Q2 2023 Walker & Dunlop Inc Earnings Call
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Please standby.
Good day and welcome to the Q2 2023, Walker and Dunlop, Inc. Earnings call. Today's call is being recorded if you would like to ask a question. Please press star one at.
At this time I would like to turn the conference over to Kelsey Duffey. Please go ahead.
Thank you Bruce good morning, everyone. Thank you for joining Walker and Dunlop second quarter 2023 earnings call I have with me. This morning are chairman and CEO , Willy Walker and our CFO Greg for accounting. This call is being webcast live on our website and a recording will be available later today, both our earnings press release and website provide details on accessing the.
Archived webcast.
This morning, we posted our earnings release and presentation to the Investor Relations section of our website Www Dot Walker <unk> Dunlop Dot com. These slides serve as a reference point for some of what where we can grad will touch on during the call.
Please also note that we will reference non-GAAP financial metrics adjusted EBITDA and adjusted core EPS. 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.
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 and Dunlop is under no obligation to update or alter our forward looking statement, whether it's or 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 reports filed with the SEC I will now turn the call over to Willie.
Thank you Kelsey and good morning, everyone.
The great tightening started by the Federal reserve in March 2022.
Is that in 525 basis points to the fed funds rate.
Dramatically reduced transaction volumes across the commercial real estate industry.
We believe the majority of tightening is behind us.
Spec pricing to adjust and transaction volumes to recover in the coming quarters.
And the mix of dramatically lower transaction volumes in the first half of 2023.
Walker and Dunlop is countercyclical lending businesses.
Separately credit track record.
Consistent servicing and asset management revenues provided us with the financial strength to continue investing in the business for long term growth and success.
Q2, total transaction volume of $8 4 billion was down 63% from the first second quarter of 2022.
Net revenues were down only 20% to $273 million, thanks to durable revenue streams from our servicing and asset management businesses.
Adjusted EBITDA was down 26% year over year to $71 million.
Again, showing the strength of our non transaction related revenues.
Diluted earnings per share, which was impacted by lower non cash mortgage servicing rights was down 49% to 82 cents per share.
And adjusted core EPS was down 44% to 98 cents per share.
It is our hope and expectation that the first half of 2023 was the low point for transaction volumes due to the fed tightening cycle and.
And we continue to build back from here.
Looking at W. Nice performance on a sequential basis.
As shown on slide six.
Q2, 23 total transaction volume of $8 4 billion was up 25% from $6 7 billion in the first quarter.
Driven by growth in agency lending with Fannie Mae volumes up 64%.
Freddie Mac volume jumped, 24% and HUD volumes up 16% on the quarter.
Through the first half of 2023, the G S. He's only deployed 30% or $44 $3 billion of the $150 billion annual lending capacity, leaving plenty of capacity to lend as the market recovers.
We continue to focus on refinancing every loan maturity in our portfolio finding.
Finding new refinancing opportunities in either lenders' portfolios using our galaxy database.
Placing financing on every sale transaction our investment sales team is marketing.
The multifamily acquisitions market stalled in Q2.
Sellers waiting for rate stabilization and cap rate clarity before putting assets on the market.
Our multifamily property sales volumes were down 81% year over year and down 21% from Q1.
If our current Q3 sales pipeline is any indication Q2 was the low point in the cycle for multifamily sales activity and we're on an upward trajectory from here.
But slowly.
Q2 debt brokerage volumes of $3 $3 billion was down 64% from the second quarter of last year.
About 40% from Q1.
The banking sector had a full on crisis in Q2 with the failure of SCB signature and first Republic dropped.
Dropping capital flows to commercial real estate dramatically.
We appear to have averted a meltdown of the U S banking system.
And it's our expectation that banks pulling back from CRE lending will increase demand for commercial real estate debt brokerage services going forward.
Private capital is coming into the CRE market to replace bank capital.
Walker and Dunlop investment partners continues to deploy and raised private capital funds that is not only valuable to the returns and growth of our asset management business, but provides our bankers and brokers with proprietary capital to meet their clients' financing needs.
We continue to invest in our business even after our April a reduction enforce the.
The vast majority of our bankers and brokers are still with us our technology enabled businesses of small loans and appraisals continues to scale.
We raised alliance 117th low income tax credit fund during Q2 and.
And we broadened our investment banking capabilities from predominantly single family by hiring a new managing director focused on the commercial real estate market.
We can make these investments thanks to the cash flow generated from our non transaction based servicing and asset management businesses.
I will now turn the call over to Greg to discuss our financial results and then come back with some thoughts on our longer term outlook Greg.
