first of all we're not giving explicit volume guidance for Q4.
As you underscored Q3 volumes were stronger.
And then any of the competition that I've read earnings releases on.
And I think that as I said previously speaks to our team and.
Their relationships and relevance to our clients.
I would say this on Q4 transaction volumes, there's still quite a bit of carryover from Q3 into Q4 on the investment sales side and so we are still seeing sales happen.
The real question is the if you will to the replenishment of the pipeline and that has slowed down significantly as I said in my comments on the capital market side. Many of those bankers and brokers in that group are very focused on agency financing right now and then as it relates to the agencies. What we're generally seeing is that Freddie Mac.
Stepped into the market very strong in October into the beginning of November .
And was pricing deals to win and want a lot of business over the past several weeks.
Freddie Mac will get to a point in the next couple of weeks, where they can no longer process business in 2022, and I would think that that then opens a lane for Fannie Mae to step back into the market and.
Price deals to win.
And so as you know.
Our very scale relationships with Fannie and Freddie are very valuable to us and right now they are dominating the lending market as they have in the past and as they will likely do going well into 2023.
Thank you very much on the gain on sale margin that was definitely one of the big variances versus our model and I think when we met you were hopeful that there could have been the trough in margins.
In July Thereabout do you still believe that's the case could you give any directionality on whether you expect gain on sale margin to be headed yes, Jade when when we did meet here in New York back in the late summer early fall.
I did express to you that I was hopeful that we had hit the trough and that things were going to come back out.
Quite honestly that inflation print that we saw in the fed raising by another 75 basis points.
Basically.
Put the pricing situation right back to where it was because if you think about it our borrowers if we quote a deal for them and let's back up a month and we would say that the indicative pricing was going to be $5 25 coupon rate.
And all of a sudden rates move up by 30 basis points on the on the base rate on the 10 year Treasury.
And now all of a sudden we're looking at pricing at $5 50.
We've got to work to get back to that $5 25, and so we in Fannie Mae would sit there and look at our GP and our SP.
I make that type of deal work and so that's the type of pricing pressure, we are dealing with right now I would underscore what I said in my prepared remarks, which is just that this is all rate driven it's not competitive landscape trip.
And as a result of that once we get any type of stabilization from the fed.
I think we will see spreads widen and I think we will see the ability to price back to normalized servicing and guarantee fees.
Each will obviously help that noncash mortgage servicing right line item as it relates to both revenues and net income.
Thank you very much thank you.
Thanks, David.
Thank you Jamie our next question comes from Steve Delaney of JMP.
Good morning, everyone. Thank you for taking the question.
Really pretty remarkable I think fit.
Topline transaction volume and revenues.
We're down but.
In high single digits on a year over year basis, given what we've what we've been through.
I think we know the right.
A rate driven business with respect to your customers doing transactions and their demand for <unk>.
10 year fixed rate loans, given where we are I assume theres some disrupted business plans.
With your borrowers properties.
Given your relationship with the agencies.
Is this an opportunity.
For WD to step in and expand your bridge lending business.
Possibly to include extension loans.
The CLO market is essentially.
Not close but it might as well be so all the commercial mortgage Reits et cetera are not in a position to step in you have capital is.
Is that an area where over the next two or three quarters, you see opportunity and as part of that specifically Freddie Mac has this Q series program that Theyre trying to reactivate could that be part of our strategy to get to expand short term lending when high rates or reducing.
Demand for long term lending thank you sure Steve.
In a really good and insightful question let.
Let me talk through a couple of things that you mentioned there. The first thing is that the volumes that we saw in Q3 I would underscore.
Show of the strength of the relationship with Walker, and Dunlop and our relevance to our customers and so while volumes may come down in Q4, as both Greg and I have said our relevance to our clients has never been more significant.
We are engaged with many many clients who are dealing with exactly what you just outlined which is a business plan that is on pace of business plan that has changed dramatically given rate movements that has been driven some people to say less.
And to try and.
Add some do a cash out refinancing and put capital on their balance sheet, we're doing a lot of that right now.
