Q3 2023 Walker & Dunlop Inc Earnings Call
Please standby your conference is about to begin.
Good day and welcome to the third quarter 2023 Walker and Dunlop incorporated earnings call.
Today's conference is being recorded.
At this time I'd like to turn the conference over to Kelsey Duffey Senior Vice President of Investor Relations. Please go ahead ma'am.
Thank you for Linda Good morning, everyone. Thank you for joining Walker and Dunlop third quarter 2023 earnings call I have with me. This morning are chairman and CEO, Willy Walker and our CFO Bradford County. This call is being webcast live on our website and a recording will be available later today.
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 Dunlop Dot Com <unk>.
<unk> serve as a reference point for some of what Willy and Greg will touch on during the call.
Please note during the call to Bill referencing non-GAAP financial metrics adjusted EBITDA and adjusted core EPS. Please refer to the appendix of the earnings presentation for a reconciliation of these non-GAAP financial metric investors are urged to carefully read the forward looking statements language in our earnings release statements made on this call, which are not historical facts, maybe deemed forward looking statements within the meaning of.
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 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 reports filed with the SEC.
I'll now turn the call over to Willie.
Thank you Kelsey and good morning, everyone.
I'd like to start this call as I have several walker webcast, highlighting the trauma and concern that many of our Jewish colleagues and clients have experienced since the whole loss terrorist attacks on Israel.
We're exceptionally challenging times with great concern for the state of Israel, its people and the Palestinians caught in the war on her boss.
To support our colleagues and clients in any and all ways we can.
As well there is no place in a free society for discrimination or any Semitic behavior, and we must be vigilant and stopping it out anywhere it arises.
When I joined Walker, and Dunlop and 2003 I looked at the consistent revenues generated by the companies $4 billion loan servicing portfolio and said to myself more of that.
The past 20 years, we have added $125 billion of servicing and $17 billion of assets under management to generate large sums of recurring revenue flow that allow us to continue investing in our people brand and technology throughout cycles.
Part and parcel of building scaled servicing and asset management businesses was to ensure our credit risk in those portfolios was minimal due to the conservative underwriting and taking credit risk solely on multifamily properties.
That strategy has worked.
A negligible credit default, allowing us to fully benefit from our servicing and asset management cash flows.
We do not control the macro environment that is increased rates dramatically in terms of the commercial real estate market on its head.
Do however control building, a sustainable business for all cycles and managing through those cycles.
As investors in Wm, Dino, we benchmark our growth and success against the bold highly ambitious five year strategic plans, we develop and pursue.
While our financial performance over the past two years and the drive to twenty-five has not met our own high expectations, we remain committed to that strategy.
If you benchmark, our business model and financial performance against our peers.
Slide three shows our revenues this quarter and year to date have fallen more significantly than our peers due to the relative scale of our capital markets businesses.
As transaction volumes recover so we'll wmd's revenues.
You can also see on this slide the sixth direct competitors I've watched year to date adjusted earnings and adjusted EBITDA fall by an average of 53% and 49% respectively. While Wmd's adjusted core earnings are up only 26% and EBITDA only 9%.
This is super important for it underscores the strength and margin of our recurring revenue businesses and the cost cutting measures we have implemented this year.
As this slide shows Wds revenues fell 15% in Q3.
Our financing and sales pipelines were robust entering the quarter and we were optimistic that transaction volumes were recovering off dramatically lower volumes in Q1 and Q2.
Yes. It is the 10 year Treasury rose precipitously, our pipeline of acquisitions and refinancing deteriorated, bringing total transaction volumes down 49% from Q3 of 2022 to $8 $6 billion slightly.
Slightly higher than our Q2 volume, resulting in total revenues of $269 million.
Diluted earnings per share declined 54% to 64 cents per share.
Adjusted core EPS, which strips out noncash mortgage servicing rights and adjusted EBITDA were down, 21% and 1% respectively.
Notably adjusted EBITDA has continued to grow throughout this year from $68 million in Q1 to 71 million in Q2 to $74 million in Q3.
This is the company we dealt to provide us with durable recurring revenue streams with limited credit exposure to allow us to continue investing in our people brand and technology throughout cycles.
The multifamily acquisitions market picked up slightly in the third quarter and our team close to $5 billion of property sales down 50% year over year, but up 67% from the second quarter.
Significantly outperforming the overall U S multifamily property sales market, which grew only 7% quarter over quarter.
Fannie Mae and Freddie Mac are deployed only $74 billion or 50% of their $150 billion annual multifamily lending caps.
Through three quarters of the year.
They are well behind.
But they arent, losing deal flow to other capital sources, there simply hasnt been demand for their capital in such a dislocated market.
Regardless of the path of rates over the next 12 months. It is our expectation that the wait and see attitude of most owners in 2023 transitions into a I must move the market in 2024, given the amount of dry powder that needs to be deployed in the volume of loans that will need to be.
Asked or sold.
Multifamily loan maturities, which totaled only $75 billion in 2023 increased 73% to $129 billion next year.
Loans must be refinanced or properties sold regardless of what happens to interest rates.
W. N D is the largest GSE lender third largest multifamily lender and six largest provider of capital the commercial real estate industry in the United States.
