Image source: The Motley Fool.

Walker & Dunlop (NYSE: WD)
Q4 2023 Earnings Call
Feb 15, 2024, 8:00 a.m. ET

Key Elements Discussed:

• Reflections on Market Performance
• Projection for Future Trends
• Key Financial Metrics

Initial Address:

Operator

Today’s conference is being recorded. At this time, I would like to turn the conference over to Kelsey Duffey, senior vice president of investor relations.

Please go ahead.

Kelsey Duffey — Senior Vice President, Investor Relations

Thank you, Karen. Good morning, everyone. Thank you for joining Walker & Dunlop’s fourth quarter and full year 2023 earnings call. 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.

Assessing Performance and Future Projections

Willy Walker — Chairman and Chief Executive Officer

2023 was a challenging year for the commercial real estate industry, and the fourth quarter started out with the same headwinds that we saw throughout the year. But the lower-than-expected CPI print in November drove a 100-basis-point rally in rates, and the deals in our pipeline held together for the first time all year, resulting in $9.3 billion of total transaction volume in the quarter.

This was still down 17% from Q4 of ’22 but up sequentially from the third quarter and our highest quarterly volume of the year. A nice way to end the year. As you can see on Slide 3, our Q4 financial performance was solid across the board, including total revenues of $274 million, down just 3% from Q4 of ’22; and diluted earnings per share of $0.93. EPS was off more than other metrics largely due to two transaction-related adjustments unique to Q4 of last year. Adjusted core EPS, which strips out a good deal of noncash revenues and expenses, was up 1% from the same period last year.

Finally, reflecting the strength of the W&D business model, adjusted EBITDA grew each quarter throughout the year, from 68 million in Q1 to 88 million in Q4, down only 5% from Q4 of ’22. Q4 results were a nice uptick after a very challenging 2023 when full year total transaction volume was down 48% to $33 billion. Yet due to our underlying business model, significant cost management, and the exceptional W&D team, full-year adjusted EBITDA was $300 million, down only 8% from 2022.

We are hopeful that we have effectively weathered the great tightening and that as rates stabilize and potentially head down, that we are extremely well-positioned to benefit from the market’s eventual recovery. The market’s belief that the Fed is done tightening and will start to ease in 2024 is welcome news and very constructive for the commercial real estate industry, yet there are clearly questions around when and by how much the Fed will ease, and the answer to those questions will have a dramatic impact on the market.

Market Dynamics and Strategic Positioning

Our multifamily property sales team closed $2.9 billion of sales in the fourth quarter, bringing our full-year volume to 8.8 billion, down 55% from 2022, slightly less than the broader market decline of 61%. As a result, we increased market share from 6.7% in 2022 to 7.4% in 2023. Yet, brokerage volume declined 34% in Q4 to $2.9 billion and was down 55% for the full year to $11.7 billion.

Our GSE volumes and market share remained strong, once again finishing the year as Fannie Mae’s largest DUS lender for the fifth consecutive year at $6.6 billion and Freddie Mac’s third largest partner at $4.6 billion of loan deliveries. Our focus on affordable housing and small balance lending added significant loan volume to our GSE totals. Our research arm, Zelman, provided W&D with stable subscription revenues as their research continues to be known as some of the very best covering the housing industry. We also expanded Zelman’s investment banking capabilities into the commercial market in 2023.

And in the fourth quarter, the investment banking team closed three transactions, albeit all in the single-family sector, that boosted revenues and expanded the W&D brand significantly. I mentioned our small balance lending group’s importance to our GSE volumes. And thanks to the team and technology we have invested in that business,

Final Thoughts on Market Development

Looking ahead, if the Fed begins easing in Q2 and continues to ease, we would expect a nice uptick in transaction volume this year and also an improvement in the credit landscape. Our multifamily property sales team closed $2.9 billion of sales in the fourth quarter, bringing our full year volume to 8.8 billion, down 55% from 2022, slightly less than the*broad.*er market decline of 61%. As a result, we increased market share from 6.7% in 2022 to 7.4% in 2023.

Yet, brokerage volume declined 34% in Q4 to $2.9 billion and was down 55% for the full year to $11.7 billion. Our GSE volumes and market share remained strong, once again finishing the year as Fannie Mae’s largest DUS lender for the fifth consecutive year at $6.6 billion and Freddie Mac’s third largest partner at $4.6 billion of loan deliveries. Our focus on affordable housing and small balance lending added significant loan volume to our GSE totals.

Walker & Dunlop Ends the Year with Strong Market Position

The end of 2023 saw Walker & Dunlop emerging as the third largest small balance lender with Fannie Mae and the fourth largest with Freddie Mac, marking a significant expansion of market share with both entities. The company’s tech-enabled business, Apprise, also demonstrated impressive growth, with 11% market share achieved in 2023, a substantial increase from the 6% recorded in the previous year. With such remarkable progress, the future outlook for 2024 appears promising.

