Walker & Dunlop Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 8 speakers on the call.

Operator

Good day, and welcome to the Q2 2024 Walker and Dunlop, Inc. Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kelsey Duffey. Please go ahead, ma'am.

Speaker 1

Thank you, Lisa. Good morning, everyone. Thank you for joining Walker and Dunlop's Q2 2024 Earnings Call. I have with me this morning our Chairman and CEO, Willie Walker and our CFO, Greg Zorkowski. This call is being webcast live on our website and a recording will be available later today.

Speaker 1

Both our earnings press release and website provide details on accessing the archived webcast. This morning, we posted our earnings release and presentation to the Investor Relations section of our website, 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.

Speaker 1

Investors are urged to read the forward looking statements language in our earnings release. Statements made on this call, which are non 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 and others are under no obligation to update or alter our forward looking statements whether as a result of new information, future events or otherwise. We expressly disclaim any obligation to do so.

Speaker 1

More detailed information about risk factors can be found in our annual and quarterly reports filed with the SEC. I will now turn the call over to Willie.

Speaker 2

Thank you, Kelsey, and good morning, everyone. We held Walker and Dunlop's Annual Summer Conference in Sun Valley, Idaho 2 weeks ago with some of the largest and most active investors in commercial real estate. The sentiment at the conference was that after 2 years of rising interest rates and limited investment activity, it is time to get active again. Q2 2024 was the Q1 in almost 2 years with consistent rates and the ability for commercial real estate owners to transact. And with the 10 year treasury falling below 4%, momentum is building in the market.

Speaker 2

W and D is very well positioned to benefit from the recovery of the commercial real estate transactions market and new growth cycle. As shown on Slide 3, Q2 transaction volume was highlighted by debt brokerage of $3,900,000,000 up 16% year over year. This growth is reflective of our talented capital markets team finding a diverse and deep market of capital for our clients' borrowing needs. Financing volumes at the GSEs were down 23% year over year to $2,700,000,000 The GSEs have been sluggish in their lending over the past 18 months, but we are seeing them lean in on deals over the past month and expect higher volumes from them in the second half of 2024. Investment sales volume of $1,500,000,000 is a good start to the market recovery, up 31% from Q1 of this year.

Speaker 2

I'd like to make sure we understand both where the market was and what the W and D team can do. We did $7,900,000,000 of multifamily investment sales in Q2 of 2022 versus $1,500,000,000 this past quarter. The market has a long way to recover and our team has tremendous capacity. Our investment sales pipeline continues to grow and it is very evident that with lower rates and the need for CRE owners to return capital to investors and deploy new capital, transaction volumes are growing nicely. Our investment sales market presence and team is extremely strong.

Speaker 2

And as property sales volumes pick up, it will benefit investment sales, debt placement, valuation services, investment banking and our affordable housing business. Apprise, our technology enabled valuation business, saw volumes grow 26% year over year as property sales returned to the market. Walker and Dunlop affordable equity closed on its newest fund of $163,000,000 at the start of Q2 and is seeing demand from both investors and developers of affordable housing. Capital raising and deployment are the day to day drivers of this business as is investment realization when assets exit their rent restriction period. W and D Affordable Equity has not sold many assets over the past 2 years, but as the market heals, we will see a pickup in sales and realize gains.

Speaker 2

Our small balance lending business has maintained market share with Fannie and Freddie, we are focused on using our technology to enhance and market a product that will allow us to take market share from the regional banks. This business has significant opportunity to grow as transaction activity resumes. HUD financing, part of our affordable housing group, grew volumes 26% year over year. And while HUD volumes are relatively small in comparison to our other debt businesses, HUD loans are a fantastic financing option for our customers and generate great mortgage servicing rights. Finally, Zelman Research and Investment Banking revenues were down slightly on the quarter, but will grow as the market recovers and transaction volumes accelerate.