We are focused on and must capitalize on our brand and scale, that's financing and sales volumes return over the coming years.
Debt brokerage volume declined 52% year over year to $3 $1 billion in Q3.
In line with our Q2 volumes.
The non multifamily acquisitions and financing markets had been very challenged in 2023, and our team is finding capital and solutions for our clients reflected in 21% or over $1 billion of our Q3 debt financing volume being on office retail hospitality and industrial assets.
As a reminder, Walker and Dunlop takes no credit risk on any of our non multifamily financing activity.
We continue to see market share growth in our technology enabled businesses of small balance lending on appraisals.
Our market share with Fannie Mae and small balance lending has grown from 7% last year to over 10% in 2023, and the same with Freddie Mac.
Up from 10% last year to 14% in 2023.
And it's not just topline growth, we are delivering deals to Freddie Mac, 12% more efficiently than the competition with 100% approval rate year to date.
And we are seeing similar achievements in our appraisal business generating appraisals more efficiently than the competition on growing market share from 6% in Q3 of 2022% to 11% in Q3 of 2023.
It is our long term strategy to take the technology investment and small balance lending and appraisals and apply them to our scaled large loan and property sales businesses.
Our asset management and servicing businesses add a tremendous amount of financial strength to our company.
We are in the process of raising two new funds through Walker and Dunlop investment partners and have significant institutional image for two separate accounts one focused on first trust lending and the other preferred equity.
What we're seeing in this challenging fundraising environment is that investors value walking dogs access to deal flow and banker broker distribution network.
As deals get harder and traditional sources of capital move in and out of the market, having capital Walker and Dunlop controls is becoming increasingly valuable and strategic.
While these deals we are completing today, our tech technically challenging and in many instances they are critical to our clients' success and deepen our long term business partnerships.
I will now turn the call over to Greg to talk through our financials in more details Greg.
Thank you Willy and good morning, everyone.
It's really just described the stability and momentum of the capital markets. This summer we're quickly halted as the 10 year Treasury has rapidly increased causing a continuation of the challenging and volatile market conditions that have persisted since the fed began tightening monetary conditions last year.
As a result commercial real estate transaction activity remained at levels consistent with last quarter and our Q3 23 transaction volume was down 49% compared to the same quarter last year, but generally in line with the second quarter of 2023.
Diluted earnings per share operating margin and return on equity continues to be negatively affected by the impacts of lower transaction volumes.
Our business continues to generate healthy cash flows due to the strength and scale of our servicing and asset management platform.
As a result, adjusted core EPS a metric we introduced this year to help investors better understand our core financial performance held up well at $1 11 per share down only 21% compared to the same quarter last year, while adjusted EBITDA was down only 1% to $74 million.
Well look at our segment performance further illustrates the counterbalance of our business model, the servicing and asset management segment or Sam includes our servicing activities and asset management businesses, both of which produced stable recurring revenues as.
It's really just discussed the same segment has grown significantly over the past several years and as shown on slide seven.
Revenues are up 15% over the same quarter last year to $148 million, while net income for this segment is up 47%.
Revenues for the same segment are tied to long term servicing and asset management contracts that are not impacted by the capital market's instability importantly segment revenues are primarily cash driven and high margin given the scale of our platform.
The operating margin for this segment was 41% this quarter up from 31% in a year ago quarter and adjusted EBITDA for the segment grew 17% to $125 million.
Our capital market segment continues to feel the impact of limited market wide transaction activity.
As a reminder, Q3 2022 was the final quarter of somewhat normal market activity before transaction volumes began it began a steady descent around labor day last year.
As shown on slide eight Q3, 2023 total transaction volume was down 49% year over year with total revenues for the capital market segment were down less only 38% to $118 million.
During the quarter, we saw slight improvement in our gain on sale margin.
Servicing fees on new Fannie Mae loans remained below historical norms again this quarter as they have since the tightening cycle began due to the loan pricing dynamics in a rapidly rising interest rate environment.
We are not expecting that to change anytime soon.
Q3, adjusted EBITDA for the capital market segment was a loss of $16 million compared to positive $1 $3 million in the third quarter of last year.
For the first three quarters of the year transaction activity appears to have settled into an elongated bottom.
In the financial results of this segment are under pressure due to the persistent negative conditions in the market.
The durability of our cash flows, though allows us to be on the offensive while the market cycles through this downturn.
Over the last several months, we brought on sales talent in Southern California, New York, and Atlanta to enhance our existing presence in those markets we.
We are proactively retaining our team and rethinking business processes to position ourselves to gain scale and market share when the cycle inevitably turns.
Given the current macroeconomic conditions, we're keeping a close eye on the credit quality within our at risk servicing portfolio.
And it remains terrific again this quarter.
During the quarter, we settled the fully reserved loss on the last remaining defaulted loan in our portfolio a default that occurred in 2019.
Net charge offs reduced adjusted EBITDA and adjusted core EPS by $2 million, but had no impact on GAAP earnings this quarter because of the default occurred four years ago.
At September 30th there are zero defaulted loans in the at risk portfolio, which includes nearly 3000 loans exceptional performance at this point in the cycle and a further reflection of what really highlighted a moment ago about building, our servicing and asset management portfolios on a foundation of responsible credit.