<unk> had some people say I want to tell my whole portfolio <unk>.
Regardless of where cap rates are.
Let's go sell it and so we're doing a lot of <unk> on people, who want to raise capital and potentially transact at this point.
Your point as it relates to the CLO market and the Friday Q series.
My understanding is that Freddie is going to do about $3 billion of Q loans.
In Q4 to those on the call who may not know what Steve and I are talking about if you back the clock up very significantly back to the 2007 timeframe. Freddie Mac went and would buy loans that were if you will stuck on warehouse lines and be able to go in securitized.
Those through what became their case series and are now being called Q3s and some of you may have heard that.
A few of our competitor firms, who had loans sort of hung on warehouse lines have been looking to sell those loans into the Freddie Mac queues.
We as I said in my prepared remarks, do not have any Hong CLO loans, and we have no credit exposure to CLO loans.
With that said, Steve we do have quite a number of loans on our balance sheet, we have loans that sit in our joint venture with Blackstone.
And so the Q execution, maybe something for some of those loans to create additional liquidity at Walker and Dunlop.
And at the same time I would say this.
We are as Greg said very focused on both returning capital to our shareholders through our dividend payment and at the same time, maintaining a cash balance on our balance sheet to not only be opportunistic as it relates to any M&A opportunities that come along any teams that may not be on a platform that is as stable as Walker and Dunlop, but also to use that capital to help.
Key clients, who may need us to step in with our balance sheet and do something for them.
We have a track record and history of doing that with some of our largest client partnerships and I would think that we would do that in a heartbeat when and if it is needed by our clients.
Your last comment tied in directly to my second question that in these tough markets. They are usually some casualties corporate casualties were not wishing for that but what part of your business would you most like to grow opportunistically over the next year, while we're going through this.
Shakeout period and transition period.
So I would underscore the fact that we made we did not make pro cyclical acquisitions in 2020 in 2021.
It's really we talked about at our board meeting yesterday. It says a ton about the fact that both alignment and zelman or on budget for 2022.
We did not go out and acquire a big investment sales business that volumes have gone from robust to nothing.
We did not go out and buy a mortgage brokerage firm, whose filings as volumes have gone from robust to nothing so I feel extremely good about our disciplined from an M&A standpoint.
And clearly as you've seen us do in the past whether it be the acquisition of CW capital in 2012 coming out of the great financial crisis, we have been very opportunistic to go and buy origination platforms. When the market has dislocated.
And when other platforms don't fare as well as ours do given the long term consistent revenue streams and earnings that we have.
So we'll be looking.
The other thing to keep in mind, though and I would underscore this for any investors who would be concerned about this.
Buying at IR scaled size, we've done tuck in acquisitions on mortgage brokerage and <unk>.
Property sales platforms and brought in people, but we haven't done a major enterprise acquisition since that acquisition of CW in 2012.
The JL HFF merger as many people who are listening to this call know was an unmitigated disaster as it relates to human resource and human capital management. It turned out to be an accretive deal for <unk>, because they took a lot of their products and push them through the HFF relationships, but as it relates to merging those two big companies too.
The other it was wildly challenging to hold on to talent at both <unk> and HFF. So we are very cautionary as it relates to going and doing a large scale human capital intensive acquisition and then the other thing that I would say on that is culture matters.
We have maintained and built a culture at Walker and Dunlop that I believe is truly unique and distinct and so if we went and did a large scale transaction, we would put ourselves susceptible to merging cultures that in a people business is very challenging does that mean, we'll never do it does that mean, we'll never will take a look at something which is a large scale human capital.
This deal I wouldn't completely rule it out, but it's probably not at the top of the list today.
I understand and thank you for the comments, where we will Miss you at our conference next week, but I know that Sheri Thompson will do a great job representing WD on on our affordable housing panel. Thanks, Thanks, Steve Thanks, Steve.
Thank you Steve.
Our next question comes from Henry Coffey of Wedbush Securities.
Yes, good morning, everyone and thank you for taking my question.
Is it is it it sounds like and I don't have the answer here.
That on one hand.