Speaker 2

Total Q2 transaction volume of $8,400,000,000 coupled with the consistent and growing servicing income generated by our $133,000,000,000 loan servicing portfolio, generated Q2 diluted earnings per share of $0.67 down 18% year over year, mostly due to lower GSE volumes and the commensurate non cash mortgage servicing rights. Adjusted core EPS, however, which strips out non cash revenue and expenses grew 26% to $1.23 while adjusted EBITDA grew 15% to $81,000,000 on the quarter. Having weathered the brunt of the great tightening and beginning to see transaction volumes return, these financial results are very strong and reflective of our teamwork, excellent business model, recurring revenue streams ability to invest in our people brand and technology during the past 2 years of market volatility. As we look forward to a market recovery and transaction volumes, we will continue to invest in our business by adding bankers and brokers who focus on meeting not only the needs of the owners of traditional assets where people live, work, shop and play, but also new economy assets where people work where they sleep, play without moving their bodies, travel without staying in a hotel and where the housing of data and digits is increasingly important for the future of our society and our world.

Speaker 2

As Greg will discuss in a moment, W and D's credit portfolio remains extremely strong. Our discipline of taking credit risk only on multifamily properties continues to pay dividends as other asset classes incur losses. And while our portfolio is neither perfect nor without losses, given we were the largest lender on multifamily properties in the United States in 2020 and the 7th largest provider of capital to commercial real estate in 2023. As shown on this slide, our credit discipline and minimal losses are truly outstanding. While I'm focused on credit, I'd like to thank our Chief Credit Officer, David Levy, for his magnificent career and 12 years of exceptional work at Walker and Dunlop.

Speaker 2

David has earned his retirement in many, many ways, and we wish him much happiness going forward. I will turn the call over to Greg to discuss our financial and credit performance in greater detail and then return with some thoughts about what we see ahead in the back half of the year. Greg?

Speaker 3

Thank you, Willie, and good morning, everyone. On our last call, we spoke about interest rates stabilizing heading into this quarter as the market adjusted to higher for longer, an improvement in the supply of capital and transaction activity for non multifamily assets and the fact that our pipeline was building nicely. Our results reflect the market we described and we delivered $8,400,000,000 of transaction activity this quarter, generating 15% growth in adjusted EBITDA year over year to $81,000,000 and 26% growth in adjusted core EPS to $1.23 per share. Our diluted EPS decreased 18% to $0.67 per share compared to the same quarter last year and our operating margin and return on equity remained below historical levels at 10% and 5% respectively. The last 2 years of the grade tightening have been difficult, but our ability to routinely deliver strong results is reflected not only of the quality of our team, but also the durable recurring revenue streams we've built leading into this cycle that will provide the foundation of our future results as transaction activity recovers from here.

Speaker 3

Turning to our segment results. Transaction activity for our Capital Markets segment rebounded from a slow first quarter, growing 32% from Q1, but coming in flat to the same quarter last year. Total revenues for the segment were $118,000,000 down 6% year over year. We have said repeatedly that our expectation is that GSEs will not meaningfully surpass their 2023 lending volume this year, but Fannie Mae's lending activity slowed during the Q2, leading to the decline in revenues. Yet, there is still plenty of capital willing to lend on both multifamily and non multifamily assets and our broker transaction activity remains robust growing 16% over the same quarter last year.

Speaker 3

Overall, net income for the segment declined $5,000,000 or 31% due to lower non cash MSR revenues, while adjusted EBITDA improved 17% to a loss of $8,000,000 due to the strength of our overall transaction activity. The positive signs of stable to lower interest rates, improving supply of capital and increased activity from operators are continuing into the Q3 and we feel very good about the opportunity ahead given the strength of our Capital Markets team. Our Servicing and Asset Management segment or SAM continues to thrive generating durable recurring cash revenues from our servicing portfolio, which totaled $133,000,000,000 at quarter end. Our SAM segment also benefits from the strength of W and D Affordable Equity, which closed the $163,000,000 multi investor fund during the Q2 and now manages over $15,000,000,000 of affordable assets and W and B Investment Partners, which recently closed a $370,000,000 debt fund and now manages over $3,000,000,000 of assets and equity. Our total managed portfolio grew 5% year over year to a total of $150,000,000,000 at June 30, 2024, driving the 4% increase in sand segment revenues to $148,000,000 Net income for the segment grew 13% year over year, reflecting the revenue growth and benefit of our cost management efforts over the past 12 months.