We only take risk on multifamily loans that's.
That's not to say there are not issues in the market today.
Uncapped floating rate loans or force majorities in a rising rate environment are causing weakness and pushing some loans to default in the multifamily sector.
But those issues are not as concerning for us today.
Only 9% of our at risk portfolio is floating rate debt and every loan must maintain an interest rate cap.
As for force maturities in a rising rate environment, only $3 $2 billion of our at risk portfolio matures over the next 24 months and the median year of origination for those loans was 2015.
It's only five 5% of our at risk portfolio maturing during the next two years and with median the median year of origination in 2015, there has been plenty of NOI growth to support refinancing the vast majority of those loans.
Finally, the weighted average debt service coverage ratio of our portfolio remains over two times.
Consistent with the end of last year.
In short.
The credit fundamentals of our at risk multifamily portfolio continues to hold up exceptionally well and we feel very comfortable that our current loss reserves will cover challenges that may arise within the portfolio.
Turning back to our consolidated results on a year to date basis as shown on slide 11, our total transaction volume is down 55%. While total revenues are down only 20% due to the stability of servicing and asset management revenues.
Diluted earnings per share for the first three quarters of the year is down 56% to $2 25 per share while operating margin is 13%.
And return on equity is 6%.
Adjusted core EPS reduces the volatility of our GAAP earnings by eliminating the large swings that can occur from noncash revenues and expenses and year to date adjusted core EPS is down only 26% to $3 25 per share.
Finally, adjusted EBITDA has held up extremely well in 2023 down just 9% year over year, demonstrating the stability of our business model from recurring revenues.
Our financial results reflect the commercial real estate market that has struggled to digest rapidly tight rapid tightening of monetary policy and liquidity and the associated impacts on the cost of capital and asset values.
Throughout the year, we have seen glimpses of stabilization only to be faced with a new piece of news that leads to leads to renewed volatility and pressure on transaction activity.
The transactions market is cycling and while we are looking for opportunities within that cycle as Willie will touch on in a moment. We are also positioning our balance sheet and operations to withstand an elongated cycle.
At the start of the year, we raised about $80 million through an incremental term loan and our term loan is priced attractively at a blended cost of 250 basis points over sofa and does not mature for another five years.
We also laid out a plan at the start of the year to reduce our controllable costs by at least $15 million and year to date, we have exceeded our goal and saved almost $16 million and now expect to realize $20 million of savings year on year.
We also reduced our head count in April creating annualized personnel related savings of $25 million in the third quarter is the first to reflect the full benefit of that action.
Those steps along with the recurring cash flows from our servicing and asset management businesses and not only stabilized our financial results in this challenging market, but enabled us to increase our cash position to $236 million at the end of the quarter.
We remain focused on building our liquidity, but.
But given the strength of our cash flow and our capital position our board of directors approved a quarterly dividend of <unk> 63 per share yesterday payable to shareholders of record as of November 24 2023.
On our last call we were optimistic about the market and our pipeline is the cost of capital and asset values were stabilizing entering the second half of the year we.
We anticipated those stable conditions would support further improvement in transaction activity and in turn our ability to deliver financial results at the low end of our guidance range for 2023.
However by mid August conditions quickly changed and the 10 year Treasury increased to its highest point in 16 years.
Although the brakes improved last week, we do not expect rates or transaction activity has stabilized again before the end of the year and do not anticipate a meaningful increase in transaction activity in the fourth quarter.
Consequently, our full year financial results will fall below the low end of our guidance range as our fourth quarter financial metrics are likely to fall within a range consistent with the first three quarters.
Our performance this year is giving me even more confidence in the investments we made to build this business since going public and the durability of our business model and associated cash flows.
Walker and Dunlop is focus on multifamily one of the best performing commercial real estate asset classes, our size and ability to move quickly to take advantage of market opportunities, we'll make difficult cost cutting decisions like we did earlier this year and the strong cash flow that our business will continue to generate regardless of the level of transaction activity.
Walker and Dunlop, a great company to invest them today, but more importantly, a great company to invest in for the long term.
When the market recovers, we are positioned to grow quickly and dramatically as has been our track record since going public.
Thank you for your time this morning, I will now turn the call back over to William.
Thank you Greg.
We were at the end of an exceedingly challenging year for our industry and as I mentioned at the top of the call Wmd's financial performance versus the competition is strong.
So what do we see going forward and how do we take advantage of our market position and exceptional team brand and technology investments.
With multifamily maturity volumes, increasing 73% from 2023 to 2024.
There is a large refinancing market to address in the coming year.
There is also another 200 or $2 billion of non multifamily commercial loans maturing next year.
And as banks continue to increased provisions for potential loan losses. It is our continued assumption with the bank pullback will increase the need for debt brokerage services to other sources of capital.
The loan maturities numbers I just mentioned are what is known.
Loans must be refinanced in 2024, regardless of interest rates.
What is unknown is what happens to the rest of the market depending on short or long term rate movements, but here are some of our thoughts.
If rates increase another 100 to 150 basis points. The distress that has emerged in the market during 2023 will increase potentially dramatically.