Thank you Willy and good morning, everyone.
Market conditions. This quarter were generally consistent with the trends we described in our first quarter earnings call.
Although our overall financial results for both the second quarter and first half of 2023 reflect an extremely different market today than during the same periods of 2022.
We saw sequential growth across almost all business lines this quarter when compared to Q1.
Pace of monetary tightening has slowed in the commercial real estate market is slowly adopted.
Q2, total transaction volume was down significantly.
Revenues from our servicing and asset management segment continued to grow and adjusted EBITDA remained strong at $71 million a.
A testament to the strength and durability of our business model.
We continue to focus on cost containment to drive improvements in operational efficiency coming into the year, we took steps to reduce annual controllable G&A cost by at least $15 million and our Q2 results reflect the full benefit of those decisions as G&A costs are down 15% compared to the same quarter last year.
We also reduced our head count by over 100 employees in April creating $25 million of annualized personnel related savings.
As a reminder, the action had little impact on our financial results this quarter due to the separation costs, but we expect to see the full benefits of the head count reduction in the third and fourth quarters.
Turning to segment operating performance Q2 of last year reflects a very different transaction market for our capital market segment in the second quarter of 2023.
As shown on slide seven a year ago, our team had its second best quarter by volume in our company's history.
Although transaction volumes this quarter declined 63% compared to that near record quarter.
Total revenues for this segment were down only 42% to $126 million as we saw slight improvement in gain on sale margins across most products year over year.
The more important comparison is the sequential comparison from Q1 to Q2, which is shown on slide eight.
Transaction volumes increased 25%.
Total revenues for the segment increased 21%.
The pickup in transaction activity drove an increase in net income for the segment from just about breakeven in Q1 to $16 $1 million in Q2 and.
In a 45% improvement in adjusted EBITDA to a loss of $10 $3 million in Q2.
Our clients will continue to draw on the expertise of our bankers and brokers to navigate these challenging market conditions and as they do the financial performance for this segment will steadily improve.
The servicing and asset management segment, where Sam.
Our servicing activities and asset management business, both of which produced stable recurring revenue stream.
As shown on slide nine revenues were up 14% year over year to $143 million due to growth in servicing fees escrow earnings.
The Fed's 25 basis point increase last week was expected and.
And we will benefit our bottom line.
Although the cost of our term debt increases with short term rates. We also manage just over three times the balance of our term loan and interest earning assets that also grow in tandem with short term rates.
So we will see a slight incremental benefit from the recent rates.
Of note Alliant revenues were $26 million this quarter as we close $271 million of new equity syndications in Q2.
Bringing our year to date total to $407 million.
13% ahead of a year ago, and putting alliance on pace for its best capital raising year ever.
As we have shared for the last several quarters, our at risk servicing portfolio continues to perform well.
With only seven basis points of defaulted loans in the portfolio.
As shown on slide 11.
As of December 31, 2022.
Weighted average debt service coverage ratio was 232 times and the underwritten loan to value was 61%.
Reflecting a cash flowing portfolio with substantial equity question across the majority of bottleneck.
This quarter, we resolved the only defaulted loan in the history of our interim loan program.
The loan default it back in 2019 and four years later, we finally sold the property returning $9 million to our balance sheet, while charging off the $6 million loss reserve.
Although the sale improve the health of our balance sheet and had no impact on GAAP earnings.
Turning back to our consolidated results for the first half of the year as shown on slide 12, our total transaction volumes are down 57% year to date.
The stability of earnings from our sand segment, offset a large portion of the slowdown in capital markets activity.
Diluted earnings per share was $1 61.
Down 57% from the first half of 2022.
While year to date adjusted EBITDA is down just 12% to $139 million and adjusted core EPS was down 24% to $2 14 per share.
Finally year to date operating margin was 14% compared to 25% in the same period of 2022.
While return on equity was 6% versus 16% in 2022.
Our first half financial results reflect the material shift in market conditions that began impacting the market a year ago as the fed aggressively increased interest rates.
The fed appears to be waning its battle over inflation, but it's clear that interest rates will remain elevated for longer and liquidity supplied by large banks is likely to remain restricted in the near term.
On our last call we provided an updated range for our 2023 guidance as shown on slide 13.
Reflecting the market uncertainty and difficulty forecasting financial performance this year due to the macro environment and the.
Quarter, our cash balance increased $40 million ending.
And in the second quarter with $228 million of cash up from $188 million at the end of two one due to the strong cash generating capabilities of our business and the repayment of a portion of our interim loan portfolio.