Customers are slamming on the brakes.
On the other hand anybody walking around any major metro market doesn't see anything that looks or smells like a recession.
How much of this is just in your mind customers overwhelmed by the rapid change in rates confusion over the election.
Watson space May try to run again.
And how much of this is <unk>.
People react reacting to some real changes in the underlying economics of multifamily lending be at rent rates or.
Ability to get buildings built or whatever the quote business.
The.
This disruption issues may be.
Is this just all capital markets related or are there some real shifts going on in the multifamily.
From your perspective.
So Henry first of all great to have you on this morning, Let me give you a couple anecdotes at all just hopefully will answer your question.
First of all with rates moving at the rate that they have moved cap rates have not adjusted fully to those rate movements and so I've heard Jade asked the question on previous calls of some of our competitor firms.
Are people buying with negative leverage and I think there were many acquirers in the August September timeframe, who are happy to deal with the negative leverage of buying at a four to five cap rate and putting 5% debt on a deal.
I would say to you that in October and November there are not many people who feel comfortable going in putting negative leverage on deals right now.
Due to no real transparency as it relates to where rates end up going.
And so as a result of that that has put downward pressure on transaction volumes.
At the same time there are many people I've spoken to three clients in the last week of call me up saying, Alex just terrible and there is nothing going on and we're pencils down and we can't do anything and I will sit there and say I had dinner with a client last night, who told me that they acquired two assets in the last month really how they do that and talk them through how they're doing it as I mentioned, we're doing right now.
Quite significant refinancing for someone who wants to do a cash out refinancing to just put cash on their balance sheet. We received a phone call two weeks ago about someone who wants to sell their entire almost $1 billion multifamily portfolio.
While many people think that it's pencils down right now I wrote an email to all Walker and Dunlop salespeople last Friday, saying, if youre seeing that life insurance companies and banks are pencils down. This is the opportunity for Walker and Dunlop to be pencils up and meeting our clients' needs and I got a bunch of emails back from bankers and brokers across Walker and Dunlop, saying I've never been busier.
And so the real question, there becomes busy or making revenues right. Because every client wants to talk to US right. Now every client wants us to be running numbers on the valuation of their properties every client wants us to be thinking about refinancing scenarios. The other thing that's a very interesting data point in the market right now is the number of borrowers who.
We believe that rates are going to go back down.
So we have in many instances put forth fixed rate quotes today, most fixed rate financing is going off in the low sixes.
But back a month ago, we were putting out fixed rate quotes in the mid fives and we had numerous clients who opted to go with floating rate debt on a three year floater rather than going on a seven or 10 year fixed rate deal just because they don't think that locking in mid 5% fixed rate debt for seven or 10 year period is is a wise move and that theyre going to float.
And watch rates come back down.
Personally I would have locked the rate put the paper away and focused on my cap rate and my rent growth, but that's may not might not my borrowers, but the point I'm trying to underscore here Henry is the fact that it's a dynamic market, but there is significant conviction that rates start to come back down in the back half of 2023 and all we need.
He'd at WMD is for rates to stabilize we don't need rates to come back down we are not rocket mortgage we do not need.
Lower rate environment to get transaction volumes back up and going what we need to have happen is a we've got countercyclical capital now so we will continue to lead with that capital.
And b as it relates to our servicing fees. The moment that we can get some rate stabilization those MSR will revert back to normal and we will have normalized.
MSR income and net or net income.
And I'll, just I'll add on there too.
Beyond multi we are seeing plenty of activity on the non multi asset classes as well and rate stabilization brings capital back into the markets and we should see our volumes rebound there as soon as he gets stabilization. So there is opportunity across the landscape.
I think everybody listening to the call it was than any history with you understands that WD is going to be just fine.
You plan your business you plan your balance sheet.
Et cetera.
What I'm really wondering about is if we put aside all the capital markets funding stuff.
Hello.
The whole business, if we put that aside and look at your clients how are they bearing in terms of the operating profitability of their.
Properties.
Yes, we've seen home price appreciation go down in the residential market since June obviously, a lot of that is rate related.