Scenario would lead to an increase in nonperforming loans distressed sales and expensive forced refinancings.
In this scenario, we would expect GSE and HUD capital to dominate the multifamily financing market.
Investment sales to be predominantly on distressed properties and our fund business to provide significant rescue and opportunistic capital to the market.
If rates remain at their current levels. It is our expectation that the wait and see market of 2023 turns into the I've got to move market of 2024.
We'd expect cap rates to adjust closer to the cost of financing.
Stability, we would expect financing and sales volumes to increase from 2023.
Finally, if rates drop we would expect a significant uptick in annual financing and sales volumes.
We obviously have no idea, which rate scenario will play out in 'twenty four but we.
Have the team and services to help our clients under any scenario.
Over the next two years maturities and our own risk portfolio comprised just 1% of the total multifamily loans maturing.
So our team is focused on winning every piece of business, we can from the competition.
During the third quarter, 74% of our refinancing activity was on new loans to Walker and Dunlop servicing portfolio, reflecting the people brand and technology to differentiate our platform.
And our last earnings call I ran through the drive to 'twenty, five and how we could achieve our goals in today's market environment.
And while the macro environment has not improved since that call.
<unk> focused on achieving the drive to 'twenty, five and executing on the underlying strategy.
The expansion of our affordable housing capabilities with the acquisition of tax credits indicator Alliance capital in 2021 is an enormous addressable market with fantastic growth drivers that will fuel additional growth in our core debt and sales businesses.
Our asset management business, which I mentioned is generating over $110 million of annual revenues only five years. After we entered it.
<unk>, great growth opportunities in distressed and stable markets.
And our technology investments and G O finding noto are transforming our small balance lending an appraisal businesses and showing great promise for growth in those two business lines as well as the opportunity to accelerate growth and reduce costs in our scaled large loan and property sales businesses.
And the underlying goal of the drive the 25 is $2 billion in revenues and $13 per share of earnings.
Those numbers still far off given our current financial performance. We know we have the team in services to achieve them and we will continue pursuing the drive to twenty-five until we do.
The Walker webcast, which just celebrated its 10 million to view on Youtube has grown and extended the Walker and Dunlop brand in ways, we never imagined.
Along with 10 million views on Youtube. The webcast is ranked in the top one 5% of global business podcasts, meaning that we are in the ears and minds of our clients on a consistent basis.
I want to end by saying these are challenging times for many of our industry and for some of our clients.
It is our responsibility to provide our clients with the very best counsel capital and execution capabilities possible. When we built this company to do just that.
The financial metrics I showed at the top of the call demonstrate our management team built a business that is managed through these challenging markets as well or better than any competitor firm.
And that takes discipline that it takes focus and that takes execution each and every day.
Thank our team for all they do I also want to thank our investors for their continued confidence in Walker and Dunlop and I want to thank all of you for joining us on this call today and for your continued interest in our company with that I'd like to ask the operator open the call for any questions. Thank you.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again that is star one to signal for a question and well pause just briefly to assembler.
Q.
And we take our first question from Jade Rahmani with K B W. Please go ahead.
Yes.
Thank you very much I wanted to start off with a question around the industry and some news. This week. It was reported that a multifamily broker had some issues with loan documentation and other things specifically with Freddie Mac. In addition, there is some chatter that as a result of GSE.
Cracking down on deals following a broker can you. Please comment on how if at all of this impacts W. P.
Hugh.
Outside third party brokers and overall, how you see this issue.
Good morning, Jade Thanks for joining us.
So first of all.
I have only read what you have read so.
There have been articles about.
Freddie Mac.
Stopping accepting of loans from a brokerage firm, which sends allowance through a number of optical lenders into Freddie Mac.
And that they can no longer submit loans.
The aftermath of that so I don't know anything further about the investigation and what has come out as it relates to that brokerage firm.
It's very clear, though that both Fannie Mae and putting back sent out notes this week.
Putting if you will new restrictions or oversight on any loan that has been brokered into either a fannie Mae dust lender or a Freddie Mac optical lender.
The implications to WMD.
Are minimal we take less than 10% of our deal flow through brokers.
We used to be all broker based in over the last.
15 years, or so and built out our direct sales force.
So.
Over 90% of our loans are originated by bankers and brokers at Walker and Dunlop.
And we will not be subject to that additional scrutiny or oversight by Fannie and Freddie.
Some of our competitor firms as you know Jade received a very large volume of their deal flow.
Through both broker networks and in some instances through JV partners, who do not have agency licenses and so I would imagine that that change in the pre review that on the Fannie Mae side, particularly all brokered loans will go through will slowdown in deal flow and make it.
A little bit more challenging for brokered loans to get underwritten and closed.
So although it's early to say might this be an opportunity for it.
<unk> gained market share and further secure expanding with the GSE, particularly perhaps with Freddie Mac.
I would say look where we are.
We're always focused on that Jade I would say in the New York area, where the subject firm is based presents a very significant opportunity because they have sent significant deal flow through competitor firms of Walker and Dunlop.
And so our team in New York.
Should have an opportunity to increase volumes.
And then the only other thing I would say on that is that.
As you well know the New York market.
<unk> has been a market that the agencies havent done that much lending.