We are operating in a challenging environment and we will continue to focus on building our liquidity to best position the company for the long term.
And at the same time, we remain committed to our quarterly dividend and yesterday, our board of directors proved a quarterly dividend 63 cents per share.
Payable to shareholders of record as of August 17th two.
Two quarters into what has been an extremely challenging here, we feel very good about a number of things first.
First.
Our business model continues to produce steady high margin cash flows that allow us to maintain profitability and build up a strong capital position. Despite the current market headwinds.
Second.
We're focused on multifamily and have access to large sources of counter cyclical capital to support our transaction businesses.
Third.
Multifamily fundamentals are holding up well from a credit perspective.
Our historical underwriting has a feeling very good about our at risk portfolio today.
Fourth.
We managed our cost to navigate the <unk> navigate the current environment, but retain the talent, we need to capitalize when growth returns to the market.
And finally, our entrepreneurial spirit combined with financial flexibility puts us in a position to take advantage of growth opportunities as we continue to pursue our longterm strategy.
Thank you for your time this morning, I will now turn the call back over to Willie.
Thank you Greg.
Commercial real estate investors today are extremely rate sensitive.
With 10 to 15 basis points, having the potential to make or break a deal.
Jackson volumes will ebb and flow in the second half of the year, depending on rates and capital flows.
Outlook is the following.
We believe the fed has done the majority of this work.
Whether it's one two or even three more rate increases the majority of their tightening is done.
Second with longterm rates determining the cost of capital to most commercial real estate deals the timing and size of the Treasury Department's new bond issuances will impact the cost of financing to commercial real estate for the next several quarters.
Third Fannie Mae and Freddie Mac had plenty of capital to provide to the multifamily industry.
Clearer objected to partner with them to deploy as much of that capital as possible.
One fourth multifamily credit, particularly in our at risk servicing portfolio with 90 per cent of our loans or fixed rate.
It should remain very healthy.
Let me dive a little deeper on a number of those points.
While the Federal Reserve has added 400 basis points to the fed funds rate over the past 12 months. The 10 year Treasury has only moved to 130 basis points.
A 4% tenure treasury is a reasonable somewhat normal interest rate to work with.
It's just the adjustment cap rates, which will allow owners to determine pricing can I.
Only happened once financing costs stabilised.
According to our research team at Zelman multifamily cap right suggested to an average of 4.90 per cent Q2, 23, compared with 4.25 per cent and Q2 22.
Uncap rates adjusted refinancing costs were between 4.75 per cent and 5.25 per cent.
Transaction points pick up.
This dynamic between financing costs and cap rates will continue.
The federal Reserve's involvement in the market diminishes rates and cap rates should stabilize transaction volumes will pick up.
His grades in my previous comments underscore multifamily fundamentals and credit quality remain very strong.
Are at risk portfolio includes only multifamily loans and 90 per cent of those loans are fixed rate with very attractive interest rates.
You have only $184 million of at risk loans maturing for the rest of 2023.
And another $1.3 billion in 2024.
So only 2.6 per cent of our at risk loans mature in the next 18 months.
That is a gift to our borrowers into the credit quality of our portfolio.
While our financial performance in the first half of 2023 isn't what we would like it to be our business model is performing to design.
$127 billion servicing portfolio and 17 billion dollar asset management businesses produce stable high margin revenues that allow us to not only maintain our banking or brokerage teams and infrastructure <unk>.
Continue investing in our high growth businesses and technology.
As it relates to our focus on technology, we have successfully used our proprietary data analytics and technology to win refinancings from the competition.
During Q2 60 per cent of the refinancings, we originated or new loans to walk around them up let.
Let me double click on that point and tie it back to my commentary on a servicing portfolio.
We are using technology in our exceptional bankers and brokers to win alone refinancings from the competition 60.
60% of our total volume in queue to which.
Which means we're not relying upon refinancing our own portfolio.
Which has very little refinancing activity over the next 18 months, which is very positive from a credit perspective.
A year ago with inflation running rampant in fed raising rates by up to 75 basis points per month, the outlook was uncertain and our deal pipelines starting to deteriorate.
Today, the outlook is markedly different while inflation is clearly still a concern markets have begun to stabilise and transaction volume appears to have bottomed and it's starting to recover.
Our day to day focuses on executing for our clients winning every piece of business, we possibly can.
Continuing to invest in our people random technology to deliver exceptional longterm shareholder returns.
In July are longtime president and my partner in building this great business Howard Smith announced that he will be retiring on January 1st 2024, after 43 years with Walker.
