Q3 2024 Walker & Dunlop Inc Earnings Call
Please standby.
Speaker Change: Good day and welcome to the Q3, 'twenty 'twenty four Walker and Dunlop earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Kelsey Duffey. Please go ahead.
Kelsey Duffey: Thank you rich good morning, everyone. Thank you for joining Walker and Dunlop third quarter 2024 earnings call I have with me. This morning are chairman and CEO, Willy Walker and our CFO, Greg Borkowski. This call is being webcast live on our website and a recording will be available later today on their earnings press release and website provide details on accessing the archived webcast.
Kelsey Duffey: This morning, we posted our earnings release and presentation to the Investor Relations section of our website Www Dot Walker Dunlop Dot com. These slides serve as a reference point for some of what Willy and Greg will touch on during the call. Please also note that bill referenced the non-GAAP financial metrics adjusted EBITDA and adjusted core EPS. During the course of this call. Please refer to the appendix of the Earth.
Kelsey Duffey: Earnings presentation for a reconciliation of these non-GAAP financial metrics.
Kelsey Duffey: Investors are urged to carefully read the forward looking statements language in our earnings release statements made on this call, which are not historical facts may be deemed forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Kelsey Duffey: 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 or detailed information about risk factors can be found in our annual and quarterly reports filed with the SEC.
Speaker Change: I will now turn the call over to Willie.
Willie: Thank you Kelsey and good morning, everyone.
Willie: Our third quarter financial results reflect an improving market.
Willie: From healthy fundamentals in commercial real estate that are attracting capital to the market and driving the increase in acquisition and financing activity.
Kelsey Duffey: So our expectation the market continues to improve over the next several years that our investments in the people at Walker and Dunlop, our brand and our technology position us very well to grow our financial result on the top and bottom line.
Kelsey Duffey: Are you expanding our market presence in the commercial real estate financing and services market.
Kelsey Duffey: We closed 11 $6 billion of total transaction volume in Q3, 36% from Q3, 2023 and up 37% sequentially from Q2 2024.
Kelsey Duffey: It increased deal flow and revenues grew diluted earnings per share, 33% year over year to 85 cents per share.
Kelsey Duffey: Adjusted EBITDA and adjusted core EPS, which strip out noncash revenues and expenses are both up 7%.
Kelsey Duffey: Shown on slide $411.6 billion of Q3 transaction volume included $3 $6 billion of property sales up 44% year over year.
Kelsey Duffey: Property sales volume grew from $1 2 billion in Q1, the $1 5 billion in Q2 to $3 6 billion in Q3.
Kelsey Duffey: With a healthy Q4 pipeline shows a terrific trend in multifamily sales activity.
Kelsey Duffey: While these volumes are still well below our pre tightening peak in Q2 of 2022.
Kelsey Duffey: Our national presence and exceptional brand will allow us to scale transaction volume significantly without adding head count.
Kelsey Duffey: Fannie Mae and Freddie Mac were sluggish market participants in the first half of the year.
Kelsey Duffey: But those step back into the market in the third quarter.
Kelsey Duffey: We closed $3 5 billion of loans with the GSE is in Q3, but welcome pick up in volume.
Kelsey Duffey: Year to date, the GSE has deployed a combined $68 billion and up.
Kelsey Duffey: Plenty of lending capacity in Q4 before they get close to their 140 billion dollar 2020 for lending caps.
Kelsey Duffey: GSE financing pipeline is robust setting us up for a strong finish with both Fannie and Freddie.
Kelsey Duffey: We will continue booking noncash MSR is to drive future cash earnings and adjusted EBITDA.
Kelsey Duffey: The three factors that can contribute to an increase in MSR revenue for higher GSE loan volumes higher.
Kelsey Duffey: Higher servicing fees and longer loving duration.
Kelsey Duffey: We saw a meaningful uptick in GSE loan volumes in Q3.
Kelsey Duffey: That's such MSR revenue was up 23% year over year.
Kelsey Duffey: The other two variables average servicing fee and loan duration did not change significantly in Q3 from the previous several quarters.
Kelsey Duffey: Below our historical averages.
Kelsey Duffey: Servicing fees, which compressed dramatically as interest rates and borrowing costs rose should revert to historic levels as the yield curve and rates normalize.
Kelsey Duffey: With regard to duration borrowers had been picking shorter duration typically five years for their borrowing with the belief that rates will come back down.
Kelsey Duffey: Depending on the rate environment in the U S government's fiscal outlook.
Kelsey Duffey: The assumption that borrowers start going along again and increasing wallet in terms back to 10 years.
Kelsey Duffey: Given that mortgage servicing rights of the present value of future servicing income.
Kelsey Duffey: Increases in loan volume with a reversion to normalized servicing fees and term should have a significant impact on wmd's revenues GAAP earnings over the next cycle.