Speaker 3

Finally, adjusted EBITDA for the segment continues to grow, ending the quarter at $125,000,000 up 15% from Q2 2023. The SAM segment also includes the impacts of our credit risk portfolio. During the quarter, we recorded a $3,000,000 provision for credit losses. Last quarter, I provided a detailed update on 3 loans totaling $62,000,000 where we either indemnified or repurchased the loan from the GSEs. During the quarter, we foreclosed on 2 of those assets and performed thorough reviews of the property condition and asset performance as we prepare to market them for sale.

Speaker 3

In the process of that review, we increased our loss reserve on portfolio of loans by $3,000,000 representing the majority of our provision for credit losses this quarter and bringing the total reserve for these 3 loans to $5,000,000 Importantly, we have not received any additional repurchase notifications beyond these three assets. Turning to our at risk portfolio, we completed our analysis of year end financial statements during the quarter and the weighted average debt service coverage ratio remains over 2 times at December 31, 2023, which speaks to the overall health of our portfolio and the quality of our underwriting. Further, the macro backdrop for multifamily remains favorable in the long term and we have only $1,900,000,000 of loans in our at risk portfolio maturing in the next 12 months, meaning the vast majority of our customers have time for supply dynamics and interest rates to adjust before there is any maturity pressure. We have a $60,000,000,000 at risk portfolio with over 3,000 loans and only 5 of those loans are defaulted at the end of the quarter, a decrease from 6 loans at the end of the Q1. We remain focused on credit risk in our portfolio and continue to feel good about how our clients are positioned and the risk we took leading into the great tightening.

Speaker 3

Although this cycle is not over, our credit quality is strong. Looking at our consolidated results for the first half of the year, total transaction volumes are down 2%, but the stability of earnings from our SAM segment helped offset the slowdown in transactions. Diluted earnings per share was $1.02 down 37% from the first half of twenty twenty three, while year to date adjusted EBITDA and adjusted core EPS were both up 12% to $155,000,000 $2.39 per share. At the start of the year, we provided guidance that our diluted earnings per share, adjusted EBITDA and adjusted core EPS would increase in the mid single digits to low teens this year. 2 quarters in, we feel very good about our outlook for adjusted EBITDA and adjusted core EPS.

Speaker 3

To hit our diluted EPS target, we expected the GSEs to deliver $100,000,000,000 of capital to the multifamily market. Activity is picking up across our business and we believe there will be sufficient demand for GSE capital in the back half of the year for them to close the gap to achieve $100,000,000,000 of volume. And that would provide a significant boost to MSR revenues and earnings during the second half of the year. We are also looking to our other business lines to drive the earnings we are expecting in 2024. With our second half pipelines building nicely, we are maintaining the diluted EPS guidance we gave at the beginning of the year.

Speaker 3

Turning to our balance sheet. There's been a strong market for high quality corporate issuers thus far in 2024 and during the Q2 a window opened for us to reprice the $200,000,000 tranche of our term loan B and reduce the spread over SOFR from 300 basis points to 2 25 basis points, lowering our cost of borrowing by $1,500,000 annually. The resiliency of our business and the strength of our adjusted EBITDA positioned us well to take advantage of that repricing window with our lender group. The continued strength of our cash generation also allowed us to end the quarter with $208,000,000 of cash and our Board of Directors approved a quarterly dividend of $0.65 per share yesterday, payable to shareholders of record as of August 22. Our results demonstrate the resiliency of our platform and the strength of our team.

Speaker 3

The macro backdrop continues to strengthen as the path for exiting the rate tightening is coming into focus. With lower interest rates and an increasing supply of capital to the commercial real estate sector, we are optimistic about the opportunities to capture deal flow and grow as the commercial real estate market recovers from the last 2 years of restricted interest rate. Thank you for your time this morning. I'll now turn the call back over to Willie.

Speaker 2

Thank you, Greg. As Greg just underscored, we have our servicing and asset management businesses along with cash origination fees from debt financing and property sales, allowed us to generate strong year over year growth in adjusted EBITDA and adjusted core EPS. 1 of the analysts who covers W and D recently did an analysis of peak earnings in 2022 to trough earnings in 2023 for W and D and several of our largest competitors. But the data shows essentially contrary to many investors' perceptions is that W and D's adjusted EBITDA was down dramatically less than the competition at just 8% versus an average of 36% for CBRE, JLL and Newmark. The conventional thinking is that those platforms with scaled workforce solutions and asset management platforms would endure the downturn better than W and D due to long term low margin facilities management and outsourcing contracts, not so.