Howard has been instrumental in helping W. M D grow from a small family owned business with one offers to the scaled industry, leading enterprise we are today.
Denouncement was not unexpected and we have two exceptional leaders and Chris Nicholson and Don King to assume Howard's primary duties as co heads of our capital markets group.
Howard will be greatly missed but I'm excited to see dawn and Chris step into their new roles.
For other members of our senior management team to take responsibility and provide leadership across the company going forward.
We established our five year highly ambitious business plan called the drive to 25 and 2020, knowing that the economy and our business would not remain static.
After the Covid pandemic and great tightening those were pretty good assumptions.
What is important for investors to know is that we remain focused on the drive to 25 and have a pathway to achieving it.
The drive to twenty-five to major financial targets are $2 billion in total revenue.
$13 of earnings per share in 2025.
Given with a great tightening is done to transaction volumes, reaching the ambitious financing and property sales volume targets a drive to 25 is unlikely.
Yeah, not necessary due to the growth and are servicing an asset management segment.
The mortgage bankers Association estimates that by 2025, the commercial real estate debt financing market will return to the financing volume seen in 2021.
In 2021 or capital markets team closed $68 billion, a transaction volume and generated $260 million of net income to walk on them up.
That team of bankers and brokers is still at work or in them up and we have every confidence that if the market's return to 2021 levels are people brand new technology can deliver similar results in a capital market segment.
And as we grow back to 2021 transaction volumes are servicing an asset management segment will continue to outperform.
After the acquisition of a line in 2021 and the rapid rise in short term interest rates, increasing our interest earnings dramatically.
Servicing an asset management segment is on track to generate $175 million of annualized net income in 2023.
<unk> from 105 million in 2021.
So a return to 2021 transaction volumes in our capital market segment coupled.
Coupled with the current net income from our Sam and corporate segment would bring us to over $10 per share a V. P. S.
And as we continue adding banker's and broker's investing in growth initiatives to scale are small balance lending an appraisal businesses and.
And raise more capital through our asset management platform, we have a pathway to achieving our drive to twenty-five financial targets of $2 billion in revenues and $13 of earnings per share.
While there are no guarantees in rate capital flows credit quality spreads an average servicing fees will impact our business we.
We have the team business model and focus to achieve the drive to twenty-five goals.
We have an exceptional team at W. M D. A diverse business model that allows us to perform in both good times and bad and the very real opportunity ahead to grow dramatically as the market recovers from the great tightening.
Thank you for joining us on today's call will now ask Ruth to open the call for any questions.
Thank you if you would like to ask a question. Please take note by pressing stylin on your telephone keypad.
A speaker phone please make sure your immune function is turned off.
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Please press star one to ask a question.
Just a moment.
Okay first 50 tiny with J M P security [noise].
Good morning, everyone and we'll eat really applaud the proactive response that management has taken you know in the first half to respond to this new commercial real estate market reality, we have and nice to hear that sounds like you'll see more more benefit from that in the second half so [noise].
I want to get that out at the start I guess, the most obvious thing and multifamily as you highlighted will use the.
How slow or let's say not slow, but how far below Freddie and Fannie collectively have been in terms of their caps. It looks like through June on a combined basis. There's about 30 billion of of catch up you know not to mentioned.
The 75 billion that we would normally expect in the second half.
How close I mean do you see b.
B and acceleration, there and Ah and Ah effort by leadership at the G. S sees to try to get closer to their full your cats and.
And as part of that.
Can we expect them to cut their loan pricing relative to benchmark rates in order to try to accomplish that banks.
[noise] Kristy and thanks for joining us this morning.
There are a couple of things I think that are important to keep in mind as it relates to the agencies and the overall market. The first thing is that.
In the first half of 2023, there simply wasn't a lot of demand for financing.
And Brian acquisition volumes fell through the floor is we just highlighted given our investment sales being down 81 per cent quarter on quarter between Q2, 22, and Q2 23.
And so there has not been a huge amount of need if you will for their capital M.
With that said.
Fannie and Freddie had been very focused on two things.
Profitability.
And affordability.
Uhm profitability on deals that are non affordable market rate, where it has been challenging to get pricing to a point, where borrowers want to move on non affordable financing. So we have underscored that point to them and.
And are very hopeful that they realized that their capitalism needed not only in the affordable part of the market, but also in the market rate section of the market.
The second thing I would say is an affordable Walker and Dunlop is well above our targets as it relates to supplying affordable deal flow to Fannie and Freddie and so we benefit from that by having <unk>.
Them affordable deals that allow them to meet their targets from a regulatory standpoint, and therefore that frees them up if you will to price more competitively on market rate deals.
And then the final thing that I would say is that there.
There had been no portfolio transaction, so far this year.
And I would expect us to start to see some portfolios in the back half of 2020th three and into 2024.
And I think you know if you look at our year on year, we did a large.
Transaction and Q2 of last year, a multi billion dollar financing and Q2 of last year and that had a big obviously impact on our queue to 22 volumes and when you strip that out the step down in volumes quarter on quarter isn't quite as pronounced as it was those types of deals will come back into.
The market sellers have been unwilling to put portfolio is on the market thinking that they weren't going to get the cat breaks they expected and as we see stability in the market, Steve I would expect we see some portfolios come up with the market and as you know Walker No op has consistently been one of the very few providers.
That <unk>.
Teams that want to hire an agency for Nat scheme go to for multibillion dollar transactions.
That's helpful background and I get your point about it is not their availability of capital to win but the demand obviously from from the borrowers who seemed to be a little bit frozen at the time I guess waiting for right certainty.
One final just clean up thing and this is.
Mmm.
This week talking to a lot of the multifamily bridge lenders. It reported you know everybody loves multifamily as a property type, but I was surprised how many people mentioned that on a case by case basis, while rents are going up that operating expenses are going up significantly in a lot of that has to do.
Do with maintenance security that was just tons of things and we're hearing a lot about economic rent and the amount of drag to revenue that you're getting from from non payers. If you will some of that obviously goes back to COVID-19.
<unk> and your conversations with your loan officers and your borrowers is this an issue and the multifamily market that needs to be kind of worked on and is it is it just a municipality by municipality or is it something broader than that thank you.
Sure. There there are a couple of things in that question that I think are important too.
Underscore.
The first is that.
We have taken.
Very limited risk on.
And a balance sheet lending is Greg pointed out we resolved one loan from 2019 that family lost we've ever had in our in our loan portfolio, but the great majority, we don't have any cielo exposure Walker and my mom and as we underscored and Paul 90 per cent of our at risk portfolio.
[noise] fixed rate loans, so from a credit standpoint W. M D. We feel extremely good <unk>.
The second point is that if you look at the fundamentals of.
Multifamily while values have come down as cap rates have gone up cash.
Cash flows off of the assets have remained very strong.
Lot of that is due to fixed rate debt alright. So if you are a buyer who went out and bought a property and put floating right get on it but it it is scary low cap rate and those operating costs that you underscored have gone up you've got problems cause your cost of financing has gone up and also your operating cost has gone up that's not.
A space, where Walker and Dunlop has played much replayed, they're a little bit but not much some of our competitor firms. They have benefited from having floating rate that they're benefiting right now from the cash flows at that potent floating rate that is giving to them. That's a risk profile of blending that we have not played in.
The third thing I would underscore is your point about economic vacancy.
There was a letter that was written to FHFA three.
Three days ago by a number of Democratic Senators.
Underscoring the by the administration's request, great tenant bill of rights to try and add renters protection.
And after seeing the letter go I reached out to a number of the senators who are signatories to that letter and I pointed out to them that.
That what they are missing is two things.
The first thing the amount of economic they can see that is still in the market and the landlords across the country through the pandemic and post pandemic have worked tirelessly with renters to make sure that they could stay in safe and affordable housing while there are clearly outliers there are clearly.
Tenants, who have not been treated as well as any of us would like <unk>.
Bent over backwards to support their tenants through the pandemic and post pandemic and so you underscore an issue from an operating standpoint that we as an industry must raise.
To both the regulator as well as legislators, who think that it's the tenant who has gotten shorting a mistake and not the owner operator.
The second piece to uhm that point steep.
Is that.
The agencies right now are very very focused.
On making sure that the assets that they learned on or at a standard of quality that makes it so that renters have a safe affordable and maintained asset.
And we have an incredibly strong track record at work or develop as it relates to asset maintenance.
But there are some situations, where we and other lenders have borrowers who for the reasons you just pointed out.
Not investing in their assets to up to keep them up and to make it so that they are safe affordable and well maintained assets and so we as an industry need to step in and make sure. The tenants have those types of properties, but <unk> and that those properties that have agency financing on them are maintained according to the loan documents that sit on top.
For them.
That's great inside baseball Willie Thanks, and it's good to know about the proposed legislation. Thanks for all your comments this morning.
Sure.
As a reminder, I think I'd like to ask a question that is star one.
We'll go next to Jamie cameras with with Bush.
Alright, good wondering one thank you for taking my questions. The first one I had Willie.
I know you would a pond in the past that the Gse's would probably hit their cats. This year, but just based on the transaction D. C up there do you think that's still on the table.
I don't think so J I'd say that you know sort of looking back to Steve's question and now to yours.
We saw a significant uptick in activity and sort of May late April into May when we got into that band that I tried to describe them as sort of precisely as I could in my prepared comments of cap rates moving up to the high for his financing.
Coffee in between 475, and 525 and borrowers, saying I'm, Okay, taking 25 to 50 basis points in negative leverage I'll go.
And so volumes picked up there and that was right around when we did our queue. One call. So we saw an uptick and said hey, if they keep going at this rate they could hit their caps.
The debt ceiling negotiations.
Then the Treasury department stepping in and starting their trillion dollar issuance program of Treasury issuances between now and the end of the year to raise capital for the cost of the federal government put a lot of upward pressure on rates right starting to move out again and as I pointed out in my comments, we've never seen a market.
It's more rate sensitive so you'll get 10 to 15 basis points of movement in the tenure, that's pushing out overall coupon rate. Some people say you know what it's outside of my band on negative Ledbury jumping pause.
So we you know the numbers of the numbers there at 30 per cent of their annual capacity. We as I said are working as closely with Fannie and Freddie to deploy as much of that capital as possible and I would go back to the point I made this D. J, if we see some large portfolios both be transacted upon from the <unk>.
Sales standpoint or needing financing.
That could change the numbers materially.
But at the current no large <unk> portfolios, and Fannie and Freddie focusing on profitability and affordability rather than capital. The appointment it will be very challenging for them to get to their caps.
Thank you and Uhm. The second question I had and and apologies if I'm misconstruing. This but it sounded like you guys are are potentially kind of doing a reset on single family correct, maybe talk about where you reference are there now and it seems like from what we've seen from the headlines the the <unk>.
Public S. F. R companies are still getting pretty good same-store <unk> uhm. So maybe talk about word W. D is on that now and then also kind of what you're seeing from from the from the operators that you work with.
So we have a a team that's very focused on the S. F R space and they've been.
Been deploying quite a bit of capital, it's challenging and that the agencies don't lend on S. F. R. They <unk> B F. R. So for those who don't know the acronyms and aren't talking about single family rental versus built for rent the.
The agencies will end on billed for rent they won't lend on single family rental and and so finding capital J has been challenging and it's one of the reasons why as the banking sector gets displaced we believe that there's gonna be an increased demand for that brokerage capabilities because the banker that developers.
With four time says, we're not lending anymore, and they don't know where to turn to for capital.
It would shock you if you looked through our queue to get brokerage list of capital sources, how many of them J you don't know they're not household names their small banks that you seemingly wouldn't think would make a commercial real estate loan in various markets that are showing up.
To.
Because they need to deploy capital because they liked the fundamentals of the commercial real estate that their lending on and so we believe that that's very positive for our deck brokerage business as the market feels and recovers.
The other thing that I would say is.
S F R. As an asset class is doing very well and should continue to do very well.
What we are seeing is that.
Because.
The majority of Americans you own a home have a very low interest expense fixed rate mortgage on their home they are not putting that supply into the market. So the existing home sales market is in the gutter and will stay there for quite some time people people will move people will have needs to buy a new home because it.
Got a larger family they've got a new job what have you, but the existing sales market is very very depressed right now because everyone has cheap financing on their home and they don't want to lose that three and a half per cent mortgage for six and a half per cent mortgage.
That means that the only new supply coming onto the market is new construction and those newly built homes are coming in at a price point that.
Is thoroughly on affordable to most renters in America, the cost of financing the down payment and the overall cost of a home or an affordable to most renters, which means that they have two options stay renting an apartment building or move into single family rental and so we see that space both mulch.
<unk> family as well as single family rental is having great growth dynamics over the next several years as the single family market is really delivering new product at a price point that is not achievable by most renters and that the existing home market basically stays depressed because people don't want to lose the benefit of that 3.5% fixed rate mortgage.
When you were talking about the small banks and some names that we wouldn't know him on the list does is that part of what you said in the prepared remarks that roughly 60% of your wounds this quarter, our our new new loans, new borrowers new investors I guess cause I thought that was pretty interesting no other side or anything yet.
At.
Another side of it okay, well, it's yeah, but these are so it's here their new loans to Walker and Dunlop J.
So it's not that it's a new capitalsource. If I showed you the capital source list it would probably be even more new providers of capital. If you will we we did alone and Q2 with a bank called Sunshine Day I have to tell you no no disrespect the Sunshine bank, but I'd never heard of Sunshine back before and so.
The what we're talking about him at 60 per cent number is that 60% of the loans that we financed in queue to where new loans to walk around a lot. So the loan that we were refinancing with a loan that was originated previously by Wells Fargo C. D. <unk> some of.
Other provider and we went and refinance that loan for the borrower where the capital source came from as a distinct view, but we're talking about the fact that in our portfolio, we do not need to rely on refinancing volume in our existing $127 billion servicing portfolio, we're going out and <unk>.
Feeling financing from the competition, because we've invested in galaxy and because we have visibility.
Into our clients portfolios to be able to go meet with them and say this isn't a walk or no up loan, but we would love to work on the refinancing of that asset.
And that has been a huge value add to our bankers and brokers as it relates to having somewhat of an X ray into our client and borrowers portfolios.
Okay, that's great to hear Willie Uhm. My last question. If you think about getting back on offense or their potential M&A opportunities for W. D out there.
Just given the fact that like he talked about higher interest rates for everyone. Some people may have gotten all sides in terms of other capital structure looks.
So I would say.
We have we have always tried J two zig when others have sagged.
We did quite a bit of work during the great.
Great financial crisis, and did an acquisition when nobody well first of all we weren't a publicly traded company. That's it no one was looking at us, but we get a large transaction in the midst of great financial crisis coming out of the pandemic. We made three acquisitions they'd have materially helped Walker and Dunlop.
<unk> quite honestly through the great tightening so I feel very good of our M&A capabilities and our ability to zig when other zag I would say that from the the lender standpoint.
I haven't seen any knives that had fallen yet if you will some of those and it took on a lot of floating rate risk seemed to be performing very well, so far and so there really hasn't been anything there that we would look at as it relates to taking advantage of someone's.
Someone's risk profile, having changed dramatically uhm I think that does go to where we are in the cycle and the fact that most people's underwriting was more conservative than when we were heading into the great financial crisis.
And then on the services side of things, we're constantly looking but.
First of all anything we're gonna do now would have to be pretty significant in size and scale, just given our size and scale and what it takes to actually move the needle and the second thing is that.
Greg went through in our numbers.
Well, we don't like the transaction volumes are down and we don't like the overall financial performance. The business model is performing to design.
$71 million a D V D. A and Q2 with deal volumes down over 60 per cent is a fantastic quarter. It provides us with the cash flow to be able to keep our team in place continue investing in our businesses.
And and continue to invest in growth.
So taking on someone else's problems at this time.
It would have to be a screaming opportunity for us to go and not to say, we got the opportunity here to inflate everything back when the market recovers as it has started to do and what we're seeing today and take advantage of that on our own rather than going I'm, taking some significant risk of bringing in someone else's problems, but with.
That said lovely required 16 companies and one vanilla history and we're constantly looking.
Okay. That's great really always very helpful. Thanks for taking my questions.
Thanks Jay.
As a reminder that is star one if you had a question well go next to change my money with K B W.
Thank you very much for taking the questions just on the GSE outlook.
More interested in W. DS.
<unk> do you think that you can exceed two two levels for Fannie and Freddie.
I think Freddie for the second half of last year, you averaged around 2 billion a quarter.
And Fannie was pretty strong sequentially, there's usually an uptick and it seems from your peers that multifamily inflows picking up and the GST volumes or.
Set to sequentially improve so just wondering if you can make any comment on that.
I certainly hope so jade.
We have.
Fantastic relationships with both Fannie and Freddie we have the client base and the bankers and brokers at work or in the lab to continue.
Continue to grow market share our market share with Freddie grew in the first half of 2023, our market share with Fannie Mae was down through the first half and that goes back to the large transaction, we did into two of 2022.
Which pop dark market share with Danny in the first half of 2022.
Given the deliveries.
That we had to deliver the Fannie Mae I'm pretty Mack M. July after closing out Q1, I think our physician can lead tables will increase.
Quite materially.
And we continue to see them very solid inflows as it relates to our agency pipeline.
And so well, both Craig and I tried to underscore.
The difficulty in projecting volumes right now given.
Going back to the comment I made the J J.
You know we had a window there in late April early may wear cap.
<unk> adjusted financing costs suggested and borrowers said go and then all of a sudden extra knowledge came in the 10 year runs a little bit artwork say don't go so it's Ah it's wildly rate sensitive market.
And at the same time every time, we've seen the opportunity for clients to move forward. They are so it gives us optimism and at the same time. It also requires us to be tempered in our enthusiasm only because we watched the market be sorted in sync for a moment and then back right away.
Thanks for that.
The gain on sale margins had a nice pick up I haven't been able to check the agency Standalone margins first last quarter, but sequentially margins they'd pick up nicely.
Feel that they've.
Kind of stabilized at this point and there isn't as much pressure.
To provide borrowers with some savings through lower imputed M. S. R gain.
How are you feeling about the <unk> margin outlook.
Yeah. So you know I've I've mentioned, a number of times <unk> that the agencies are very focused on profitability and affordability.
I looked at Fannie Mae's Q2 financial results in their G fees year on year our flat.
R. S V easier on your down precipitously.
They have passed on to us and other partners.
The burden of pricing in this market.
And we talk to them about it.
They want a partner with us and they're being good partners, but they're G fees have stayed static wall all of their partners S. D. As you've come down precipitously to deal with the <unk>.
Sensitivity in pricing. So we're very hopeful that they realize that they've got.
A lot of capital to deploy.
That they have a there's no obligation for them to hit their caps, but there is a sentiment. If you. If you think about it Jade there's 600000 homeless people in America.
600000 homeless people in America today.
And there was a study done by the Benny off center at the University of San Francisco that was just published it shows very clearly, California has 12 per cent of the U S population 30 per cent of the U S homeless population and 50 per cent of the U S.
Homeless non sheltered population and.
Benny off center went and looked at it and there's this narrative that says that people who become homeless in other states move to California, because it's got a large social safety net and it's also got great weather.
Wrong and wrong 90 per cent of the homeless people in California, we're living in an apartment or a home in California before becoming homeless. The reason they're homeless as housing affordability.
Period.
And what we have is an affordability crisis in America today.
And what Fannie and Freddie <unk>.
Have an obligation to do is just pull a valid capital to the market.
In market rate deals.
In small a affordable deals and a big a affordable deals to make sure that there is adequate capital to the market to make it so that we do not have the affordability crisis in America that we have today.
So the fact that Fannie and Freddie <unk> 30 per cent of their annual caps through the first half of the year.
Authorized.
Insurance cap is one of the main reasons why we're not getting more HUD D for financing to create new affordable supply in the market.
So as we sit there and look at that letter that came out of the U S Senate going to the FHFA administrator talking about 10, it celebrates the real focus right now needs to be on capital deployment.
Eight. One example, that's just incredibly clear as it relates to housing affordability and homelessness.
In Los Angeles County, 79% of.
Of the property in Los Angeles County is zoned single family, 79% that makes it almost impossible to build new affordable multifamily.
To go to the under under the Spectrum Houston, Texas has dropped their homelessness rate by 61% over the last decade and the reason for that is because of the lack of nimbyism and the lack of zoning, which allows for new product to be built.
So if you think about the difference between Los Angeles, California in Houston, Texas.
Los Angeles, California is a great place to be an owner.
Terrible place to be a developer or to be a renter.
Houston, Texas is the complete inverse Houston, Texas is a terrible place to be an owner, it's a great place to be a developer and a renter.
We need Fannie and Freddie <unk> <unk>.
<unk> at this time to provide capital of the market across the spectrum to make it. So that this housing affordability crisis, that's going on in America gets their capital and brings the cost of renting down.
Thanks for that one of your peers took a large write down in its valuation.
Of private <unk> investments.
And I just wanted to ask about the outlook for G. F. I a prize you know how you're feeling about those two businesses.
So <unk>.
As you May recall J G O Fi acquisition had a very significant earn out to it and so as it relates to the value that we actually paid for G. O five and then the.
Total value that we will end up paying out for it I do not expect us to have any need to do a write down on the <unk> acquisition. Given if you will the variable nature of that acquisition with a very large amount on the back and that then leads into small balls lending enterprise it should be no.
Surprise to you or anyone else on this call that transaction volumes in the appraisal business as well as in the small balance lending business have come down as the market has.
Digested the great tightening and while we are not where we would have liked to have seen those two businesses. We have fantastic teams in both we are applying the technology every single day to make both of them far more efficient than our larger businesses and we see gray crowhop.
Kennedy's and both of them to both scale them with the technology as well as use that technology to help us grow our larger scale businesses once they get up and going in the technology gets proven so feel very good about G O five as well as the investments we've made in our emerging businesses.
Thanks very much.
Thank you.
There are no other questions at this time.
Great.
Thank you everyone for joining us today.
Have a fantastic day, and we'll talk to you again next quarter. Thanks.
This does conclude today's conference call. Thank you for your participation you may not disconnect.
Mmm.
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