Kelsey Duffey: Have you indeed affordable housing is an important growth area.
Kelsey Duffey: Fannie Freddie and HUD focus on affordable lending and the need for low income housing tax credits expands.
Kelsey Duffey: Lending volumes grew over 200% to $272 million in Q3.
Kelsey Duffey: And then in terms of you know.
Speaker Change: Purpose mix is there any kind of shift.
Speaker Change: Between refinance and purchase deals.
Speaker Change: <unk>, I guess compared to longer term averages.
Speaker Change: No. The one thing that we've been very focused on as we head into Q4, particularly with the recent.
Speaker Change: Run up in rates is how much of the pipeline is refinancing activity, which typically is.
Speaker Change: Perm, driven where someone has to refinance the property versus acquisition financing.
Speaker Change: And as we look into it we feel very good that the Q4 pipeline is overweighted towards refinancing activity versus acquisition activity, but then I would also say as we look at the acquisition pipeline.
Speaker Change: As I, just said acquisitions are still moving forward and people are not pulling properties from the market given the run up in rates.
Speaker Change: Got it very helpful color. Thank you.
Speaker Change: Well go next to Jade Rahmani with K B W.
Speaker Change: Jade, we don't have yet.
Speaker Change: Mr. <unk> your line is open.
Speaker Change: So nothing J&J.
Kelsey Duffey: He may be on mute.
Kelsey Duffey: Can you hear me now yeah.
Speaker Change: Yes, we can.
Kelsey Duffey: Yeah.
Speaker Change: Okay, sorry about that what do you see happening if the 10 year Treasury goes to 5%.
Speaker Change: I am curious as to how your game out that scenario. There are some puts and takes with respect to transaction volumes servicing portfolio duration as well as implications for the multifamily market.
Kelsey Duffey: Likely single family homes would.
Kelsey Duffey: We have lower demand.
Kelsey Duffey: Yes, Jay.
Kelsey Duffey: Yes.
Speaker Change: We haven't sort of if you will gain that out as you as you just said.
Speaker Change: We're obviously watching where rates go.
Kelsey Duffey: We saw a significant increase.
Kelsey Duffey: Increase in rates yesterday post election.
Kelsey Duffey: It's impossible for us to predict where rates are going to go I would say that there is a general sense that we are at the beginning of the next cycle, but after two years of tightening rates.
Kelsey Duffey: It is likely that we're going to get another cut from the fed funds rate and that we should remain in a relatively stable rate environment and should that change, we'll obviously adjust to it as everyone who is an investor in Walker and Dunlop saw over the last two years, we adjusted very significantly too dramatic chain.
Kelsey Duffey: <unk> in rates.
Kelsey Duffey: We were seeing as you well know 75 basis point increases in the fed funds rate on a on a on an every other meeting or every meeting basis.
Kelsey Duffey: There is no project into that but as you also focus on our business is really much more based off of the long bond and the 10 year treasury than it is off of fed funds rate.
Kelsey Duffey: But we will react to whatever interest rate environment comes our way you do underscore in your comment.
Kelsey Duffey: That as rates go up that gap between multifamily and single family would only increase which means that people will remain renters, which will mean that occupancy will stay high.
Kelsey Duffey: And as you burn through the new deliveries, which we underscored in our call that put downward pressure on rents, albeit we still are going to see national rent growth in 2024 with an unprecedented volume of deliveries.
Kelsey Duffey: That all bodes well to the underlying fundamentals of multifamily, which should continue to attract investment dollars, which then drives investment sales activity, which then brings capital to the market and as capital comes to the market cap rates go down and the value of assets in flight. So.
Kelsey Duffey: Hard to predict we never do actually predict where rates are going to go.
Kelsey Duffey: I have been saying for some time that the 10 year auto settle in to a as we get into a normalized yield curve.
Kelsey Duffey: Somewhere between four and 450, we're obviously at the high end of that range with the 10 year closing at 441 yesterday.
Kelsey Duffey: I.
Kelsey Duffey: The encouraging thing is that our.
Kelsey Duffey: Our clients are still transacting and as I said to derek's question a moment ago.
Kelsey Duffey: Not seeing the Q4 pipeline fade away as we've seen rates go up precipitously.
Speaker Change: Thank you very much on the GSE side typically the fourth quarter is seasonally the strongest quite a meaningful uptick.
Speaker Change: And yet I think one of your competitors noted.
Speaker Change: Some pressure on the throughput the ability to get loans closed because there's now so many requests coming into the gse's and theyre looking to be more active so there they've gone from being kind of in a holding pattern to having to ramp up our ability to close loans do you see that being a gating factor in the fourth quarter.
Kelsey Duffey: Okay.
