Good day and welcome to the Q4 2023 Walker & Dunlop, Inc. Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Kelsey Duffey, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Taryn. Good morning everyone. Thank you for joining Walker & Dunlop’s fourth quarter and full year 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.walkerdunlop.com. These slides serve as a reference point for some of what Willie and Greg will touch on during the call. Please also note that we will reference the non-GAAP financial metrics, adjusted EBITDA and adjusted core EPS during the course of this call. Please refer to the appendix of the earnings presentation for a reconciliation of these non-GAAP financial metrics. Investors are urged to carefully read the forward-looking statements language in our earnings release. Statements made on this call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe our current expectations and actual results may differ materially. Walker & Dunlop is under no obligation to update or alter our forward-looking statements, whether as 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 Willy.

Thank you, Kelsey and good morning everyone. 2023 was a challenging year for the commercial real estate industry and the fourth quarter started out with the same headwinds that we saw throughout the year, but the lower than expected CPI print in November drove a 100 basis point rally in rates and the deals in our pipeline held together for the first time all year, resulting in $9.3 billion of total transaction volume in the quarter. This was still down 17% from Q4 of ‘22, but up sequentially from the third quarter and our highest quarterly volume of the year, a nice way to end the year. As you can see on Slide 3, our Q4 financial performance was solid across the board, including total revenues of $274 million down just 3% from Q4 of ‘22 and diluted earnings per share of $0.93. EPS was off more than other metrics, largely due to two transaction-related adjustments unique to Q4 of last year. Adjusted core EPS, which strips out a good deal of non-cash revenues and expenses, was up 1% from the same period last year. Finally, reflecting the strength of the W&D business model, adjusted EBITDA grew each quarter throughout the year from $68 million in Q1 to $88 million in Q4, down only 5% from Q4 of ‘22. Q4 results were a nice uptick after a very challenging 2023, when full year total transaction volume was down 48% to $33 billion. Yet due to our underlying business model, significant cost management and the exceptional W&D team, full year adjusted EBITDA was $300 million, down only 8% from 2022. We are hopeful that we have effectively weathered the great tightening and that as rates stabilize and potentially head down, that we are extremely well positioned to benefit from the market’s…

Thank you, Willy and good morning everyone. This was a year of persistent, volatile market conditions that depressed commercial real estate investment and transaction activity. However, the sharp decline in long-term rates during the fourth quarter and a positive sentiment that followed the Fed’s November remarks led to increased transaction activity that drove improved performance in our Capital Markets segment. When coupled with the continued strength of our servicing in Asset Management segment, we delivered our strongest quarterly results for 2023. I will spend a little time on our quarterly segment performance before recapping our annual consolidated financial performance and finish with our current outlook for 2024. Beginning with our Capital Markets segment on Slide 6, this segment delivered its strongest quarterly financial results of the year due to the sequential uptick in total transaction volume. Total revenues were $129 million, down 5% year-over-year, but up 10% from the third quarter of 2023. Revenues benefited from a stronger gain on sale margin compared to the same quarter last year due to the mix of transaction activity that was weighted more heavily towards agents’ deep financing volume this quarter. Personnel expense for the segment declined 17% year-over-year due to a decline in variable compensation. Our Capital Markets segment benefits from a high proportion of performance based compensation and in periods of lower transaction activity and associated revenues, we recognize lower variable compensation costs. This is reflected in adjusted EBITDA, which improved to a loss of only $2 million this quarter, compared to a $16 million loss in Q3 ‘23, but down from positive adjusted EBITDA of $6 million in the fourth quarter last year. The Servicing & Asset Management sector or SAM produced revenues of $140 million this quarter, as shown on Slide 7, driven by our $131 billion servicing portfolio…

Thank you, Greg. As you just heard, our solid Q4 financial performance was thanks to the rally in the debt markets and the prospect of rate cuts in 2024. And while those two macro shifts drove top and bottom and line performance in Q4, they do not explain why our balance sheet is so strong where our credit book remains healthy and why our brand and team are so exceptional. Performance in those metrics takes years of consistent investment in performance. Our balance sheet and cash position are so strong because we have built a wonderful business model over decades, which supplies us with durable revenues and earnings. And we have continuously invested in businesses like Zelman and Alliant that have broadened our client offering and diversified our revenue and earnings away from our core debt finance and sales businesses. Our credit book is healthy because we have taken the conservative, thorough underwriting perspective throughout both bullish and bearish markets. 92% of our at-risk portfolio is fixed rate loans. We have no exposure to CLOs and we have no credit risk on commercial real estate asset classes outside of multifamily. And our brand and team are so strong because we are continually innovating and investing in them both. We take a long-term view of our business and this long-term view has not only benefited our company and financial performance, but also our investor returns. As you can see on Slide 13, over the past 1, 5 and 10 years, Walker & Dunlop has generated total shareholder returns greater than any of our direct competitors in the commercial real estate services, specialty finance and real estate technology space. Note that we aren’t cherry picking here. These are global firms and domestic firms, services firms and specialty finance firms, lenders and technology…

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

Thank you, very much. Appreciate the balanced commentary about the outlook, I think that’s the prudent thing to do. I wanted to ask about credit, how it’s holding up. I think, Greg, in your remarks, you did cite seven loans delinquent as of January 2024. How are you all feeling about the outlook? And have you looked at the portfolio stating by 2021 to 2022 vintages and focusing on geographies with excess supply.

So yes, I think, look, go ahead, Will.

No, no, no. Greg, go.

Yes, Jade I was just going to say about that, I think that, as I said in my remarks and as we’ve said for the last few quarters, our credit is holding up well. I think seven delinquent loans in our at-risk book is on a book of close to 3,000 loan. So we’re feeling really good about how our borrowers are performing and how they are capitalized and how their assets are doing. We are looking at different markets, but most of the ones we have are going to be longer-term, longer duration. So the ‘21 to ‘23 visage that you cited there is really going to be maturing in 5 to 10 years. So that’s much farther out than the deals we’re looking at that are maturing in the next 2 years that are likely our focus just given where the macro is right now. So again, I’d just reiterate what we said on the call and what we’ve been saying, which is we’ve got real cash flowing assets with over 2x debt service coverage ratio, low going-in LTVs and limited maturities over the next 2 years. And I think that, that has us feeling good about where we’re positioned at this point in the cycle.

Yes, I’d only jump in behind that, Jade and just say, 92% fixed rate. So many of the problems that people are seeing right now are on floating rate debt on our at-risk portfolio, 92% are fixed rate. And as Greg just said, the ‘21 and ‘22 vintages are all longer-term fixed rate loans. And then we only have 3.0 what was it, $3.2 billion of loan maturities in the portfolio in ‘24 and ‘25. So we don’t even have significant refi risk in the portfolio on a fixed rate loan that was done at 3%. It needs to be redone at 6.5%. So generally speaking, feeling extremely good. But as you well know from covering the broader industry, the multifamily industry has credit concerns to it today and particularly deals that were advanced in ‘21 and ‘22 with floating rate debt on them. And we are very fortunate to not have done a lot of that.

Okay. And then in terms of the CECL reserve, I know you have to factor in your current expectations and the period of loss look back is probably 2 decades, a period during which there is very strong multifamily credit performance for lots of different reasons. But then when you look at prior periods, the ‘80s and early ‘90s, clearly, there was a lot of pressure there. So is it reasonable to expect a general uptick in CECL reserves in the coming quarters? In 2023, there are a lot of releases that took place.

Yes, yes, I think I would say I look back at the last 10 years, which included even during the GFC probably actually look at over our entire history and we’ve lost our losses on defaulted loans total in that 30-year period, $15 million. So we’ve had an excellent track record of credit that includes some of the cycles that you’re talking about and included the GFC, it included what happened post COVID and I think ultimately, our CECL reserve today is greater than that by 2x. So we feel like we’ve got adequate reserves given history, we’re absolutely going to continue to monitor the market and the fundamentals. One of the reasons I gave the guidance for Q1 was that we aren’t going to have a release of reserves like we’ve had in the last 2 or 3 years and we’re expecting to at least maintain that level of reserves on a forward-look basis. We will continue to take a forward look as you said. Right now, I think our forward-look reserves for the next year or 2 are 6x or 7x our average historical loss rate. So look, we will keep an eye on that for sure. But right now, I don’t see anything more than normal growth, absent some change in the credit fundamentals that we just went through both Willy and I just talked through.

Thank you very much.

We will move to our next question from Kyle Joseph with Jefferies. Please go ahead.

Hey, good morning, Willy, Greg. Thanks for taking my question. First one probably for Greg, I just want to kind of get a little bit more on guidance. From what – from your commentary, it sounds like you guys are baking in kind of flattish agency volume. So, just want to get a sense for the incremental growth there in ‘24. Is that a function of servicing or is that kind of other channels of origination opening up more so than agency?

Yes, I think, Kyle, great to hear you. Thanks for joining us this morning. I think a couple of things, one is I mentioned we added 17 bankers and brokers last year. So even as the market was shifting on us, we were still bringing on talent and making sure that we were bolstering our bankers and brokers. So we think we have an opportunity to gain share even in a flat environment. I think importantly, there is a lot of deliveries coming online in 2024 and there is going to be an opportunity for our investment sales team to get involved in some of those deals for merchant builders and help them capitalize those assets. And I think there is – there is likely to be more Capital Markets transactions this year than in prior years. So while may the uncertainty – may not be as active, there is certainly market data. The MBA is projecting the market to increase to $350 billion from multifamily perspective in ‘24. So there is going to be transactions likely brokered or Capital Markets. Obviously, we have a very talented team there as well. So we will capture our share and I think there is many different ways for us to try to take the diversified platform we have and deliver those results to generate that growth, even if Fannie and Freddie are flat year-on-year.

Yes, and kind of...

Very helpful. And then...

Kyle, let me – if I can just add one other quick thing, which is, as Greg said, I want to reiterate one thing that Greg said in his commentary. It is ridiculous that Fannie and Freddie are signaling to the market that their volumes are going to be flat between 2023 and 2024. They are in the market to provide counter cyclical capital. Their role is to provide counter cyclical capital to the market and their capital is needed in this market. So while we are reflecting to everyone on this call what we are hearing from Fannie Mae and Freddie Mac, as it relates to their outlook for 2024. And as Greg said, we can’t do anything about that outlook other than work with them. I just want to underscore the point that as Fannie’s largest partner and Freddie Mac’s third largest partner, seeing the opportunity in the market to meet refinancing needs in a year where refinancing is up dramatically in the multifamily market as it relates to demand. There is no reason that Fannie and Freddie’s volume should be the same in 2024 as they were in 2023.

That’s helpful. That makes sense. Yes, that’s a good segue to my next question, just on Slide 11, in the maturity wall on multifamily. Just – and given your knowledge of the market, any sort of color you can give us on the quality of this portfolio, whether it’s floating versus fixed, Class A, Class B and geographic areas. And then specifically, if there is any, I don’t know geographic areas you’re looking to avoid or target as a result of this upcoming maturity ways?

So if you look at the overall maturities in 2024 per the Mortgage Bankers Association, in 2023, the ‘24 number for total commercial real estate refinancings were somewhere in the $600 billion number, $620 billion and about $300 billion of loans that were scheduled to be refinanced in 2023 were pushed to 2024. So the 2024 total commercial real estate refinancing volume is over $900 billion now. That’s going to present a significant challenge to the market to find enough capital across the spectrum to meet that need for financing, particularly as we see banks pull back. CMBS had growth in 2023. You probably expect to see continued growth in CMBS. Life insurance companies have been very, very consistent at doing about 10% of the market’s volume through cycles even in good times and bad times when they could actually expand out beyond 10%. And the interesting part about the 2024 refi is that the agencies, Fannie and Freddie have a very small amount of deal flow in their own books that is maturing in ‘24. And so the opportunity for us in ‘24 is to go out and take refinancing opportunities from the competition. And to your specific question, Kyle, what those loans look like, how much new equity needs to go into them to refinance them or preferred equity or a recapitalization is the real question. And I think that, we have got the team, we have got the capital as it relates to both first-trust financing, as well as anything above that, whether it would be in a mezzanine or preferred equity position to be able to meet borrowers’ needs. But there is no doubt that a lot of those deals that are coming up for maturity in ‘24, fortunately not in our portfolio, but a lot of them are going to need some type of structured finance to get them refinanced out.

Really helpful color. Thanks for taking my questions.

[Operator Instructions] We will move to our next question from Steve Delaney with Citizens JMP. Please go ahead.

Thanks. Good morning everyone and great news on the dividend increase and the buyback. Willy, I was wondering on the buyback, looking back to the end of ‘21, you haven’t repurchased any shares over that period, obviously, the last year or so was sort of uncertain environment, that’s understandable. But as far as your execution, as you are talking to the Board, should we think about the buyback as being opportunistic or programmatic given where you sit today? Thank you.

Good morning Steve, nice to have you on the call.

Yes sir.