But if you think about signature bank no longer being there New York community Bank, having gotten a lot of brokered loans from the from the subject firm.
You would think that there will be a pullback from bank capital and if the agencies can get their arms around the underwriting characteristics of New York that'd be the opportunity to increase volumes.
That makes sense turning to multifamily more broadly.
Just trying to parse through our remarks.
I guess two related questions first would be on the interest rate outlook.
Considering the magnitude of that issuance that the federal government has to undertake to finance itself as well as replace maturities.
Let's say the outlook for the 10 year is to remain here and maybe up to five 5%.
However, if the fed is done there could be less volatility in fixed income and therefore the spread.
Being applied to commercial real estate loans might have an opportunity to narrow or do you think that alone would be enough to spur an increase in transaction volumes that would be number one and number two would just be with respect to multifamily credit performance clearly <unk> crowd.
Credit performance is pristine, but with respect to your comments about if this lasts.
Longer than expected do you anticipate any distress to emerge in multifamily.
So.
Hey.
Clearly as it relates to rates.
No clue.
Shall see how that plays out.
I I will just as an anecdote say that we had a.
<unk> and senior executive Offsite, two days ago, and I went through the various scenarios and asked for a show of hands.
No hand went up when we said rates go up a lot of hands almost everyone's hands went up when we said rates stay relatively the same in the band of sort of $4 15 to five two.
So I think that that that's one little poll of our senior executive team and board take from that whatever you want to play into it but obviously nobody in that room has any real insight.
The other thing that I would say to that is it not so much the spread.
On the cost of financing as you know spreads on agency paper had been very tight throughout 2023.
It says that investors like the relative spread you can get from buying agency paper over just buying a 10 year bond or a two year bond.
The real spread that is going to drive market activity is the spread between cap rates and interest rates.
And as we saw in September and October the spread between cap rates and interest rates blew out.
As rates rose.
So it's very clear that.
Commercial real estate is driven by the 10 year Treasury treasury not by the fed funds rate.
Two thirds of commercial real estate debt is fixed rate.
Great debt, therefore, it's going off of a treasury, it's not going off a sofa. So as the tenure moved and blew out that spread between multifamily cap rates and the cost of financing got to a spread that was too wide for any buyer.
To say I'll go by that asset put negative leverage on it at 100 to 150 basis points and due to rent growth and potential cap rate compression over my whole period I'm going to get a good return on that by.
So that's what that's what.
Froze the market that movement in the 10 year and cap rates being in high.
High fours low fives.
So until that spread between the cost of financing and cap rates closes and so then the question would be rates come down you can get deal volume coming back cap rates move up you're getting significant value destruction in the market.
Once you get that labeling if you will you can get transaction volumes coming back that calculation. If you will that recalibration of cap rates to interest rates has historically taken about a quarter.
So what you need that happened, which we have not happened in any quarter through 2023 is rates to stabilize and cap rates to then move according to where rates are and so if you play that out for 2024, if you were to get rate stabilizing somewhere between a <unk> and a five.
Sent 10 year treasuries, you could then get cap rate movement to make it so that the acquisitions market is pricing assets at either slight negative leverage or potentially positive leverage depending on how far cap rates move and that's when you're going to get transaction volumes on the sales side coming back and clearly the commensurate refinancing volumes that would come.
From an acquisitions market.
That's a great answer thanks framework.
If you find that your question has been answered you may remove yourself from the queue by pressing star two we go to the line of Kyle Joseph with Jefferies. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
Wanted to go back to the agencies.
Obviously they have been.
Utilizing lessen their cap that sounds like thats, a lack of demand not a lack of desire to put capital to work there.
I think based on my math, they've been easing roughly two thirds of their cap year to date.
How does that compare to historical levels and given the kind of outlook for refi activity to improve into 'twenty. Four would you anticipate the GSE is moving back towards their cap rate.
So kind of how it compares to previous times. Unfortunately, I'm old enough to remember all of this stuff specifically.
If you think about the great financial crisis, when all other capital providers moved out of the market, Fannie and Freddie and HUD stepped into the market and their volumes in percentage market share went up significantly, but we were in a decreasing rate environment, which meant that everybody who has a property that they wanted to either refinance or go.
By and there wasn't a lot of acquisition activity during the Dfc, particularly 2008 2009.
They had capital and Fannie and Freddie, particularly we're able to deploy that didn't have caps back then but they have they can deploy significant volumes of capital fast forward to the pandemic. The exact same thing happened pandemic. Other capital sources moved out of the market Fannie and Freddie moved into the market and volumes went up you may recall.
That Walker and Dunlop was the largest multifamily lender in the United States in 2020 that was due to Jpmorgan and Wells Fargo to ahead of US in the league tables stepping out of the market and Walker and Dunlop stepped in with agents and capital. The difference. This time is that we are in a raising rate environment. Therefore, all of those refinancings that happened.
In 2021 rates went down and happened at 22009, when rates went down or not coming for refinancing in this market.
So what you have set up is that the agencies should be the dominant source of capital in the market today, except in a raising rate environment. There just isn't that much demand for their capital. So now go to 2024 first of all we are talking extensively we and the industry with the regulator to keep Fannie and Freddie is caps.
At their current $75 billion level for each one of them or 150 billion combined.
Thinking that volumes will go up in 2004, as we get hopefully rate stabilization. That's 0.1, we don't know what the regulator will do but it's our hope that the regulator says look 24 will be a higher volume year than 2003, let's leave them with the capacity that they had this year, even though they won't use all of it. The second thing is that refinancing number that I put forth.
Only <unk> $75 billion of multifamily loans matured in 'twenty three that number steps up precipitously in 'twenty for those deals Boston get done.
So the agencies are positioned well to do those loans.
And the issue there is how much of them are refinanced and how many of them hit the wall, which then requires potentially either a foreclosure on the loan a sale of the property or some other type of structured deal rather than just a straight out.
Trust refinancing.
And then the final thing is if you get any kind of stability where cap rates move as I said in my comments, there's a lot of dry powder sitting on the sidelines waiting to get into this market. The issue with it is a lot of that capital is waiting for distress in the distress just hasnt shown up in 'twenty three so if distress starts to come in 'twenty four and there is.
The opportunity for people to start deploying that capital you would be able to put on new loans at lower bases in the properties when people move in to try and take advantage of a of a distressed market should arrive final thing I would say that Greg underscored is just that we have a very very low vol.
<unk> loans maturing in 2024 as well as in 2025, so what that means for US is it's great from a credit standpoint at Walker and Dunlop, We don't have a lot of opportunities. If you will for loans to hit the wall because of poor performance and because of high refi volumes the challenge as I underscored in my comments.
I used to go out and find those loans and in Q3, 74% of the refinancings that we did at Walker and Dunlop were loans that we got from competitor firms and finance for Walker and Dunlop, that's the opportunity for us into 'twenty, four and 'twenty five.
Really helpful perspective, Thanks, and then just one quick follow up I mean, obviously, you guys had kind of a phenomenal job growing your servicing portfolio, but given where.
Call It seven months out from Philly Valley, and more rumblings of bank capital requirements.
On Msr's.
Is that a bigger opportunity in your mind now or potentially accelerate growth there, particularly we've been hearing a lot of bank stepping away from the red the MSR side of things, but just wanted to get your perspective more on the commercial side.
So the you know the growth of the servicing portfolio was all related to the growth in origination volumes.
As you know just if you look at what we're originating as it relates to quarterly origination volumes at these lower levels, which Greg just walked through if were in a band of doing $8 billion to $10 billion of total transaction volume on a quarterly basis I. Just greg's number was we've only got $3 8 billion in our at risk portfolio rolling off in the <unk>.
Two years. So you will continue to add loans and MSR as to the servicing portfolio.
But significant growth in the servicing portfolio is going to come when those quarterly volumes moved from eight to 10 10 to 12 from 12 to 16 and from 16 to 20 and the exciting part for US is we know that's going to happen.
Question is when I think one of the one of the things that are.
As CEO of this great firm I have a lot of competence in is we don't have to be in the lab trying to figure out how to design the iPhone and 16 to get people to go buy the next.
Generation of technology.
We don't have that problem, we know that we have the bankers and brokers brand and services at Walker and Dunlop that when demand comes back into the market, we will be able to meet that demand. We have the people we have the services and so really it's a matter of keeping the team focused doing every piece of business. We can now.
But we know as we saw in 2010 and 11 and 12 after the G. F C. When the market heals and those cap rates and interest rates come together to a point, where the market starts to transact we are going to be positioned exceptionally well.
Great. Thanks, so much for answering my questions really appreciate it.
Thanks Kyle.
Our next question comes from the line of Steve Delaney with JMP Securities. Your line is open.
Good morning, everyone and Willy Thanks for your clear and candid comments this morning.
I think appropriate for the market we're in.
The thing that was most interesting to me.
Was the.
Creative idea that Youre thinking about two new funds that you would raise I assume with.
Partners asset management partners, you mentioned prep and debt could you just comment about those maybe a little more I am.
Not sure Youre at the point right now you can mend.
Mentioned, who your partners might be but anything you could add on that and then I have one follow up related to that thank you.
Yes, Steve.
I think you can appreciate because we are in the fund raising mode I have to be very careful as it relates to quote unquote promoting those funds.
So I can't go much deeper into exactly what part of the market they're focused on the.
The outline I put into our script was as you can imagine a heavily scrutinized by our lawyers to make sure that I was in no way promoting the funds.
But what I would underscore.
Is this not speaking specifically to the funds as I said, what we have seen is that our access to deal flow through our banker or broker relationships with the market is very attractive from an investor's perspective.
Unlike some of our competitor firms, who have incredible brands and the ability to raise volumes much higher than Walker and Dunlop would ever contemplate on the asset management side.
All of that deal flow is being brokered into them and they are being bid off against other investors other people with capital. The fact that we all have access to the clients makes it so that we can find the deals quicker and in many instances are not being if you will bid off against other capital sources, because we're coming in with what you would deem sort of rescue.
Capital and so that's an important piece of the value proposition that Walker and Dunlop.
Interesting and.
Jade and I and others cover a group of 25 commercial mortgage Reits. If you can believe it's it's it's that many and obviously, while theyre not multifamily focus they probably should have been more.
But I think the same characteristics.
Characteristics or apply everywhere.
What we're seeing is a.
Kind of a loan to own strategy or a need for these companies on their five rated filed a tick.
Ratings right risk ratings, yeah, a lot of fives, right and they've already put in big reserves to me. There is seems to be this amazing opportunity to step in.
And actually buy loans.
Sort of a loan to own our strategy.
And we're seeing it we're seeing that play out, but I don't sense that it's really institutionalized yet, but theres an awful lot of public data.
Their decks, they've just been reporting in the last few days. So it just strikes me that there's this tremendous opportunity for external opportunistic external capital to come into those situations and heck. If it's if we're seeing what we're seeing Justin twenty-five little commercial mortgage Reits the opera.
<unk> with within the commercial banks has to be multiples of that so I applaud what youre doing.
The market needs, what you and your partners are focused on I can I can assure you that.
The one thing that I would say on that Steve so that new and Jade and others on this call.
No I was thinking about it we see the exact opportunity that youre talking about the one thing that I would put forth is that.
The reason, we fit so well today is because we haven't been the type of investor to say, let's either use our own balance sheet or our own capital to go take 100% of the risk on making that bet on that deal that asset that opportunity and so what investors should expect.
Specter of Walker and Dunlop is to raise funds with other People's capital do co investments to then meet our clients' needs and that will drive increased deal flow at Walker and Dunlop and will create additional asset management fees, but we are not the ones to look at 2024 and say huh.
<unk> opportunity to go all in and take the commensurate risk with that it is not the way we built the company and we're not going to go off of that more conservative risk strategy, even though we see exactly the same opportunities you just identified.
Yes totally understood.
Use O P M and earn your fees and and get paid for your expertise. Thank you for the color Willy I appreciate it.
Thanks, Steve.
Once again that is star one to signal for a question and we'll go next to Jay Mccanless with Wedbush. Please go ahead.
Jay I think you're on mute.
Here, we go so that funding will button on the phone sorry about that.
Okay.
[laughter]. So my first question is if you're in that rate environment, a range that you talked about Willie.
If rates are stable does that potentially help HUD origination volume going into next year makeup for some of the Walsh business you guys haven't been able to get this year.
I would hope so Jay let me, let me dive into that question a little bit deeper.
Our HUD origination volumes, which have come down quite significantly over the past two years.
Art due to too.
Significant factors.
And I want to underscore we know we are not holding up in that space and we need to our team knows that we know what we have lost the market share in the HUD space and we need to gain that market share back.
One hot originations in both 'twenty, one and 'twenty two the other large component of our HUD volume was construction loans. We are the largest HUD deed for construction lender in the country. We have the very best HUD D for construction team in the country.
That was a big component to our HUD volumes in 'twenty, one 'twenty two I.
I don't need to tell you that construction lending has gone through the floor in 2023 due to cost due to rates and due to a sense of oversupply in many of the high growth markets. So what we have is a market in 2003 that dislocated on our two biggest products.
<unk> and D Force. So we have an exceptional team what we need to focus on is more of the standard refinancing market, which is called $2 23 apps, we need to get volume out of $2 23 at refinancings and hard we will see that construction pipeline continue to both hold in <unk>.
And grow.
There is a lot of there are a lot of investors today, Jay that are looking at the market and saying multifamily starts in 2022 were around 550000.
Multifamily starts in 2023 are I've heard people talking about dropping down to 450000 given.
Given the backlog and the starts that went into the ground. This year I've also heard people bring that number down lower than that two or $3 50 number but what is projected for 2024 is only 250000 units.
That lack of supply that is starting in 'twenty, three and 24 will present, a fantastic new delivery market for 25 and 26.
So what you should see those developers who have the capability and have a good piece of property in a underserved market to put shovels into the ground in 'twenty four 'twenty five and deliver in two great markets and 25 and 26, So I would expect us to see Hudson before volumes increase in 2024.
Sure.
But that's the reason we fell down in the league tables in 'twenty, three and we and our team are extremely focused on getting those numbers up in 'twenty four.
Okay.
Very good.
And youre not the only.
Management team, we've heard talking about looking past what happens in 'twenty for maybe 25 for better market and 25 and 26 is that part of the reason that you think there is going to be kind of a reset in 'twenty four as people start to evaluate look look at those new opportunities.
It sounds like.
You have and the management team has a pretty high degree of optimism in terms of volumes getting better in 'twenty four.
I guess is that just a function of what you know is coming from a refinance standpoint or do you believe you're going to be able to take market share in certain areas to grow those volumes.
I want to be really clear, we started 23 with optimism that rates would stabilize and volumes would come back.
And neither thing has happened so I do not want to be misinterpreted as saying that we think that volumes are going up in 2024. We are right now planning for a redo of 'twenty three in 2004, we go above that fantastic, we're very focused on it and that refi number I put out there.
Should drive an increase in volumes in 'twenty four.
We've got a war in Europe, we've got at Warren Israel. We've got are threatened in China in Taiwan, We've got a presidential election, and we've got a physical.
Problem in Washington of printing.
More treasuries than the market can absorb that all could have significant factors on the 2024 market.
I'd love to see all of those things go away.
And I'd also love to see US have some type of leadership in Washington, but said that we're not going to be having Janet yellen issue a trillion dollars of debt every quarter.
The nice part of that is that there is actual focus on that now.
The nice part of that is that whomever becomes president of the United States in November of next year is going to know that this goal.
Outlook for the United States government must change.
But unfortunately, we have two people right now is the two candidates that looked like they're going to be the nominees of the Republican and Democratic parties that neither one of them have shown any interest at any time and focusing on that issue.
So what I want to be really clear is the dynamics of the commercial real estate industry would tell you that you should in a stable rate environment have volumes go up in 'twenty four.
But youre also talking to a company into a management team that has gone through a 'twenty three where every time, we thought we were going to get stability stability did not appear.
The final thing to it is commercial real estate is a slow rolling industry, Greg talked in his comments about us resolving a loan that defaulted in 2019 in 2023.
So I think one of the other things as you watch CNBC in the morning, and everyone's talking about office or this and that and back in May and July everyone's sitting there, saying you know this is going to come crashing down on bank balance sheets.
Be a massive massive issue this is a slow rolling problem.
Banks have plenty of capital to deal with this as I have said for a very long period of time. This is an earnings issue for banks, it's not a capital issue for banks.
The same thing is going to happen in commercial real estate, where 23 has been a wait and see market.
It is our expectation that 'twenty four is I've got to go market people start to move.
There are a lot of factors that will play into whether 24 becomes I've Gotta go market from a wait and see market.
Got it.
Maybe turning to <unk> for a minute.
To see getting good numbers, there I guess maybe.
What youre thinking about for that part of the business for 24 is there anything positive or negatively we need to be thinking about as we model ahead.
So as I I mean first of all the alliance acquisition has been a home run of an acquisition couldnt be happier with the company couldnt be happier with the management team and couldn't be happier to what it has gone to Walker and Dunlop strategically in the affordable housing space.
The second thing is that.
The the tax credit.
Syndication market the amount of tax credits being allocated in the federal budget and there are many many many.
Governors senators from across the country, who the number one issue on their minds as affordable housing.
Housing affordability.
And so figuring out how light tech and low income housing tax credits and have contracts that come out of hard all play into the affordable housing equation and the ability to supply more affordable housing is a very very important issue for 'twenty four 'twenty five 'twenty six we are extremely well positioned there.
And I think that given the breadth of the Walker and Dunlop platform.
Our ability to increasingly grow the size of our funds that we're raising around our tax credit business is very present.
And the second thing is the dynamics of that market.
Very strong growth drivers over the next several years.
Because if you look at where supply has come into the multifamily market. It has come in at the high end if not at the bottom end or in the middle of the market and so there is still.
Dramatic growth drivers in the affordable housing space, and we feel extremely well positioned with alliance to take advantage of that.
Okay. That's great. Thank you thanks for taking my question.
Thank you Jack.
Well return to the line of Jade Rahmani with <unk> W. Please go ahead.
Thanks, very much I wanted to ask about the Devil is in the platform and its relative size.
How do you see the greatest growth opportunities would it be in small balance and affordable housing.
C C pace as.
As a meaningful opportunity for.
Or is it on the asset management side is raising those funds, perhaps pursuing M&A there.
So jade.
It's a very appropriate question, we just ran through exactly that with our board and management team at our annual strategic Offsite.
The tangible addressable market in multifamily.
Is enormous and even though Walker and Dunlop is the largest agency lender in the country. The third largest multifamily lender in the country and the sixth largest provider of capital to commercial real estate industry, which all if you think about who we compete within those markets and I was having those rankings is pretty great.
We're still of the total multifamily revenues on an annual basis. We are still I think the number that came out of the strategic Offsite was less than 2% of total revenues out of at the tangible addressable market in multifamily.
The largest area that we play in today as it relates to annual revenue opportunity is in the asset management space.
And as you know relative to other asset managers and multifamily we are tiny.
So we clearly see great growth drivers in the asset management business, but.
But the other piece to it is if you think about the team that we have in place and our rankings when transaction volumes come back.
We're like we're like a bowling narrowed it is loaded ready to explode.
Explode in the sense that we have the team we have the brand we have the client relationships and so one of the great things as it relates to overall growth for US is I mean do you think about our investment sales team. We have added to our investment sales team since they did $20 billion of investment sales in 2022.
So that team that we have on the field can easily expand from $20 billion to $25 billion to $30 billion when and if the market comes back.
So the I feel extremely good as it relates to overall growth drivers of the existing businesses. We are in but then we have the opportunity to scale in some areas of the market that have extremely large tangible addressable markets, where we today are very small like small balance lending like asset management like appraisal.
Yeah.
Thanks very much.
Thank you.
And that was our final question for today I'll turn the floor back over to Willy Walker for any additional or closing remarks.
I want to thank all of.
The analysts on the call today for their questions and coverage at WMD.
Thanks again to our team.
For all you do every single day, and thanks to everyone who listened in on the call. Today. Appreciate your interest in Walker and Dunlop and I wish everyone. A fantastic day. Thank you.
Thank you. This does conclude today's teleconference. We thank you for your participation you may disconnect your lines at this time.
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