Kelsey Duffey: I believe our competitor that made that call on their earnings call is a much larger Freddie Mac up to go lender than they are a Fannie Mae dust lender and as you know Jade and the optical business those loans are underwritten by Freddie Mac and Fannie Mae dust.
Kelsey Duffey: The loans are underwritten by the Fannie Mae dust lender partner.
Kelsey Duffey: And so I would just say to you that on the Fannie Mae side of things, we control our destiny a lot more than we would on Freddie Mac and so I would not echo what our competitor firms said as it relates to the ability to process business.
Kelsey Duffey: Thanks.
Speaker Change: That's good color and good to hear and then just finally on these tax syndication business. It sounds like there was maybe a delay in recognition of placement fees and you expect that to be.
Speaker Change: Correct itself in the fourth quarter, but how can you touch on your broader outlook for that business say in 2025.
Kelsey Duffey: Still on a positive trajectory do you expect growth from that business in 2025.
Kelsey Duffey: Yeah.
Kelsey Duffey: We certainly expect growth in that business in 2025 as I said in my comments that it's been an extremely key.
Kelsey Duffey: Consistent.
Kelsey Duffey: Contributor to both revenues and earnings since we acquired alliance.
Kelsey Duffey: Several years ago, and it's a fantastic business.
Kelsey Duffey: Q3 24.
Kelsey Duffey: It's a slow quarter for us due to no syndication activity and no dispositions.
Kelsey Duffey: We are very focused on both of those two things and I have great confidence that in the coming year, we will see that get back on track.
Kelsey Duffey: We've made some significant changes.
Kelsey Duffey: In integrating that business into Walker, and Dunlop and as I underscored with Fannie Freddie and HUD, all very focused on affordable housing.
Kelsey Duffey: And also the low income housing tax credit market needing more capital as one of the primary sources of equity capital for the construction of affordable multifamily properties. We see great. If you will dynamics in that business going forward. The one other thing I would say on that is.
Kelsey Duffey: That business took a step backwards when the Trump administration.
Kelsey Duffey: In 2017 pack that pass the jobs Act and tax reductions at that time, where the corporate income tax came down significantly.
Kelsey Duffey: What has been talked about is either the extension or potentially a decrease in the corporate tax rate from 21% to 20% nothing close to the dramatic change that happened in 2017 as tax rate step down on the corporate level significantly. So if we either saw a 1% modification or a continuation of the tax rates.
Kelsey Duffey: You would think that that business stays in line and doesn't have the step back that it did last time, the corporate tax rate came down as dramatically as it did.
Kelsey Duffey: Yeah.
Speaker Change: Thanks, a lot.
Kelsey Duffey: Yeah.
Speaker Change: Well go next to Steve Delaney with citizens J M P.
Steve DeLaney: Good morning, everyone and congratulations on your strong third quarter.
Steve DeLaney: Obviously transaction volume up very strongly year over year, 36% I noticed though the total revenues, obviously only increased 9%. So it appears there's something going on with the revenue mix or there was an outlier.
Kelsey Duffey: Transaction.
Speaker Change: Maybe last year.
Speaker Change: Just help me rationalize the difference between your your volume of business and your revenue growth.
Kelsey Duffey: Sure.
Speaker Change: Morning, and great to have go ahead Greg.
Kelsey Duffey: Go ahead.
Speaker Change: Uh huh.
Kelsey Duffey: Hmm.
Speaker Change: Look I think Steve the thing to point out is just the balance of our business now between the capital markets platform and the Sam segment, where.
Kelsey Duffey: A significant portion of our revenues are coming from Sam <unk>.
Kelsey Duffey: Sam segment and the transaction activity.
Kelsey Duffey: As an impact that that revenue base until down the road right. When the loan closes you then start to earn servicing fees during the next quarter or so.
Speaker Change: 36% increase in transaction activity.
Speaker Change: Generated the growth that we highlighted in revenues and earnings for the capital market segment, which is in line with what you would expect and generated the 210% growth in net income that we highlighted on the call.
Speaker Change: And so look at it more on a segment basis, and an overall basis, because youre going to get some.
Kelsey Duffey: Some blending of the two segments. When you when you just look at the transaction volume growth relative to our overall business growth got it got it. So it's really not apples to apples that you would you say in the <unk>.
Kelsey Duffey: Mix of where.
Kelsey Duffey: Where you are where you're earning the money within within Sam versus originations.
Steve DeLaney: Okay, but that is yes, but let me let me let me, let Steve just let me Steve Let me just jump in real quickly.
Steve DeLaney: You know our numbers well you know our numbers well enough to know that you have identified one thing that did happen in the quarter, which was we did a large transaction that we made a a less than normal field. It was highly competitive we were very excited we wanted but it had a it had a a big number as it relates to the size of the transaction, but it didn't have a commensurate fee.
