Good day, and welcome to the Q3 2024 Walker & Dunlop Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kelsey Duffey. Please go ahead.

Thank you, Ruth. Good morning, everyone. Thank you for joining Walker & Dunlop’s third 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. Our third quarter financial results reflect an improving market that benefited from healthy fundamentals in commercial real estate that are attracting capital to the market and driving an increase in acquisition and financing activity. It is our expectation the market continues to improve over the next several years and that our investments in the people of Walker & Dunlop, our brand and our technology position us very well to grow our financial results on the top and bottom line and continue expanding our market presence in the commercial real estate financing and services market. We closed $11.6 billion of total transaction volume in Q3, up 36% from Q3 2023 and up 37% sequentially from Q2 2024. Due to increased deal flow and revenues, we grew diluted earnings per share 33% year-over-year to $0.85 per share. Adjusted EBITDA and adjusted core EPS, which strip out non-cash revenues and expenses were both up 7%. Shown on slide 4, $11.6 billion of Q3 transaction volume included $3.6 billion of property sales, up 44% year-over-year. Property sales volume grew from $1.2 billion in Q1 to $1.5 billion in Q2 to $3.6 billion in Q3, and with a healthy Q4 pipeline shows a terrific trend in multifamily sales activity. While these volumes are still well below our pre-tightening peak in Q2 of 2022, our national presence and exceptional brand will allow us to scale transaction volume significantly without adding headcount. Fannie Mae and Freddie Mac were sluggish market participants in the first half of the year, but both stepped back into the market in the third quarter. We closed $3.5 billion of loans with the GSEs in Q3, a welcome pickup in volume. Year-to-date, the GSEs deployed a combined $68 billion and have plenty of lending capacity in…

Thank you, Willy, and good morning, everyone. The growth in transaction activity and improvement across nearly all our key financial metrics signal the beginning of a recovery within the commercial real estate market. Total transaction volumes grew 36% this quarter to $11.6 billion and generated diluted earnings per share of $0.85, up 33% year-over-year. We continue to produce strong and stable cash flows, supporting the 7% increase in adjusted EBITDA and adjusted core EPS. With increasing clarity around the path of short-term interest rates and a growing supply of capital to the commercial real estate sector, the macroeconomic landscape is strengthening and WD's financial position, diversified platform and differentiated business model position us to outperform as the market continues its recovery. Turning to our segment results. Capital markets transaction activity accelerated this quarter. Our platform has been steadily rebounding throughout 2024 with sequential increases in our GSE, debt brokerage and property sales volumes since Q1. As shown on slide 6, the surge in transaction volumes this quarter produced 210% growth in net income for the segment to $22 million, while adjusted EBITDA also improved to a loss of $4.6 million. We are particularly encouraged by the significant growth in property sales transaction activity, which increased 135% from last quarter, reflecting a stabilization of asset prices and a robust pool of buyers confident in the long-term fundamentals of multifamily assets. Additionally, the momentum Willie described in our GSE transaction volumes is promising, and we anticipate this trend to continue into the fourth quarter. The current interest rate environment, coupled with an expanding supply of capital, suggests we are at a turning point for the segment's performance as we transition into the next commercial real estate cycle. Our SAM segment continues to deliver healthy recurring cash flows from our scaled servicing and…

Thank you, Greg. As shown on slide 10, market research shows that 2024 will be a peak year for apartment completions with 600,000 units expected to come online. And yet Walker & Dunlop Research Company, Zelman, is projecting 1.8% rent growth in 2024 as many assets and regions are still growing rents. Multifamily assets have held up extremely well against a massive influx of supply because the cost of homeownership is simply unaffordable for many Americans. Until we get a dramatic increase in the supply of single-family housing or a dramatic decrease in mortgage rates, cost of homeownership will remain out of reach for someone making a median income in America. Add to this macro outlook, the construction starts on new multifamily properties have dropped dramatically in 2024, only 250,000 units, down 58% from 2022's peak creating an undersupplied market in 2026 and 2027. Greater conviction on rents and future supply is driving investment sales volume today, which will lead to higher capital flows, which will lead to lower cap rates, which will lead to higher returns. This is what happens at the beginning of every real estate cycle, and we believe we are starting one right now. As we look forward to a recovery in transaction volumes, it is important for investors to understand Walker & Dunlop's ability to grow both our top and bottom-line. We made the decision to hold on to the majority of our bankers and brokers during the great tightening even as transaction activity fell off dramatically because we could afford to and because we knew the cycle would eventually turn. As shown on this slide, in 2019 before the pandemic and under relatively normal market conditions, we had 174 bankers and brokers at Walker & Dunlop who closed on average $184 million in transaction…

Thank you. [Operator Instructions] We'll go first to Derek Sommers with Jefferies.

Hey. Good morning everyone. Just on the property sales volume, I know for the past couple of quarters, we had talked about expanded kind of broker opinion in the value pipeline. In the quarter, how much of the property sales volume was pull-through from that pipeline? And how much was kind of opportunistic?

I'm not -- Derek, could you be a little bit more -- I'm not exactly sure what you're looking for there in the sense of -- we don't -- the pipeline sort of, if you will, is the pipeline. And so are you asking what deals materialized in Q3 versus had been in the pipeline in Q2?

Correct, yes.

The gestation period, if you will, as it relates to doing a BOV on a property, then listing it and having the actual transaction happen is longer than a quarter. So it's impossible to say to you, well, all of that was in Q2 and then got delivered in Q3. I think as both Greg and I said in the call, we have seen a significant up-tick in both the pipeline as well as transaction volumes as I went through in detail in the call. And even in the last six weeks as rates have gone up, we have seen the pipeline hold in to the extent that very few deals have been dropped, although there have been requests for adjustments in price that are sometimes accepted by the seller and sometimes not. But generally speaking, the investment sales pipeline is holding very strong into Q4.

Got it. That makes sense. And then, in terms of purpose mix, is there any kind of shift between refinance and purchase deals recently, I guess, compared to longer-term averages?

No. The one thing that we've been very focused on as we head into Q4, particularly with the recent run-up in rates is how much of the pipeline is refinancing activity, which typically is term-driven where someone has to refinance the property versus acquisition financing. And as we look into it, we feel very good that the Q4 pipeline is overweighted towards refinancing activity versus acquisition activity. But then I would also say, as we look at the acquisition pipeline, as I just said, acquisitions are still moving forward and people are not pulling properties from the market given the run-up in rates.

Got it. Very helpful color. Thank you.

We'll go next to Jade Rahmani with KBW.

Jade, we don't have you yet...

Mr. Rahmani, your line is open. You may be on mute, Mr. Rahmani.

Can you hear me now?

Yes, we can hear you now.

We can.

Okay. Sorry about that. What do you see happening if the 10-year treasury goes to 5%. Curious as to how you game out that scenario. There are some puts and takes with respect to transaction volumes, servicing, portfolio duration, as well as implications for the multifamily market since likely single-family homes would have lower demand.

Yes, Jade, we -- we haven't sort of, if you will, gained that out, as you just said. We're obviously watching where rates go. We saw a significant increase in rates yesterday post election. But it's impossible for us to predict where rates are going to go. I would say that there is a general sense that we are at the beginning of the next cycle that after two years of tightening rates, it is likely that we're going to get another cut to the Fed funds rate and that we should remain in a relatively stable rate environment. Should that change, we'll obviously adjust to it as everyone who's an investor in Walker & Dunlop saw over the last two years, we adjusted very significantly to dramatic changes in rates that we were seeing, as you well know, 75 basis point increases in the Fed funds rate on an every other meeting or every meeting basis. There is no projection to that. But as you also focus on, our business is really much more based off of the long bond and the 10-year treasury than it is off of Fed funds rate. But we will react to whatever interest rate environment comes our way. You do underscore in your comment that as rates go up, that gap between multifamily and single-family would only increase, which means that people will remain renters, which will mean that occupancy will stay high. And as you burn through the new deliveries, which we underscored in our call that have put downward pressure on rents, albeit we still are going to see national rent growth in 2024 with an unprecedented volume of deliveries. That all bodes well to the underlying fundamentals of multifamily, which should continue to attract investment dollars, which then drives investment sales activity, which then brings capital to the market. And as capital comes to the market, cap rates go down and the value of assets inflate. So hard to predict. We never do actually predict where rates are going to go. I have been saying for some time that the 10-year ought to settle in to a -- as we get into a normalized yield curve somewhere between 400 and 450. We're obviously at the high end of that range with the 10-year closing at 4.41% yesterday. But the encouraging thing is that our clients are still transacting. And as I said to Derek's question a moment ago, we are not seeing the Q4 pipeline fade away as we've seen rates go up precipitously.

Thank you very much. On the GSE side, typically, the fourth quarter is seasonally the strongest, quite a meaningful uptick. And yet, I think one of your competitors noted some pressure on the throughput, the ability to get loans closed because there's now so many requests coming into the GSEs and they're looking to be more active. So they've gone from being kind of in a holding pattern to having to ramp up ability to close loans. Do you see that being a gating factor in the fourth quarter?

I believe our competitor that made that call on their earnings call is a much larger Freddie Mac Optigo lender than they are a Fannie Mae DUS lender. And as you know, Jade, the Optigo business, those loans are underwritten by Freddie Mac. And in the Fannie Mae DUS business, the loans are underwritten by the Fannie Mae DUS lender partner. And so I would just say to you that on the Fannie Mae side of things, we control our destiny a lot more than we would on Freddie Mac. And so I would not echo what our competitor firm said as it relates to the ability to process business. Q – Jade Rahmani: Thanks. That's good color and good to hear. And then just finally, on the tax syndication business, it sounds like there was maybe a delay in recognition of placement fees and you expect that to be correct itself in the fourth quarter. But can you touch on your broader outlook for that business, say, in 2025, still on a positive trajectory. Do you expect growth from that business in 2025?

We certainly expect growth in that business in 2025. As I said in my comments, that's been an extremely consistent contributor to both revenues and earnings since we acquired Alliant several years ago. And it's a fantastic business. Q3 2024 was a slow quarter for us due to no syndication activity and no dispositions. We are very focused on both of those two things, and I have great confidence that in the coming year, we will see that get back on track. We made some significant changes in integrating that business into Walker & Dunlop. And as I underscored with Fannie, Freddie and HUD all very focused on affordable housing and also the low-income housing tax credit market needing more capital as one of the primary sources of equity capital for the construction of affordable multifamily properties. We see great, if you will, dynamics in that business going forward. The one other thing I would say on that is that business took a step backwards when the Trump administration in 2017 passed the Jobs Act and tax reductions at that time where the corporate income tax came down significantly. What has been talked about is either the extension or potentially a decrease in the corporate tax rate from 21% to 20%, nothing close to the dramatic change that happened in 2017 as tax rates stepped down on the corporate level significantly. So if we either saw a 1% modification or a continuation of the tax rate, you would think that, that business stays in line and doesn't have the step back that it did last time the corporate tax rate came down as dramatically as it did. Q – Jade Rahmani: Thanks a lot.

We'll go next to Steve DeLaney with Citizens JMP. Q – Steve DeLaney: Good morning, everyone. And congratulations on your strong third quarter. Obviously, transaction volume up very strongly year-over-year, 36%. I noticed though that total revenues obviously only increased 9%. So it appears there's something going on with the revenue mix or there was an outlier transaction maybe last year. Could you just help me rationalize the difference between your volume of business and your revenue growth? Thanks.

Sure, Steve. Good morning, and great to have you. Go ahead, Greg.

No, go ahead, Will, if you. Look, I think, Steve, the thing to point out is just the balance of our business now between the capital markets platform and the SAM segment, where a significant portion of our revenues are coming from SAM -- our SAM segment and the transaction activity doesn't impact that revenue base until down the road, right? When the loan closes, you then start to earn servicing fees during the next quarter. So a 36% increase in transaction activity generated the growth that we highlighted in revenues and earnings for the Capital Markets segment, which is in line with what you would expect and generated the 210% growth in net income that we highlighted on the call. And so I would look at it more on a segment basis than an overall basis because you're going to get some -- some blending of the two segments when you just look at the transaction volume growth relative to our overall business growth.

Got it. Got it. So it's really not apples-to-apples. I hear what you're saying, it's the mix of where you're earning the money within SAM versus originations. Okay. That is.

Okay. That is right. Yeah. Let me just let Steve, let me just jump in real quickly. You know our numbers well enough to know that you have identified one thing that did happen in the quarter, which was we did a large transaction that we made a less than normal fee on. It was highly competitive. We were very excited we won it, but it had a big number as it relates to the size of the transaction, but it didn't have a commensurate fee because it was very competitive in getting it. So what Greg said as it relates to the overall mix of business is exactly right on the overall business. But as you look into that, you identified in that, that as it relates to volumes, we had one transaction that was a very large size transaction, but we did not make a commensurate fee on it given how competitive it was to win it. We were thrilled to win it, but quite honestly, didn't love the fee we made on it.

Understood. That helps. That's exactly kind of what I was trying to identify if there was an outlier somewhere in the mix. Just looking -- stepping back big picture, Willie, and I appreciate we all know what's going on with rates here right now and understand the impact that, that can have on your borrowers. But looking back bigger, not so much the election, but let's tie that in. I guess when you look -- the GSEs are so critical to housing and to your business on multifamily. Are there any lingering issues out there from sort of a political standpoint or just policy standpoint, anything that is out there that could create problems for the GSEs as we go down the road that would affect your business? Yes.

I'll just -- without talking too specifically about the conversations that I have had, as you can imagine, Steve, we have been in constant contact with both these and ours leading up to the election to make sure that whatever the outcome is, we have a good sense of any thoughts as it relates to what would happen to the GSEs under a Harris administration or a Trump administration. And all I would say is, having spoken to many, many Republicans who either were previously engaged with the GSEs or are on, if you will, various lists of people who could potentially go in there. Everything that I am hearing is quite positive as it relates to a desire to get the agencies out of conservatorship, but to do it without significant market disruption. And there was, as you well know, significant work done in the first Trump administration to work on getting the GSEs out of conservatorship. And I would assume that, that work is picked up on in the next Trump administration. I would think 2025 is all about taxes and that there really won't be -- there will be work done in the background as it relates to potentially getting Fannie and Freddie out of conservatorship, but that 2025 will be all about taxes and what the new tax bill will be at the end of the year. And then I would think that you start to see some type of real work, honestly, in 2026 and 2027 on getting them out of conservatorship. And I think the other piece to it is now that it's looking like you will have both a Republican Senate as well as a Republican House, who are the Chair, men or women of the various committees, House Financial Services Committee, if a representative French Hill is the Chairman there and on the Senate Banking Committee, if Tim Scott is the Chairman there, both of those obviously are TBD. Both of those two gentlemen know well the role the agencies play in the market. And I would think both of them would look at doing something legislatively, but at the end of the day, Steve, if I had to handicap it, I would think that if Fannie and Freddie get out of conservatorship at any point in 2026 or 2027, it would be done through an administrative action/executive order and not through a congressional route, if you will. But that's just -- that's trying to project a lot of different things. The final thing I would say is it really will matter who the Treasury Secretary is and whether he or she has the appetite to make GSE reform and the spinout of Fannie and Freddie a priority in his or her tenure as Treasury Secretary. Q – Steve DeLaney: Thanks so much, Willy. Those are very inside baseball kind of comments that are helpful at this time. Thanks.

We'll go next to Jay McCanless with Wedbush.

Hi. Good morning, everyone. Thanks for taking my questions. Willy, if I could pick up on a comment you made earlier that with rates moving higher, I think you said that the pending backlog in the book has not fallen off. People are still ready to go get transactions done. Did I hear that correctly?

You did, Jay.

Okay. Great. That's good to hear. And then very encouraging what you're saying about the start of a new real estate cycle. Is there anything besides rates, of course, that we need to be monitoring that could be headwinds or even potential tailwinds to that cycle above and beyond what's going on with rates?

Well, as we've talked about in the past, Jay, there's a tremendous amount of equity capital that has been sitting on the sidelines for the last two years. That is either going to be deployed or returned to investors. And as a result of that, I think you've got to watch that because most investors don't like returning capital to their end investors, if you will. They like to put it to work. So I think, first of all, we're going to see that. The second thing that I think is important is M&A activity in commercial real estate has basically been more than for the last year. We had Blackstone take AIR Communities Private earlier this year. But other than that and then a recently announced retail acquisition, again by Blackstone, there's been very, very little M&A activity. And if you look at 2021 into 2022 into 2023, there was significant M&A activity of either public-private or public-public as it relates to large REITs and as well as private equity firms buying publicly traded companies. I would think, given the amount of excitement as it relates to the M&A market that you will see a lot more activity there. And as the M&A market picks up, you obviously have both the need for all the things we do, investment sales, valuation work and financing work. And so I would think the M&A market picking up will also drive transaction volumes. And then the final piece to it is the private REITs and the role the private REITs have played in the market in 2021 and 2022 going to the sidelines in 2023 and 2024. And they all sit on a massive amount of properties and collateral that needs to either be financed, sold. And so I would think that that market as well has a big impact on volumes in 2025 and 2026 as those major market players come back to either figure out whether they're holding, selling or refinancing properties.

That's great. Thank you for all the detail, Willy. And the last one for me, I guess if the tenure stays where it is, 440 right now into 2025, I guess how much risk should we think about for the loans in the servicing portfolio? I know you guys took another provision this quarter, just wondering how you all are thinking about that book into next year if rates don't move off of where they are at this point?

So Jay, 91% of our average risk portfolio is fixed rate loans. So the tenure moving does not impact those loans. We also have a very, very small amount of loans that actually mature in 2025. So as a result of that, the refi risk in the portfolio is very low. So the real as it relates to the tenure, either staying where it is, moving up, moving down, that's not going to have a big impact as it relates to credit side of the equation. It will, obviously, have a big impact as it relates to the market continuing to transact or the marketing pulling back from transaction volumes. And I would put forth that all the things that we just talked about as it relates to the pent-up demand for transactions, for refinancings give us a good sense that we are at the beginning of the next cycle where things will have to move forward. But the bottom line is that we feel extremely good that we have a platform that can, if you will, work on either eventuality. And I would also say that a 440 tenure, we have to all remember that we just went through, what, 12, 13 years of incredibly low interest rates. And clearly, there is a massive amount of debt outstanding that has very low coupon rates on it, which means that as you're trying to redo those deals, as you're thinking about going and selling those deals with a cost of capital for the buyer much, much higher than what you have on the asset, that's going to impact value. And at the same time, a 400 to 450 10-year, go back, and I'm dating myself here, but go back to 2004 to 2007, the 10-year sat in the band between…

Thank you for the color, Willy. Really appreciate it. Thanks for taking my question.

We'll go next to Jade Rahmani with KBW.

Thank you, very much. Just wanted to confirm, the large deal you referred to, that was within the brokerage origination channel, right?

Yes.

Correct, Jade.

Okay. That was the $1.2 billion mixed-use property.

You do your homework, Jade.

It was in the press release. Just wanted to confirm because the gain on sale margins actually came in pretty strong, and I think the mix was quite favorable in terms of GSE volume.

Again, what you just did perfectly was point to the deal I was talking to and yet underscore what Greg said in response to Steve's question.

Okay. Great. Well, thanks very much.

Thank you.

This does conclude today's question-and-answer session. I would like to turn the call back over to Willy Walker for any closing remarks.

Great. Thank you, everyone, for joining us today. Thank you, Greg and Kelsey for all your work on this quarter's script and earnings release. And thanks to everyone on the W&D team for a fantastic Q3. I appreciate everyone dialing in this morning to listen to the call, and I hope everyone has a great day.

This does conclude today's conference call. You may now disconnect.