What about the fundamentals of their business you all have a unique.
Specced on exactly that not only in terms of what people want to do with their balance sheets, but.
How the properties are performing so okay.
Okay.
The noise aside what does it look, but yes, everyone who owns today Henry.
Is loving life.
Everyone, who owns today has an asset that was financed anytime over the last 10 years is sitting back on I have rarely had the type of performance.
On this asset that I've gotten.
So their cash flow is fantastic, they're leasing is fantastic.
And while there is lots of reporting as it relates to rent growth peeling back from the very elevated levels that it was in 2021 and the beginning of 2022.
As I tried to underscore in our comments on our servicing portfolio I had someone call me last week, who said Oh my gosh.
There's $100 million of multifamily debt, that's coming up to be refined every year over the next 10 years.
And with rising interest rates, none of that stuff's going to be able to be done and I looked at the CEO of this company and I said do you know what the debt service coverage ratio is in the Walker and Dunlop $120 billion servicing portfolio. Today, It's 232 times to three two times every one of those assets has plenty of cash flow to be refinanced in a high.
The rate environment.
And so in less and less you went out and did a floater in Q1 of 2022.
And you didn't put a cap on it because it was done by our CLO provider not one of the agencies. Yeah, you could have some pain there.
But as Peter Linneman set on the Walker webcast.
Probably about a month ago when I asked him on a specific point, he said will be going to be some pain, yes will there be real opportunities few and far between.
So I think the bottom line here is that we're seeing a market adjustment right now we're seeing a number of people sit on the sidelines, just basically saying I'm going to wait and see where rates go and where cap rates go and then I can get back and get active there are people who are taking advantage of this market dislocation there will clearly be people, who have to sell assets to raise capital.
And may do so at quote unquote distressed pricing.
There will be someone there right now to take advantage of that and the final thing I would say is the banks are still on the sidelines.
As you well know JP Morgan Wells Fargo and Bank of America, basically went pencils down sometime in mid August .
There is no way at least from my read of it that they can stay on the sidelines in 2023.
Theyre all overcapitalized they have all taken significant loan loss reserves and my assumption would be come January one, Jamie Diamond and Charlie sharp they get back to work.
Start making loans again.
And if that ends up happening that will change the liquidity in the commercial real estate space today warehouse lines have been Paul as we talked about with Steve. There is no CLO market. There is fairly a see MBS market.
So the market's really to the agencies right now selectively to life insurance companies from a debt capital standpoint and.
And I think that to your point Henry if we see any kind of break on the inflation numbers.
And you'll get any type of okay, here's our forecast as it relates to fed rate increases you could see the market stabilized in Q1, and you could see transaction volume come back nicely.
So clearly a best case scenario.
Many people many of Mike our competitor firms on their earnings calls last week and the week before said, we're looking at a strong back half of 2023, I think thats, a reasonably fair and reasonably conservative comment. The question will be really Q2 2023.
And then the other piece to it for Walker and Dunlop is how long does the market stay dislocated, while we take advantage of our position with the agencies to supply capital to market. One of the things we tried to say in our prepared remarks was that if you look at our history in past crises, it's not during the crisis, where we completely outperform even though we do.
It's also afterwards, because it takes time for capital to form again, it takes time for life insurance companies to get conviction on the market. It takes time for banks to say, okay. We're clear from a liability standpoint with.
We finished reserving now it's time to get back into the markets.
And so we will take advantage of that and every single time, we have shown very clearly that this business and our platform is positioned very well to do just that.
Okay. Thank you.
Thank you.
Thank you Henry we have no further questions at this time I will now turn the call back to William for closing remarks.
Thank you everyone for joining us today.
The <unk> team for a fantastic Q3.
And as Greg and I both underscored.
While these are challenging times, we feel exceptionally well positioned and we have a team that's engaged with our customers every single day and doing a fantastic job of providing capital and capital solutions to our clients. Thanks, everyone for joining US today. Thank you Jenna and Kelsey for all your work on this earnings call, Greg well done and I hope everyone has a great day.