Speaker Change: It was a very competitive and getting it so what Greg said is it relative to the overall mix of business is exactly right on the overall business, but as you look into that you identified in that that as it relates to volumes. We had one transaction that was a very large sized transaction, but we did not make a commensurate fee on it given how competitive it was to win it we were thrilled to win it but.
Steve DeLaney: Quite honestly didn't love the fee we made on it.
Speaker Change: I understood that that helps us exactly kind of what I was trying to identify if there was an outlier somewhere in the mix.
Steve DeLaney: Just looking at stepping back Big picture, Willie and I. Appreciate you know, we all know what's going on with rates Youre right now and understand the impact that that can have on your borrowers.
Steve DeLaney: Looking back bigger.
Steve DeLaney: Not so much the election, but.
Steve DeLaney: Let's tie that in I guess when you look the <unk> are so critical to housing and enter your business on a multifamily.
Steve DeLaney: Are there any lingering issues out there from sort of a political standpoint, or just policy standpoint anything.
Speaker Change: It is out there.
Speaker Change: Create problems for the GSE ease as we go down the road that would affect your business yet.
Steve DeLaney: I'll just.
Speaker Change: Without without talking too specifically about the conversations that I have had.
Speaker Change: As you can imagine Steve are.
Speaker Change: We have been in constant contact with both DS and ours, leading up to the election to make sure that whatever the outcome is we have a good sense of any thoughts as it relates to what would happen to the GSE is under a Harris administration or a Trump administration.
Speaker Change: <unk> and all I would say is having spoken to many many Republicans who either were previously engaged with the GSE.
Speaker Change: <unk> or are on if you will a various lists of people who could potentially go in there.
Speaker Change: Everything that I am hearing is quite positive.
Speaker Change: As it relates to a desire to get the agencies out of conservatorship.
Speaker Change: But to do it without.
Speaker Change: A significant market disruption and there was as you well know significant work done in the first Trump administration.
Speaker Change: To work on getting the Gse's out of Conservatorship and I would assume that that work has picked up on in the next Trump administration.
Speaker Change: I would think 2025 is all about taxes.
Speaker Change: And that there really wont be there'll be work done in the background as it relates to potentially getting Fannie and Freddie out of conservatorship.
Speaker Change: The 25 will be all about taxes, and what the new tax bill will be.
Speaker Change: At the end of the year and then I.
Speaker Change: I would think that you start to see some type of real work honestly in 'twenty six 'twenty seven on getting them out of conservatorship.
Speaker Change: And I think the other piece to it is.
Speaker Change: Now that its looking like you will have.
Speaker Change: Oh, a Republican Senate as well as a Republican.
Speaker Change: Our house.
Speaker Change: Who are the chair men or women of the various committees House Financial Services Committee is represented of French Hill was the chairman there and on the Senate.
Speaker Change: Banking Committee, if Kim Scott is the chairman there both of those obviously are TBD.
Speaker Change: Both of those two gentlemen, no well the role the agencies play in the markets.
Speaker Change: And I would think both of them wouldn't look at doing something legislatively.
Steve DeLaney: But at the end of the day, Steve If I had to handicap. It I would think that if Fannie and Freddie get out of conservatorship at any point in 26 or 27, it would be done through an administrative action slash the executive order and not through a congressional.
Speaker Change: Our roots if you will.
Speaker Change: That's just that's just.
Speaker Change: That's trying to project a lot of different things. The final thing I would say is it really will matter, who the treasury Secretary is.
Speaker Change: And whether he or she has.
Speaker Change: Has the appetite to make GSE reform and they're in there.
Speaker Change: Spin out of Fannie and Freddie are priority in his or her tenure as Treasury Secretary.
Speaker Change: Thanks, So much really does.
Kelsey Duffey: Barry.
Speaker Change: Baseball kind of comments that are that are helpful. At this time.
Speaker Change: Well go next to Jamie Cook, Kansas with Wedbush.
Speaker Change: Hey, good morning, everyone. Thanks for taking my questions.
Speaker Change: Really if I could pick up on a comment you made earlier that with rates moving higher I think you said that the pending backlog in the book has not fallen off people are still ready to go get transactions done did I hear that correctly.
Speaker Change: You did.
Speaker Change: Okay, great that's good to hear.
Speaker Change: And then very encouraging what you were saying about the start of a new real estate cycle is there anything besides rates of course that we need to be monitoring that could be headwinds or even potential tailwind does that cycle above and beyond what's going on with rates.
Speaker Change: So as we've talked about in the past Jay there's there's a tremendous amount of equity capital that had been sitting on the sidelines for the last two years.
Speaker Change: That is either going to be deployed or returned to investors.
Speaker Change: And as a result of that I think you've got to watch that.
Speaker Change: And because most.
Kelsey Duffey: