Good day, and welcome to the Q2 2024 Walker & 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.

Thank you, Lisa. Good morning, everyone. Thank you for joining Walker & Dunlop’s second quarter 2024 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 archived 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 Willy 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 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 & Dunlop is 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. 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 Willy.

Thank you, Kelsey, and good morning, everyone. We held Walker & Dunlop’s Annual Summer Conference in Sun Valley, Idaho two weeks ago with some of the largest and most active investors in commercial real estate. The sentiment at the conference was that after two years of rising interest rates and limited investment activity, it is time to get active again. Q2 2024 was the first quarter in almost two 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. W&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 $3.9 billion, 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 for the GSEs were down 23% year-over-year to $2.7 billion. 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 $1.5 billion is a good start to the market recovery, up 31% from Q1 of this year. I'd like to make sure we understand both where the market was and what the W&D team can do. We did $7.9 billion of multifamily investment sales in Q2 of 2022 versus $1.5 billion 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…

Thank you, Willy, 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 $8.4 billion of transaction activity this quarter, generating 15% growth in adjusted EBITDA year-over-year to $81 million 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 remain below historical levels of 10% and 5%, respectively. The last two years of The Great 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. 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 million, 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 second quarter, 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 brokered transaction activity remains robust, growing 16% over the same quarter last year. Overall, net income for the segment declined $5 million, or 31%…

Thank you, Greg. As Greg just underscored, 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. One of the analysts who covers W&D recently did an analysis of peak earnings in 2022 to trough earnings in 2023 for W&D and several of our largest competitors. What the data shows, essentially contrary to many investors perceptions is that W&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 a downturn better than W&D due to long-term, low margin facilities management and outsourcing contracts. Not so, and that is due to the strength of W&D servicing and asset management businesses. And what is really exciting is that as we enter this next cycle, W&D's capital markets focus will benefit disproportionately from increased transaction volumes in financing, property sales, appraisals, research and investment banking. As W&D investors know, originating loans with mortgage servicing rights is a large and important component of W&D's revenues and GAAP EPS. Over the past two 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. 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&D. Regarding servicing fees, we are seeing a recovery in…

Thank you Mr. Walker. [Operator Instructions] Our first question comes from Jade Rahmani with KBW. Please go ahead.

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, 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.

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 have 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 GSEs 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 one 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. 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 DUS and Optigo 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 have 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.

Thanks very much.

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

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, Willy. I want to talk just about the earnings statement, if I might. Your frontline numbers are gap and I think most of the analysts were the numbers we put into our consensus. I'd like to just make the point that I think, well, let me ask you this, Willy and Greg. Adjusted Corp EPS seems to take out a lot of the noise from fair value marks and servicing et cetera. 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.

Thanks, Steve. It's a heck of a good question because I will tell you that while the growth in adjusted core as well as an 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 two years is because we were so successful at building up $133 billion 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 two years. But we also realize that cycle will be whether its five years from now, seven years from now, let's hope its ten 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 three, five, seven years. And so one of the things that we are very focused on is that there is no shifting of focus inside of Walker & Dunlop away from booking mortgage servicing rights, because that is the business model, and so while our financial results, 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 generates significant mortgage servicing rights, which will benefit non-cash earnings and non-cash revenues as we book them, which will then pay huge dividends three, five, seven 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.

Got it. So what you're saying when you think about WD and the origination side of your business, your GSE business, obviously the MSR 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, Willy, 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 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?

Yes. I mean, Steve, let 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 & Dunlop. And as Jade's analysis showed, they didn't, okay. 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 off 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 onto 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, Willy, we think for you and the other senior managers, we should start to focus on adjusted core EPS and less on GAAP EPS, 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 five, seven, 10 years from now when we have another downturn in transaction volumes, that's the model and we'll stick to it.

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

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

Hey, good morning, everyone. I was wondering, I think in the prior quarter, we 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 that deal flow pulling through?

Yes. Derek, pipeline is very nicely in 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 Walker & Dunlop wouldn't have been invited to those – 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. But we’re still a top five 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.S. who is thinking about selling either an individual asset or a scaled portfolio, Walker & 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.

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?

Cool. I’ll skip on the second one. On the first one, FHFA 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. I think they see the market recovery coming. And as a result of that, I would think that they lean toward 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 a 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. And so, always, with a 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 2008. And so, none of that is terribly concerning at this point.

Got it. Thank you. That’s all for me.

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

Great. Thanks. Good morning. Just on escrow income, obviously, that’s been a benefit over the last few years with higher short-term rates. But just curious if you 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? 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 two.

Yes, Greg. You want to take that?

Yes, absolutely. So, simply, we have about – depending on the time of the year, we have between $2.2 billion $2.5 billion 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. 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 an annualized basis from that point forward.

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?

Absolutely. We’ve made sure to maintain capacity. We’ve got, as Willy said on his remarks, plenty of capacity with respect to our 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. There’s absolutely going to need to be a little bit of incremental expense increase as 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.

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 escrow income comes down, so does our borrowing cost. So, you and Greg talked about that as it relates to how you also have – as escrow comes down, so does our borrowing cost and our debt. So, those two act as a hedge against one another. And then if you’re in a lower-rate environment, very clearly, the assumption that transaction volumes 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 in the escrows were basically in tandem as the hedge, and then what you pick up is increased transaction volumes.

Make sense. Thanks a lot.

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

Thank you. Just wanted to ask about the Affordable Equity business, the business that used to be known as Alliant. Just on the LIHTC outlook, what are you seeing there? And I think you alluded to the lower rate environment outlook potentially benefiting that business.

A couple of things there, Jade. First of all, just did not pass the bill that it had in it increased LIHTC 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 two years ago. We’ve been integrating Alliant into Walker & 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 Sheri Thompson into running all of affordable housing earlier this year. And so, bringing the formerly known as Alliant business, Walker & 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. 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 two years.

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?

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. 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 [indiscernible] to having more of those IRR loans going forward. So, the name of the game right now, Jade, is increased D4 as well as 223(f), which is just their standard refinancing product. And our team knows that those are the two 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.

Thank you.

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

Great. Thank you, everyone, for joining us today, and thank you to the W&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. Have a nice day.

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