Walker & Dunlop, Inc

Good day and welcome to the Q1 2024 Walker & Dunlop Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jenna Sims. Please go ahead.

Thank you, Ruth. Good morning, everyone. Thank you for joining Walker & Dunlop's first quarter 2024 earnings call. I have with me this morning our Chairman and CEO, Willie 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 Willie and Greg will touch on during the call. Please also note that we will reference the non-GAAP financial metrics, adjusted EBITDA, and adjusted core EPS during the course of this call. Please refer to the appendix of the earnings presentation for a reconciliation of these non-GAAP financial metrics. Investors are urged to carefully read the forward-looking statements language in our earnings release. Statements made on this call which are not historical facts may be deemed forward-looking statements within the meaning of the private securities Litigation Reform Act of 1995. Forward-looking statements describe our current expectations, and actual results may differ materially. Walker & Dunlop is under no obligation to update or alter our forward-looking statements, whether as 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 Willie.

Thank you, Jenna, and good morning, everyone. As we outlined in our February earnings call, the strong January jobs report pushed back expectations for a March rate cut, and the 10-year Treasury rose from 3.88% at year end to a high of 4.34% during the first quarter. Market uncertainty and rising rates disrupted the transaction market, And according to RCA, first quarter 2024 multifamily property sales volume was the lowest level since Q2 of 2020 when the pandemic shut down the market. Yet within this context, the W&D team closed $6.4 billion of total transaction volume, down only 5% from Q1 of last year. Given slightly lower volumes and no one-time benefits that we earned in Q1 last year, which we pointed out on our last earnings call. Q1 diluted earnings per share were 35 cents, down 56% year over year. Adjusted core EPS, which strips out non-cash mortgage servicing rate revenues and expenses, was $1.19, up 2% from last year. And adjusted EBITDA, which has been an important indicator of WMD's growth and financial stability, was $74 million, up 9% from Q1 of last year. The origination and servicing businesses we have built with dramatic earnings growth and expansion cycles and steady earnings and cash flow and down cycles is what allows WMD to maintain our market presence and invest for the future in challenging markets. $6.4 billion of transaction volume is driven by strong debt brokerage volume of $3.3 billion, up 40% year over year. Our clients need capital, and our debt brokerage team did a fantastic job finding the appropriate capital for their needs. Importantly, and atypically, over half of our Q1 debt brokerage deal flow was on non-multifamily assets in retail, hospitality, industrial, and office. The vast majority of 2024 commercial real estate loan maturities are on non-multifamily assets, and the start to the year by our debt brokerage team using non-agency capital is encouraging. But as you can see on slide seven, the Mortgage Bankers Association estimates that $929 billion of commercial real estate mortgages mature in 2024. Of that rather large volume, only 28% or $257 billion are multifamily loans, and only 3% or 28 billion are Fannie, Freddie, and HUD loans. In a normalized market, half the market would be multifamily loans, and half that volume would be with the GSEs and HUD. This lack of multifamily and agency maturities is good from a maturity risk standpoint, but will require our team to search outside the W&D portfolio for financing opportunities, something our team has done consistently as W&D has climbed the league tables and built a $132 billion servicing portfolio. In the first quarter alone, 79% of our refinancings were new loans to Walker & Dunlop. There are two big questions after Q1. First, are banks going to require loan payoffs, or are they going to allow borrowers to extend? If banks call loans, there will be over $400 billion of maturities that need to be refinanced off bank balance sheets in 2024. If banks simply extend loans because they are performing and the bank is making SOFR plus 300, for example, there will be no 2024 refinancing of that loan. Second, are Fannie and Freddie going to step into the market and refinance multi-loans that are part of CMBS pools, debt fund CLOs, life insurance company portfolios, or bank balance sheets? They have done this in the past and are doing this today. But as we stated on our last earnings call, Fannie and Freddie had said that they expect to do the same volume in 2024 as they did in 2023, which given the volume of 2024 maturities, surprises us. There are opportunities for the GSEs to exceed their 2023 volumes, but it will require them to be innovative and entrepreneurial and in partnership with their DUS and OptiGO partners. For example, a multifamily construction loan on a new asset in Austin, Texas might be priced at SOFR plus 300 with a 311 structure, three-year loan with two one-year extension options. If the asset is still leasing up and doesn't have 90% occupancy, it can't qualify for a GSE loan. But if Annie and Freddie modified their occupancy requirements for assets owned by established developers with impeccable track records, they could put permanent financing on the asset that would do several things, reduce the borrowing cost, allow the owner to lock in long-term fixed rate financing, and also de-risk the bank's balance sheet. We continue to invest in technology and are seeing promising signs of growth in small balance lending and appraisals. Our multifamily appraisal business, Surprise, grew Q1 appraisal revenue by 20%, while the overall multifamily appraisal market shrunk by 53%. Our investments in technology have generated significant efficiencies in this business, and we achieved our Q1 growth with 23% fewer people. Our small balance lending business has maintained market share with Fannie and Freddie and grew Q1 revenues 17% year over year, with the opportunity to grow dramatically as banks continue to pull back from originating new small-balance multifamily loans. Our servicing and asset management business contributed meaningfully to the strength of the trusted EBITDA, thanks to dramatically lower runoff in the portfolio and our conservative credit culture, which has led to strong credit fundamentals within the portfolio. We launched a new technology portal for WMD servicing clients at the end of 2023 and already have over 2,000 active users. Not only does this bespoke technology save W&D licensing fees, but it puts us closer to our clients with a technology solution we not only own and can upgrade, but also can add new features to engage more deeply with our significant servicing client base. Walker Nullop Affordable Equity, formerly known as Alliant Capital, generated $18 million of revenues in Q1, down 9% from the first quarter of last year. Although this is a slow start to the year, We closed Affordable Equity Fund 119 with $163 million in funding in early April, which will add the syndication fee revenue in the second quarter. It is our expectation that W&V Affordable Equity increases both fundraising and disposition activity in 2024 with substantial growth over the team's very successful 2023. Finally, credit in our servicing portfolio remains strong. And as a result of lower payoffs and continued growth in the portfolio, we grew servicing fees 6% year over year in Q1. This is one of the advantages of having both an origination and servicing platform inside of W&D. With limited runoff in the loan portfolio, even reduced loan origination volumes add UPV and fee income to our servicing business. I will now turn the call over to Greg to discuss our Q1 financial performance in more detail. And then I'll come back with some thoughts about what we see coming ahead.