Speaker 2

And that is due to the strength of WMD's servicing and asset management businesses. And what is really exciting is that as we enter this next cycle of the capital markets focus will benefit disproportionately from increased transaction volumes in financing, property sales, appraisals, research and investment banking. As W and D Investors know, originating loans with mortgage servicing rights is a large and important component of W and D's revenues and GAAP EPS. Over the past 2 years, we have endured something of a perfect storm with regard to MSRs due to reduced GSE lending volumes, reduced servicing fees and reduced loan duration. Going forward, we believe all three of these components should improve significantly.

Speaker 2

The GSEs only do one thing, lend on residential real estate and they happen to have the cheapest cost of capital of any market participant. They will play their role as the market recovers and as they grow their lending volumes, so will W and D. Regarding servicing fees, we are seeing a recovery in pricing due to lower rates and investor spreads remaining tight. Finally, regarding term, over the past several years, many borrowers went short and put on fixed rate debt for only 5 years, thinking rates would come back down and they could refinance. To put numbers to this, in 2020, 45% of all Fannie Mae multifamily loans were 10 year loans and 0% were 5 year loans.

Speaker 2

In the 1st 6 months of 2024, the percentage of 10 year loans at Fannie Mae dropped to 26%, while the volume of 5 year loans grew from 0% to 32% of total lending. As the yield curve normalizes and CRE owners can acquire assets with positive leverage once again, we will see more borrowers go long and request 7 10 year paper. Higher financing volumes, normalized servicing fees and longer loan terms will benefit our mortgage servicing rights substantially in the coming years. Let me give an example of a W and D client going long as it is instructive on a number of fronts. The client's existing loan was $34,000,000 and the new loan only sized to $30,000,000 The fundamentals of the property were sound, so the borrower put $4,000,000 of fresh equity into the property to pay off the $34,000,000 loan.

Speaker 2

In the process, they bought down the interest rate by 30 basis points from 5.80% to 5.50% and at that coupon rate, they decided to go long and lock up the financing for 10 years. There are several themes to this loan. 1st, there is plenty of equity capital to be invested in properties. 2nd, all in borrowing costs, particularly on multifamily properties are not that high and are getting lower fast. And with good assets and appropriate financing, many owners are starting to go long and push out long term.

Speaker 2

This example is not unique to multifamily. Some of you may have heard about the refinancing of 277 Park Avenue in Manhattan. This is not a financing Walker Knollop worked on, but is instructive of today's market. The property had a $750,000,000 loan at a 3.60 percent interest rate that matured this year. The new loan only sized to $500,000,000 the new interest rate being almost double the old one.

Speaker 2

So the owners wrote a $250,000,000 check to pay off the maturing mortgage. Building recently signing 175,000 square feet of new leases to bring the building back to 98% occupancy. This is a trophy asset in America's largest office market, but a $250,000,000 cash in refinancing is not a minor deal, reflecting that there is still plenty of debt and equity capital in the market for great assets and that new office leases are actually being signed. Let me shift from the market to technology for a moment. We continue to invest in data analytics to find new business and better serve our clients.

Speaker 2

Our Galaxy application continues to generate new client opportunities and in Q2, 77% of our refinancings were new loans to Walker and Dunlop. While new lending opportunities come to us in myriad ways, client coverage, referrals, sales transactions and in some instances just dumb luck. Galaxy has been an incredibly powerful tool that shows our team the composition of a client's entire debt portfolio. And given the very small volume of loan maturities in W and D's existing loan portfolio for 2024 2025, the name of the game for our team is winning new loans and new customers away from the competition, and Galaxy helps tremendously with this. Our technology team also created a new digital experience for W and D servicing clients named Client Navigator that allows our borrowers to do analytics on their loans and interface with W and D through a dramatically enhanced user interface.

