Please stand by. Your conference is about to begin. Good day and welcome to the third quarter 2023 Walker & 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, Melinda. Good morning, everyone. Thank you for joining Walker & Dunlop's third quarter 2023 earnings call. I have with me this morning our Chairman and CEO, Willy Walker and our CFO, Greg Florkowski. 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 archive webcast. This morning we posted our earnings release and presentation to the Investor Relations section of our website, www.walker.com. These slides serve as a reference point for some of what Willy and Greg will touch on during the call. Please note during the call that we will reference the 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 metrics. Investors are urged to carefully read the forward-looking statements language in our earnings release. Statements made on this call, which are not historical facts, may be deemed forward-looking statements within the meeting of the private securities litigation reform act of 1995. Forward-looking statements describe our current expectations and actual results may differ materially. Walker & Dunlop is under no obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, and we expressly disclaim any obligation to do so. More detailed information about risk factors can be found on our annual and quarterly reports filed with the SEC. I will now turn the call over to Willy.

Thank you, Kelsey, and good morning, everyone. I'd like to start this call as I have several Walker webcasts highlighting the trauma and concern that many of our Jewish colleagues and clients have experienced since the Hamas terrorist attacks on Israel. These are exceptionally challenging times with great concern for the state of Israel, its people, and the Palestinians caught in the war on Hamas. We continue 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 anti-semitic behavior, and we must be vigilant in stopping it out anywhere it arises. When I joined Walker & Dunlop in 2003, I looked at the consistent revenues generated by the Company's $4 billion loan servicing portfolio and said to myself, more of that. And for 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. And that strategy has worked, resulting in negligible credit defaults, allowing us to fully benefit from our servicing and asset management cash flows. We do not control the macro environment that has increased rates dramatically in turn the commercial real estate market on its head. We do, however, control building a sustainable business for all cycles and managing through those cycles. As investors in W&D know, we benchmark our growth and success against the bold, highly ambitious, five-year strategic plans we developed and pursue. While our…

Thank you, Willy. Good morning, everyone. As Willy just described, the stability and momentum of the capital markets this summer were 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. Deluded earnings per share, operating margin, and return on equity continued to be negatively affected by the impacts of lower transaction volumes. However, 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. A 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 produce stable recurring revenues. As Willy just discussed, the SAM segment has grown significantly over the past several years, and as shown on slide 7, segment revenues are up 15% over the same quarter last year to $148 million, while net income for the segment is up 47%. Revenues for the SAM 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…

Thank you, Greg. We're at the end of an exceedingly challenging year for our industry, yet as I mentioned at the top of the call, W&D’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, 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 $202 billion of non-multi-family commercial loans maturing next year. And as banks continue to increase provisions for potential loan losses, it is our continued assumption that the bank pullback will increase the need for debt brokerage services to other sources of capital. The loan maturity numbers I just mentioned are what is known. Those 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 and long-term rate movements. But here are some of our thoughts. If rates increase another 100 to 150 basis points, the distress that is emerged in the market during 2023 will increase, potentially dramatically. This scenario would lead to an increase in non-performing loans, distressed sales, and expensive forced refinancings. In this scenario, we would expect GSE and HUD capital to dominate the multifamily financing market, invest in 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 Gotta Move market of 2024. We would expect cap rates to adjust closer to the cost of financing, and with rate stability, we would expect financing and sales volumes…

Thank you. [Operator Instructions] And we take our first question from Jade Rahmani with KBW. Please go ahead.

Thank you very much. I want 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 GSEs are cracking down on deals involving a broker. Can you please comment on how, if at all, this impacts W&D? If you, 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 loans from a brokerage firm, which sends loans 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. I, it's very clear though that both Fannie Mae and Freddie Mac 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 W&D are minimal. We take less than 10% of our deal flow through brokers. We used to be all broker based and over the last 15 years or so it built out a direct sales force. And so over 90% of our loans are originated by bankers and brokers at Walker & Dunlop, and will not be subject to that additional scrutiny or oversight by Fannie and Freddie. Some of our competitive firms, as you know, Jade, receive a very large volume of their deal flow through both broker networks and in some instances through JD 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 brokerage loans will go through, will slow down deal flow and make it a little bit more challenging for brokerage loans to get underwritten and closed.

So although it's early to say might this be an opportunity for W&D to gain market share and further secure it standing with the GSEs, particularly perhaps with Freddie Mac?

I would say, look, 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 & 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 has been a market that the agencies haven't done that much lending in. But if you think about signature bank no longer being their New York community bank having gotten a lot of brokerage loans 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, they'd be the opportunity to increase volumes.

That makes sense. Turning to multifamily more broadly, just trying to parse your remarks, I guess two related questions. First would be on interest rate outlook. You know, considering the magnitude of debt issuance that the federal government has to undertake to finance itself as well as replace maturities, let's say the outlook for the tenure is to remain here and maybe up to five and a half percent. 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. 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 W&D's credit performance is pristine. But with respect to your comments about if this lasts longer than expected, you anticipate I need to stress to emerge in multifamily.

So, Jade, clearly as it relates to rates, no clue. We shall see how that plays out. I will, just as an anecdote say that we had a board 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 hand went up and we said rates stay relatively the same in a band of sort of four, 15 to five. And two hands went up when we said that rates would be cut. So, I think that that, you know, said that rates would be cut. So, I think that that, you know, 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's not so much the spread on the cost of financing. As you know, spreads on agency paper have been very tight throughout 2023. That just 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, not by the Fed Fund's rate. Two-thirds of commercial real estate debt is fixed rate debt. Therefore, it's going off of a treasury. It's not going off of SOFR. So as the 10-year moved and…

That's a great answer. Thanks very much.

[Operator Instructions] We go to the line of Kyle Joseph with Jeffries. Please go ahead.

Hey, good morning, Will and Greg. Thanks for taking my questions. Just wanted to go back to the agencies. Obviously, they've been utilizing less than their cap. That sounds like that's a lack of demand, not a lack of desire to put capital to work there. You know, I think based on my math, they've been using roughly two-thirds of their cap year to date. How does that compare to historical levels and given the outlook for REFI activity to improve into '24, would you anticipate the GSEs moving back towards their cap rates?

So, Kyle, how it compares to previous times, unfortunately I'm old enough to remember all this stuff specifically. If you think about the great financial crisis when all other topical providers moved out of the market, Fannie and Freddie and HUD stepped into the market and their volumes and percentage market share went up significantly. But we were in a decreasing rate environment, which meant that everybody who had a property that they wanted to either refinance or go buy and there wasn't a lot of acquisition activity during the GFC, particularly 2008-2009. They had capital and Fannie and Freddie particularly were able to deploy. They didn't have cap stack then, but they had deployed 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 & Dunlop was the largest multi-family lender in the United States in 2020. That was due to JP Morgan and Wells Fargo, the two ahead of us in the league tables, stepping out of the market and Walker & Dunlop stepped in with agency capital. The difference this time is that we are in a raising rate environment. Therefore, all of those refinancings that happened in 2020 when rates went down and happened in 2009 when rates went down are not coming for refinancing in this market. And then you have, as I just described to Jade, a drying up of acquisition activity based on that gap between the cost of financing and where cap rates are on a lightning basis. So what you have set up is the agencies should be the dominant source of capital in the market today, except in a raising rate…

Really helpful perspective. Thanks. And then just one quick follow up on me. Obviously, you guys have done a phenomenal job growing your servicing portfolio, but given we're called seven months out from Silly Valley and more rumblings of bank capital requirements on MSRs. Is that a bigger opportunity in your mind now or potentially to accelerate growth there? Particularly we've been hearing a lot on bank stepping away from the red, the MSR side of things, but just wanting to get your perspective more on the commercial side.

So the growth of the servicing portfolio is all related to the growth and origination volumes. 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 we're in a band of doing $8 to $10 billion of total transaction volume on a quarterly basis, Greg's number was we've only got $3.8 billion in our at-risk portfolio rolling off in the next two years. So you will continue to add loans and MSRs to the servicing portfolio, but significant growth in the servicing portfolio is going to come when those quarterly volumes move from $8 to $10 to $10 to $12 to $16 and from $16 to $20. And the exciting part for us is we know that's going to happen. The question is when. I think one of the things that as CEO of this great firm I have a lot of confidence in is we don't have to be in the lab trying to figure out how to design the iPhone 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 & 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 GFC when the market heels 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.

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 kind of creative idea that you're thinking about two new funds that you would raise. I assume with partners, asset management partners, you mentioned Pref and Debt. Could you just comment about those maybe a little more. I'm not sure you're at the point right now. You can mention 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 fundraising mode, I have to be very careful as it relates to quote unquote promoting those funds. And so I can't really go much deeper into exactly what part of the market they're focused on. The outline I put into our script was, as you can imagine, 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 broker relationships with the market is very attractive from an investor's perspective. And unlike some of our competitor firms who have incredible brands and the ability to raise volumes much higher than Walker & 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 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 to the value proposition at Walker & Dunlop.

Interesting. And, you know, Jade and I and others cover a group of 25 commercial mortgage rates, if you can believe it's that many. And obviously, while they're not multifamily focused, they probably should have been more. But I think the same characteristics are apply everywhere. What we're seeing is a kind of a loan to own strategy or a need for these companies, you know, on their five rated five ticks, see ratings rate risk ratings, you know, a lot of fives right and they've already put in big reserves to me there's seems to be this amazing opportunity to step in and actually buy loans with sort of a loan to own strategy. And we're seeing it. We're seeing that play out but I don't sense that it's really institutionalized yet, but there's an awful lot of public data, you know, in 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 just in 25 little commercial mortgage rates, the opportunity with within the commercial banks, you know, has to be multiples of that. So I applaud what you're doing. The market needs what you and your partners are focused on. I can assure you that.

The one thing that I would say on that Steve, so that you and jade and others on this call know are thinking about it. We see the exact opportunity that you're talking about the one thing that I would push for is that the reason we sit 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 of Walker & Dunlop is to raise funds with other people's capital, do co investments to then meet our client needs, and that will drive increased deal flow at Walker & Dunlop, and we'll create additional asset management fees. But we are not the ones to look at 2024 and say, huh, massive opportunity go all in and take the commensurate risk with that. It's 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.

Totally understood you're going to use OPM and earn your fees and get paid for your expertise. Thank you for the color Willy appreciate it.

[Operator Instructions]. And we'll go next to Jay McCanless with Wedbush. Please go ahead.

Jay I think you're on mute.

There we go. That funny little button on phone sorry about that. So my first question is, if in that rate environment range that you talked about Willy. If rates are stable. Does that potentially help HUD origination volume going into next year, make up for some of the the law space 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. And our HUD origination volumes which have come down quite significantly over the past two years are due to two significant factors. And I want to underscore, we know we are not holding up in that space and we need to, our team knows it we know it. We have lost the market share in the HUD space and we need to gain that market share back. The reason we have lost market share is the first is the reason for a very strong 2021 HUD print was that we were doing a lot of interest rate reduction loans. So as we were in that low-rate environment we were going back to our historic borrowers and we doing those loans with lower interest rates and that drove a lot of volume for 2021 HUD originations. In both '21 and '22 the other large component of our HUD volume was construction loans. We are the largest HUD D4 construction lender in the country. We have the very best HUD D4 construction team in the country. And that was a big component to our HUD volumes in '21 and '22. I don't need to tell you that construction lending has gone through the floor in 2023 due to costs 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 '23 that dislocated on our two biggest products IRRs and D4s. So we have an exceptional team. What we need to focus on is more of the standard refinancing market which is called 223 Fs. We need to get volume out of 223 F refinancing in HUD. We will see that construction pipeline continue to both hold in place 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 550,000. Multifamily starts in 2023. I have heard people talking about dropping down to 450,000. Given the backlog and the starts that went into the ground this year, I have also heard people bring that number down. Lower than that to a 350 number. But what is projected for 2024 is only 250,000 units. That lack of supply that is starting in '23 and '24 will present a fantastic new delivery market for '25 and '26. So what you should see is those developers who have the capability and have a good piece of property in a underserved market to put shovels into the ground in '24 and '25 and deliver into great markets in '25 and '26. So I would expect us to see HUD's D4 volumes increase in 2024. That is the reason we fell down and building tables in '23 and we and our team are extremely focused on getting those numbers up in '24.

Okay, very, very good. Thank you for the comprehensive answer on that. I guess the, and you're not the only management team we've heard talking about looking past what happens in '24, maybe '25 for better market in '25 and '26 is that part of the reason that you think there is going to be kind of a reset in '24. As people start to evaluate, look, look at those new opportunities. Because it's, it sounds like you have in the management team has a pretty high degree of optimism in terms of volumes, getting better in '24 and 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 '23 in '24. We go above that fantastic we're very focused on it. And that refine number I put out there should drive an increase in volumes in '24. But we've got a war in Europe. We've got a war in Israel. We've got a threatening China in Taiwan. We've got a presidential election. And we've got a fiscal 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 that 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 the fiscal outlook for the United States government must change. But unfortunately, we have two people right now as the two candidates that look 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 in 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…

Maybe turning to Alliant for a minute, you know, continue to see good numbers there. I guess maybe what you're 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?

Well, as I mean, first of all, the Alliant acquisition has been a home run of an acquisition. Couldn't be happier with the Company, couldn't be happier with the management team and couldn't be happier to what it's done to walk in the lobby strategically in the affordable housing space. The second thing is that the tax credit syndication market, the amount of tax credits being allocated in the federal budget. There are many, many, many governors, senators from across the country who the number one issue on their minds is affordable housing and housing affordability. And so figuring out how LIHTC and low-income housing tax credits and HAP contracts that come out of HUD all play into the affordable housing equation and the ability to supply more affordable housing is a very, very important issue for '24, '25, '26. We are extremely well positioned there. And I think that given the breadth of the Walker & Dunlop platform, our ability to increasingly grow the size of our funds that we are raising around our tax credit business is very present. And the second thing is the dynamics of that market have very strong growth drivers over the next several years, because if you look at where supply has come into the multifamily market, it is coming at the high end, 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 Alliant to take advantage of that.

That's great. Thank you, Willie. Thanks for taking my question.

We'll return to the line of Jade Rahmani with KBW. Please go ahead.

Thanks very much. You know, I wanted to ask about the W&D platform and its relative size. Where do you see the greatest growth opportunities? Would it be in small balance and affordable housing? Do you see C-PACE as a meaningful opportunity or is it on the asset management side, 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 & Dunlop is the largest agency lender in the country, the third largest multifamily lender in the country and the sixth largest provider of capital in the commercial real estate industry, which all if you think about who we compete with in those markets and us 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 percent of total revenues out of 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 in multifamily, we are tiny. So we clearly see great growth drivers in the asset management business. 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 a bow and arrow that is loaded ready to 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, 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 I feel extremely good as it relates to overall growth drivers of the existing businesses we're 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 appraisals.

Thanks very much.

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 of W&D. Thanks again to our team for all you do every single day. Thanks to everyone who listened in on the call today. Appreciate your interest in Walker & Dunlop.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.