Walker & Dunlop, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Market Improvement: Q3 financial results reflect an improving commercial real estate market with $11.6 billion in total transaction volume, up 36% Y/Y. Diluted earnings per share grew 33% Y/Y to $0.85. Property sales volume in multifamily is on the rise, and GSEs stepped back into the market in Q3 with strong loan volumes.
• Business Model: Held onto bankers and brokers during the tightening cycle, expanding the team from 174 in 2019 to 231 today. Utilizing data analytics tool Galaxy to drive efficiency, with 68% of refinancings rated locked being new loans and 19% of transaction volume with new clients. Technology-enabled businesses like Apprise and Small Balance Lending showing growth, with Apprise revenues growing from $2.4M in Q1 to $3.3M in Q3.
• Affordable Housing: HUD lending volumes grew over 200% to $272M in Q3, moving from 5th to 2nd largest HUD multifamily lender. Affordable equity revenues down 37% due to lower syndication and dispositions, but confident in pickup of syndication and disposition volumes.

Segment Performance

• Capital Markets: Closed $11.6 billion of total transaction volume in Q3, up 36% from Q3 2023 and 37% sequentially from Q2. Net income for the segment grew 210% to $22 million, while adjusted EBITDA was a loss of $4.6 million. Property sales volume increased 135% from the previous quarter, with multifamily sales activity showing a strong trend. GSE loan volumes saw a pickup, with $3.5 billion closed in Q3.
• SAM (Servicing and Asset Management): Ended the quarter with a total managed portfolio of $152 billion, including a $134 billion servicing portfolio and $18 billion of assets under management. Revenues declined 2% this quarter due to lower syndication revenues from Walker & Dunlop affordable Equity, but servicing fees increased 3%. A $3 million provision for credit losses was recognized related to defaulted loans.

Guidance

• Full-year target: Mid-single digits to low-teens growth in diluted EPS, adjusted EBITDA, and adjusted core EPS. Q3 momentum and strong Q4 pipeline support achieving the low end of diluted EPS guidance.
• Interest Rates: FOMC rate cut in September will reduce net interest earnings by $4M-$5M in Q4, but transaction activity growth expected to offset this decline.

Risks

• Credit Risk: Recognized a $3 million provision for credit losses this quarter related to defaulted loans. Fannie Mae requested repurchase of two defaulted loans totaling $26M.
• Interest Rate Volatility: Impact on transaction volumes and asset valuations if interest rates continue to fluctuate significantly, affecting the ability to determine accurate cap rates for property sales/buybacks.

Question and Answer

• Q: On property sales volume pull-through from pipeline and purpose mix shift A: Pipeline gestation period longer than a quarter, Q4 pipeline overweighted towards refinancing activity versus acquisition activity.
• Q: Impact of 10-year treasury at 5% A: Unpredictable, but market at start of new cycle with pipeline holding strong despite recent rate increase.
• Q: GSE throughput in Q4 A: Fannie Mae side in control, not echoing competitor's concerns about Freddie Mac Optigo's ability to process business.
• Q: Revenue mix difference between volume and growth A: Balance between Capital Markets and SAM segments, with transaction activity impact on revenues occurring down the road (e.g., servicing fees earned after loan closure).
• Q: Risk in servicing portfolio with rates A: 91% of risk portfolio is fixed rate, low refi risk in 2025; stability in rates more important than aggregate rate level for market transaction volumes