We talked about just this issue yesterday. As you know, Steve, because you have covered us for quite some time, we have a track record of being opportunistic in buying back stock. As Greg underscored in his comments, our cash position at the end of the year is very strong. And as you just reiterated in response to Jade’s question on credit, we feel very, very good as it relates to our credit provisions and our credit outlook. So, with that said, the Board said, we will authorize $75 million of potential share buybacks. I would not think it will be programmatic, Steve, as we see how the year goes. I would also say to you that if we start to see the growth that we expect as rates come down and as transaction volume picks up, we could find ourselves in a more programmatic situation. But for now, the authorization, I would say, is more opportunistic than programmatic.

Got it. And Greg, you gave a figure – I probably didn’t get these right. I know Willy, you commented on $13 of EPS by 2025. You mentioned $300 million, I believe of earnings for 2024. In both cases, are you referring to the earnings or the EPS on a GAAP basis as we, I think all tried to convert to over the second half of this – of last year, just for clarity on if we are talking about GAAP or some other measure?

Yes, Steve – when we gave the – yes, we had not yet implemented adjusted for EPS, so we are trying to balance the transition from GAAP to adjusted core, but we are continuing to refer to GAAP as we give guidance. But in my remarks, I did give similar full year guidance for adjusted EBITDA and adjusted core EPS to GAAP diluted EPS, all in mid-single or mid-single digits to low teens.

Got it. And just a final thing for clarity. When you define your at-risk portfolio, I assume that’s your bridge book, as well as your Fannie Mae loss sharing. Is there anything else in there that I am missing?

That’s exclusively. We have $40 million of bridge loans left on our balance sheet and then the vast majority of our at-risk book is the Fannie Mae portfolio, nearly $60 million.

Got it. Willy, I know there is 20 some of these commercial mortgage REITs out there, like everything in life, there is some really good and some really bad. Most of their problems are obviously office or maybe some hotel, not so much multifamily. But I think both with the CM REITs and even the commercial banks, I think there will be – they are in kind of a pullback hunker down mode on anything other than residential real estate. Is this a year or the next 2 years for W&D to maybe step up a little bit in non-agency multifamily or single-family residential housing given the fact that capital flows from those two industry sectors are likely to be constrained?

I would say, Steve, yes, but with a very significant aspects or caveat to that statement, which is just that we have been super disciplined in the risk that we have been willing to take. And as again, I would reiterate you know from watching us in various times over the past 13 years as a publicly traded company. There have been lots of opportunities for us to step in and do office loans to do floating rate CLO loans. And at every turn, we have sort of said that’s just not the risk profile of W&D and it has paid massive benefits. And believe me, I met with plenty of investors in ‘21 and ‘22 who watch what some of the CLO originators were doing and said, oh, you are missing market share, you are not growing fast enough. And we said that’s fine. That’s not a risk that we want to take. We don’t like the fundamentals of that business when interest rates are this low and the credit loss that you would incur by doing those loans is that high. So, I think the bottom line, as you well know, we are not going to not look at anything. We will look at everything. And we have plenty of other capital providers coming to us saying, hey, you have got the distribution network. Can we give you a pool of capital to go deploy, and depending on the risk sharing agreement, depending on how much we are getting paid for the risk we are taking, we will obviously underwrite all of that and make decisions on what we will and won’t do. But I think your general comment is exactly right. I think there will be plenty of opportunities, but I would also reiterate to investors that you are invested in a company that takes a very conservative credit outlook. And while the opportunity they present itself, that does not necessarily mean that W&D is going to do it.

Well, thank you both for the color and congrats on a solid close to a difficult year for everyone. Thanks.

Thanks Steve.

Thanks Steve.

We will move to our next question with Jay McCanless from Wedbush Securities. Please go ahead.

Hey. Good morning everyone. Thanks for taking my questions. Greg, could you talk to the – I think you said potentially for 1Q, somewhere between $0.40 to $0.60 in earnings, maybe talk about, what would have to happen to get to the high end versus the low end of that range?

Yes. Thanks Jay. Certainly, I think look, ultimately, it’s a matter of what transaction activity is going to look like in the first quarter and then whether some of our other businesses that – whether it would be investment banking can generate some fees in the first quarter, what our dispositions or syndication activity looks like in our affordable business. So, there is a range there because we have got, obviously, different opportunities within the platform, but those are the big variables, I would say as transaction activity and then the likelihood of other revenue streams from either affordable or investment banking coming through.

Okay. And then maybe just for the full year and underpinning some of the full year assumptions, maybe talk about where you guys think the 10-year ends up? And are we going to continue to see some of this volatility we have seen? Just trying to get a sense of what your assumptions were for the full year guide regarding EPS and EBITDA?

So, I will jump in there, Greg. So, Jay, a couple of things. First of all, I talked about this on the Walker webcast yesterday with some of my colleagues. We were out at NMHC, the National Multifamily Housing Council meeting and meeting with a number of W&D clients who are sitting on a pile of capital, pile of capital. There is so much equity capital sitting out there to be deployed. And in one of the meetings, one of the client said, we are not active right now because we don’t like negative leverage. And my question to the individual was, okay, let’s play this out. We get a Fed funds rate cut, the Fed funds rate comes down, do you really think the 10-year rallies much from here if the Fed starts to cut, the client sort of said, maybe a little bit, I said, great. So, do you think that cap rates are going to stand still when you get a rally in the short end of the curve, as well as the long end of the curve and the client said to me, no. And I said, so then when do you think you are going to get yourself back to a positive leverage position? And the client said, well, you make a good point. And then the client said that we probably ought to be taking a look at acquisition based on IRR and on replacement cost and not so much on negative leverage. And I think that we are seeing more and more people realize that if you want to deploy capital into this market that you should probably take as an assumption that the 10-year sits somewhere in the band that it’s been in for the last 1.5 months, which is obviously it’s…

Great. Thank you, Willy. With all the buzz recently about rent-regulated properties in New York City, is there any exposure on Walker & Dunlop’s balance sheet to those rent-regulated entities and/or are there going to be some potential opportunities with the debt fund you recently raised to get involved in that market?

Number one, no, as it relates to our – first of all, we don’t have a lot of exposure to New York in our agency portfolio. Agencies have never been terribly competitive in that market. So, as it relates to our Fannie Mae at-risk portfolio, I don’t have an actual number in front of me, but I can tell you from having been in this company for a very long period of time, we do not have anything in that, I can’t say anything. We have very limited exposure in our at-risk portfolio on Fannie Mae loans in New York City. And as it relates to our bridge portfolio, I am quite certain we have none. So, no rent control risk as it relates to New York City. Is it a market that we would like to dive into, that’s a good question. In the affordable housing space, we actually love the affordable housing space and with operators who understand how to work in a rent-controlled market, those are great loans. On more market-based deals, you have got to make sure that you are lending to the proper operator who understands the market they are in. And so while there is probably opportunities, I go back to what I have said to Steve previously. We are going to look at everything. If we like the risk-adjusted returns, we will do the deal, but the investors shouldn’t expect Walker now off the back of the bus on risky deals in challenging markets just because we can do a loan.

Great. And then the last question I had, I think when I have asked you about this before, Willy, you were kind of not as positive as some people, but office conversions continues to be a topic of conversation in the general press and looks like there are some funds being committed towards it. Would love to get your updated thoughts on that space? And are there opportunities for Walker & Dunlop to get involved there if you feel like – if you have a more positive outlook on that now?

Look, I mean we did a deal in Q4, Jay, that was in L.A. It was an office conversion and we did the takeout loan. Wells Fargo had done the actual construction conversion loan and we did an agency takeout on the property, fantastic property. It had a couple of very unique things to it. The owner had owned it since the early 1990s, so the cost basis in the building was exceedingly low. The second is, it was a small footprint. So, the conversion from office to multi was very, if you will, applicable or doable given the smaller footprint. And the final piece to it is, he had the zoning to be able to do it. And we love doing that. And we will continue to do that on people who are as talented and successful as that borrower has been in the office to multi conversion. I think the reason I have been somewhat, if you will, tempered on my comments about it is just that lot of people are saying, oh, that’s the solve for all this office inventory and I don’t believe that it is. There is a ton of office buildings that are impaired because of the footprint, because of the location and because of the cost basis. And so what I am just saying is people shouldn’t think that this is the panacea for creating a whole bunch of new supply in multifamily by converting these office buildings into multifamily properties. But I do see an opportunity for us to do good loans like we did in Q4 and the one that I just outlined of a takeout loan of a very good conversion. And then the final thing is, would we put construction debt into the actual conversion process, sure. With the appropriate operator and with an asset that was primed for conversion, we find the capital and put it into that type of a deal to help someone get that done.

Great. Very helpful guys. Appreciate it.

It appears there are no further questions at this time. I would like to turn the conference back over for any additional or closing remarks.

I thank everyone, particularly those who asked questions this morning. Thank you very much for your time and interest in W&D. Congrats again to the W&D team on a very solid Q4 and 2023. And we look forward to talking to you all after Q1 2024 and I hope everyone has a great day.

This concludes today’s call. Thank you again for your participation. You may now disconnect and have a great day.