Speaker 2

We currently have over 3,000 active users on Client Navigator. And as you can see on this slide, our customer service ratings on Client Navigator is above some of the top financial services institutions in the world. As the market continues to recover and then grow, extremely well positioned. We have the bankers and brokers today to achieve our drive to 25 loan origination target of $65,000,000,000 and our inviscid sales target of $25,000,000,000 if the market returns to normalized transaction levels. WMD is known for being one of the very best at multibillion dollar multifamily financings and our team is currently being asked to pitch on large portfolio financings that have not existed in the market over the past 2 years.

Speaker 2

What is new and very exciting is that our multifamily investment sales team is also being asked to pitch on large portfolio transactions. Add to that our valuation services, search and investment banking capabilities and our go to market presence has never been stronger. Howard Smith, our longtime President, who retired at the beginning of 2024 stepped down from the W and D Board in May. Then in June, our longtime lead independent director, Mike Malone, died suddenly and tragically from a heart attack. Mike was an amazing director and friend and he will be missed by our fellow board members and senior executives dearly.

Speaker 2

Jeff Hayward, Executive Vice President, Fannie Mae prior to retiring in January of 2024 joined the W and D Board in Q2 and has had an immediate impact due to having run the Fannie Mae DUS program for 12 years. And also in Q2, McKinsey Partner and Chairman of McKinsey North America, Gary Pincus joined our Board. And while we will miss Howard and Mike's contributions greatly, we are very excited to have Jeff and Gary's insights and wisdom going forward. As Greg said earlier, we feel very good about our current pipeline of business and our expectations for deal volumes and financial results in the back half of twenty twenty four. Lower interest rates and the need to recycle and invest equity capital should push property sales, financing, appraisals, research and investment banking volumes higher.

Speaker 2

What is imperative is that we remain focused on our clients and exceeding their expectations. We need to retain and expand our team as the market recovers. We need to reinforce our credit discipline as new opportunities arise. And as I noted earlier, we need to be constantly evolving to meet the needs of the new economy, not just the established economy where we have been so successful over the past 2 decades. Thanks to the people of Walker and Dunlop and our business model, our financial results during the great tightening were impacted significantly less than the competition.

Speaker 2

Now that we sit at the doorsteps of a recovery and new cycle, we feel extremely well positioned to benefit from the macroeconomic shift. Thank you for joining us this morning. Operator, please open the line for any questions. Thank you.

Operator

Thank you, Mr. Walker. Our first question comes from Jade Rahmani with KBW. Please go ahead.

Speaker 4

Thank you very much. Can you give some further color as to what's going on with the GSEs? It seems like there's been a regular stream of media reports about them adding more scrutiny, tightening their processes, which seems to express some caution on their part, not just about interest rates having an impact, but about the entire system that they're exposed to. And most recently, JLL in their earnings did note about 0.5% of their agency portfolio had fraud. So just want to get some color as to your thoughts and insights into this phenomenon that's going on.

Speaker 2

Jade, thanks for joining us this morning. And I saw your note this morning as it relates to our numbers versus your projections. And I would take my hat off to you for being right on top of where we came in on the quarter. As it relates to the GSEs, the article that was in the Wall Street Journal earlier this week, I would say that article probably should have been written a year ago, not today in the sense that as you know, the GSE's sort of shift in a view on asset management was prompted by some of the issues that, that Wall Street Journal article mentioned as it relates to 1 GSE lending partner sort of being blacklisted by the GSEs and the ensuing focus on both fraud as well as overall asset condition. And for the past year, the agencies have been very focused on that.

Speaker 2

I would say that they are both now very much on the front foot as it relates to their focus, what they're looking at and how they are working with their DAS and optical lenders versus a year ago, it was sort of they were moving very quickly in ways that we've never seen them move before. And so I would say this is not anything new. We've been working very closely with both Fannie and Freddie for the past year. As Greg and I both said, we feel very good as it relates to our overall portfolio. And I think the most important thing is that while they had been somewhat distracted over the past year as it relates to asset management and looking at their past book of business, we're very encouraged to see both of them, if you will, focusing to the future as it relates to new loan originations and processing business with both us as well as our competitor firms.

Speaker 4

Thanks very much.

Operator

And we'll move to our next question from Steve DeLaney with Citizens JMP. Please go ahead.

Speaker 5

Good morning, everyone. I appreciate Jade asking the question because it's a lot of conversation out there among clients about how far this GSE thing and the Meridian thing might go. So thanks, Jade. Thank you for your reply, Willie. Want to talk just about the earnings statement, if I might.

Speaker 5

Your frontline numbers are GAAP. And I think most of the analysts where the numbers we put into our consensus. I'd like to just make the point that I think well, let me ask you this Willie and Greg. Adjusted corp. EPS seems to take out a lot of the noise from fair value marks and servicing, etcetera.

Speaker 5

Internally, does management and the Board focus more on adjusted core or more on GAAP earnings when you're looking at your evaluating your profitability? Let's start there if we can. Thanks.

Speaker 2

Steve, it's a heck of a good question because I will tell you that while the growth in adjusted core as well as in EBITDA show the incredible strength of the platform and the enduring cash flow that we have been able to create, we also know that the booking of mortgage servicing rights is extremely important for the next cycle. So the reason we've done so well over the last 2 years is because we were so successful at building up $133,000,000,000 loan servicing portfolio that would kick off cash during times when transaction volumes went down. And we have been the net beneficiary of that over the last 2 years. But we also realize that cycle will be whether it's 5 years from now, 7 years from now, let's hope it's 10 years from now. But in the next cycle, what will get us through that next cycle is booking lots of mortgage servicing rights over the next 3, 5, 7 years.

Speaker 2

And so one of the things that we are very focused on is that there is no shifting of focus inside of Walker and Dunlop away from booking mortgage servicing rights because that is the business model. And so while our financial results, I as I said in the call feel very good about, it is up to us to continue to have our loan originators going out and finding lending opportunities that generate significant mortgage servicing rights, which will benefit non cash earnings and non cash revenues as we book them, which will then pay huge dividends 3, 5, 7 years from now when we hit the next downturn where transaction volumes come down. And that's the resiliency of the platform, but it's also very much our strategy and that has not changed one iota.

Speaker 5

Got it. So what you're saying in it, when you think about WD and the origination side of your business, your GSE business, obviously, the MSR is the fair value recognition of that discounted fair value is critical, right, to your accounting and your profitability. So I guess what I'm hearing you say, Willie, in a normal origination focused environment, which we'll have here with hopefully with lower rates, that MSR recognition in the current period is an important part of your business model. So I guess I was asking for taking away noise, but you can't what you're telling me is we can't have it both ways, right? I mean if we're going to look at the MSRs as revenue as they're booked, then we're just going to have to live with any adjustments going through other than the normal amortization going forward.

Speaker 6

Yes. I mean, Steve, let

Speaker 2

me just let me put a finer point on this if I can. I just in the call talked about some of our larger scaled competitive platforms. And the thinking always was that because they were broad and diversified and had these lower margin services contracts that in the downturn, they would do better than Walker and Dunlop. And as Jade's analysis showed, they didn't. Okay?

Speaker 2

So then go to the other extreme, which is some of our other competitor firms that are all transaction volume focused. If we were to forget about GAAP EPS, we would run after adjusted core EPS, which is the cash flow of the servicing portfolio, but it is also just cash transaction fees. And what happens is if you're solely focused on cash transaction fees, you do really well on cash earnings, but you do not have that mortgage servicing right portfolio to hold on to when those transaction volumes come down. And so that's the beauty of the model. And so if our compensation committee came to me and said, Willie, we think for you and the other senior managers, we should start to focus on adjusted core EPS and less on GAAP EPS.

Speaker 2

I would say no way, because it's the GAAP EPS and the generation of those mortgage servicing rights over time that will benefit this platform 5, 7, 10 years from now when we have another downturn in transaction volumes. That's the model and we'll stick to it.

Speaker 5

That's very helpful, Willie. I appreciate that clarity. Thanks so much.

Operator

And we'll move to our next question from Derek Summers with Jefferies. Please go ahead.

Speaker 6

Hey, good morning, everyone. I was wondering, I think in the prior quarter, you talked about a kind of large property sales pipeline. I was just kind of wondering how that compares at the end of this quarter and what were the puts and takes of that deal flow pulling through?

Speaker 2

Yes, Derek. Pipeline is developing very nicely and sits, we haven't disclosed the actual number, but it's great. And as I tried to give color, one of the our success in sales team and moving up in the lead tables is fantastic, not only from the flow business, but also being invited to pitch for some very large portfolio transactions, where previously walking them up, wouldn't have been invited to those bake offs, if you will. I will say that if you look at the first half of the year, a number of our competitor firms had some significant growth in their volumes year over year from 2023 to 2024 and our volumes were down slightly. That's disappointing as it relates to our overall competitive positioning.

Speaker 2

But we're still a top 5 multifamily investment sales platform. Pipeline is very strong. And as I said in our comments, our team is doing everything right, right now. So, I feel very good about where we are positioned. And the combination of investment sales and lending has us right now any multifamily owner operator investor in the U.

Speaker 2

S. Who is thinking about selling either an individual asset or a scaled portfolio, Walker and Dunlop is going to be on their list of firms to talk to. And given the strength of our financing platform, those two things during this next cycle should benefit one another tremendously.

Speaker 6

Got it. Very helpful color. Thank you. And then just to switch to the GSEs, coming to the end of the year here, have there been any conversations about the multifamily caps? And then I guess given the election cycle, any kind of pertinent thoughts on working with different administrations?

Speaker 2

Cool. I'll skip on the second one. On the first one, FHFA is always take Q3 to see where the GSEs are as far as their volumes and coming up with what they want to do in the scorecard in the coming year. I've spoken to the regulator, various people at FHFA over the past couple of months. And I think that they're looking at a lot of different data points right now.

Speaker 2

I think they see the market recovery coming. And as a result of that, I would think that they lean towards maintaining the caps where they are rather than either shrinking or expanding them. But only time will tell and that's obviously something that the regulator has complete discretion over. And then I will only say as it relates to the election that we will likely have regardless of whether it is Trump administration or a Harris administration, we will likely have a change in the directorship of FHFA. I don't know Director Thompson's desires personally about whether she wants to stay on or go, but I would assume that with either one of those new administrations that there would be a new director at FHFA.

Speaker 2

And so always with the new director, there is change. And we've been pretty good at adapting to that change from some directors of FHFA who have had a very aggressive strategy on changing what the GSEs do to others who have been more in line, if you will, with the previous Director. But I would put forth that we'll see what happens in the election and we'll see what happens at FHFA in 2025. But we've sort of been to this rodeo before, if you will, having worked with Fannie and Freddie for as long as we have and particularly since they went into conservatorship in 2,008. And so none of that is terribly

Speaker 7

concerning at this point.

Speaker 6

Got it. Thank you. That's all for me.

Operator

And moving to our next question from Brian Violino with Wedbush Securities. Please go ahead.

Speaker 7

Great. Thanks. Good morning. Just on escrow income, obviously, that's been a benefit over the last few years with higher fair term rates. But just curious if we do see the Fed start to cut here, could you kind of frame what the negative impact on escrow revenues would be for, say, each 25 basis point cut?

Speaker 7

And obviously, I know that will be offset by better transaction revenues, but just curious what the offset could be there and maybe the timing between the 2?

Speaker 3

Yes, Brian. You want

Speaker 7

to take that

Speaker 3

in? Yes, absolutely. So simply we have about depending on the time of the year, we have between $2,200,000,000 $2,500,000,000 of escrow reserves that we hold. So a quarter point is going to be multiplied by that balance and then you're going to just take that. Whenever the reduction in Fed funds occurs is effectively when our rate is decreased.

Speaker 3

So expect that to just be implemented as soon as the rate change occurs, that type of a change will occur to our revenues. Whatever you're projecting or thinking about from a forward curve perspective is what you'll see the impact be on our financials on the annualized basis from that point forward.

Speaker 7

Okay, thanks. And then just on the expense side, it sounds like there's plenty of capacity, but just curious how you're thinking about fixed expenses at this point. Would you see a more notable uptick in volumes? Is it fair to say that you think the expense base is pretty set for where you see volumes at least going in the very near term?

Speaker 3

Absolutely. We've made sure to maintain capacity. We've got, as Willie said in his remarks, plenty of capacity with respect to the team. He gave some stats on where our investment sales team was towards the peak of the market. So there's a lot of room for us to run from where we are today to there.

Speaker 3

There's absolutely going to need to be a little bit of incremental expense increases we need to add just processing power, if you will, but nothing that would be outsized or too excessive. And I think as transaction volumes grow back, it will be somewhat I don't think there will be a massive spike. So I think we'll be able to grow into the market pretty easily from here without a lot of change there.

Speaker 2

The one other thing I'd jump in behind Greg on the escrows and origination volumes. First of all, to your specific point, that's exactly right that the growth in volumes will more than offset the step down in escrow income. But the other piece to it is that there's also the escrow income acts as a hedge to our borrowing cost as well. And so as escrowing comes down, so does our borrowing cost. So you and Nora, Greg talked about that as it relates to how you also have as escrowing comes down, so does our borrowing cost on our debt.

Speaker 2

So those two act as a hedge against one another. And then if you're in a lower rate environment, it's very clearly the assumption that transaction volume step up. And so net net, that's all net beneficial to us. In a rising rate environment, it was nice to have that hedge against the increased borrowing cost in the escrows. But as that steps down, the debt cost and the escrows were basically in tandem with the hedge and then what you pick up is increased transaction volumes.

Speaker 7

Makes sense. Thanks a lot.

Operator

And our next question is from Jade Rahmani with KBW. Please go ahead.

Speaker 4

Thank you. Just wanted to ask about the affordable equity business, the business that used to be known as Alliance. Just on the LI THC outlook, what are you seeing there? And I think you alluded to the lower rate environment outlook potentially benefiting that business.

Speaker 2

A couple of things there, Jade. First of all, just did not pass the bill that had in it increased LITEC for 2025, which was disappointing as it relates to specifically that issue. But the general consensus is that Congress needs to increase the amount of low income housing tax credits being issued at the federal level of both 9% as well as 4%. And I think that we're extremely well positioned as it relates to the need for more low income housing tax credits to drive the building of affordable housing across the country. The second thing is that we bought Alliant 2 years ago.

Speaker 2

We've been integrating Alliant into Walker and Dunlop, raised our newest fund at the beginning of Q2. And we are starting to see that integration of Alliant into Walker Dunlop and the general branding of our affordable housing business start to have real benefits. We moved Sherry Thompson into running all of affordable housing earlier this year. And so bringing the formerly known as Alliant Business, Walk and Dunlop Affordable Equity in with our affordable debt originations, our affordable investment sales and pulling all of that together, I think is going to start to really show some benefits. And so we feel very, very good about it.

Speaker 2

We have a fantastic team that we brought across in that acquisition. And clearly, the assets in that portfolio have been operating extremely well. And the additional EBITDA that we generate from that business has been very beneficial over the last 2 years.

Speaker 4

Thank you. And then on the HUD business that picked up meaningfully and I know it's a high margin business, although dollar volume is not that big, but what are your thoughts on the outlook there?

Speaker 2

I think you just said it, which is that it's extremely valuable business. HUD volumes have been down. We're very focused on increasing those volumes. Their D4 product, which is their construction loan product, is a fantastic product for people who want to build and hold rather than build and sell. And we're very, very and we've got a fantastic D4 team, the very best in the country.

Speaker 2

And one of the big issues that was driving our higher HUD volumes pre tightening was what are called interest rate reduction loans, where you've put a HUD loan on back in whenever 2014 and because rates came down, we could go and redo that loan. That was a big driver of volumes pre, great tightening. That volume obviously fell off as we moved into this higher rate environment. And there hasn't been a whole lot of new lending that would help to having more of those IRR loans going forward. So the name of the game right now, Jade, is increased D4 as well as 223F, which is just their standard refinancing product.

Speaker 2

And our team knows that, that those are the 2 products that we're out selling and that we need to get ourselves. The aggregate volume is important, but lead tables are extremely important to us and continuing to be at the very, very top of the lead tables versus the competition is super important and our whole team is focused on doing just that.

Speaker 4

Thank you.

Operator

And ladies and gentlemen, that concludes Q and A portion of today's call. I'd like to turn the conference back to Mr. Willie Walker for additional or closing remarks.

Speaker 2

Great. Thank you everyone for joining us today. And thank you to the W and D team for all they did to produce a very solid Q2 2024. And we look forward to talking to you all at the end of Q3 and well beginning of Q4 for Q3. Thanks everyone.

Speaker 2

Have a nice day.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Walker & Dunlop Q2 2024
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