A Year of Market Volatility and Resilience

Greg Florkowski, the Executive Vice President and Chief Financial Officer, highlighted the challenges posed by persistent volatile market conditions in the commercial real estate investment sector throughout 2023. Despite this, the company witnessed improved performance in its capital markets segment, driven by increased transaction activity following a decline in long-term rates during the fourth quarter. The positive sentiment following the Federal Reserve’s November remarks also contributed to this upswing in market activity.

Florkowski emphasized how the company’s capital markets segment delivered its strongest quarterly financial results of the year, underlining the sequential uptick in total transaction volume. Although total revenues experienced a year-over-year decline, they were up 10% from the third quarter of 2023, with a stronger gain on sale margin. In addition, cost reduction measures, including a decline in variable compensation, contributed to improved performance in this segment.

Segment Performance Overview

The servicing and asset management segment, or SAM, also demonstrated resilience, producing revenues of $140 million in the fourth quarter of 2023. Although this represented a decrease compared to the same quarter in the previous year, it showcased the segment’s robustness in a challenging market environment. The decline in investment management revenues was offset by the success of the Affordable Equity team, which achieved its highest year of equity originations in history, syndicating $688 million of new equity during 2023.

Florkowski also provided insights into the company’s credit performance, highlighting the minimal impact of defaulted loans on the portfolio and the proactive measures taken to address any potential issues. He reaffirmed the company’s disciplined approach to credit and expressed confidence in the broad credit fundamentals of their at-risk portfolio going forward.

Consolidated Financial Results and Future Outlook

The annual performance for 2023 reflected the impact of lower transaction activity, with total transaction volume down 48% year over year. However, the company’s scaled servicing and asset management platform played a significant role in supporting revenues, which totaled $1.1 billion, demonstrating the durability of this segment’s cash flows. Despite this, diluted earnings per share were affected, declining by 50% compared to 2022. Adjusted EBITDA and adjusted core EPS also experienced decreases of 8% and 16% respectively.

Greg Florkowski pointed out that despite the challenging market conditions, the company maintained a strong cash position and generated stable cash flows, leading to the approval of a quarterly dividend increase of 3% and the authorization of a $75 million share repurchase program. He expressed confidence in the business model’s resilience, reinforced by the company’s decision to increase dividends and retain capital to support the business.

Caution and Preparedness for 2024

Florkowski acknowledged the cautious approach adopted by the company in response to the unpredictable market conditions, underlining the proactive measures taken to navigate through the decline in transaction activity. He forewarned that the first quarter of 2024 might see slower earnings compared to the previous year and reiterated the company’s preparedness to face the challenges ahead.

Overall, Walker & Dunlop remains positioned as a resilient player in the market, proactively adapting to market challenges while maintaining a long-term focus on sustaining and developing its business. The persistence and agility demonstrated by the company in navigating through the market headwinds provide a positive outlook for the future. Walker & Dunlop’s ability to harness growth opportunities, even in the face of adverse market conditions, underscores the strength of its business model and the potential for sustained success.

An Unyielding Vision – Walker & Dunlop’s Triumph Amidst Adversity

In the financial realm, the journey to triumph is not just defined by skyrocketing numbers and soaring statistics but by an intricate labyrinth of challenges and opportunities. For Walker & Dunlop, the hurdles of 2023 have not been dismissed as mere blips on the radar. Instead, they are being skillfully navigated through a potent blend of resilience and forward-thinking maneuvers. Despite the prevailing tides of uncertainty, the expectant spirit remains firmly rooted, interspersed with a resolve to conquer the future.

Overcoming the Challenges

Amidst the ebb and flow of economic landscapes, Walker & Dunlop has confronted a series of formidable challenges. The majestic multifamily loans, to the tune of over $450 billion, maturing in the next two years, present a daunting but riveting battleground. Leaning on the pillars of data and technology, the company has set its sights on understanding these looming deals, engaging with customers, and seizing the day. Furthermore, with an array of multifamily units springing to life in 2024, Walker & Dunlop has positioned itself in the vanguard, poised to assist developers in selling or restructuring their assets.

An Ongoing Pursuit of Growth

Walker & Dunlop’s relentless pursuit of growth finds resonance in their recruitment efforts, adding 17 bankers and brokers to the team in 2023 and eyeing a pie of the market share in the current year. The turbulent winds of change in 2023 did not deter the company from focusing on LIHTC dispositions or investing in their business, as exemplified by the successful announcement of their new debt fund. The $150 million capital raise for the fund, when leveraged, is poised to pave the way for funding $0.5 billion of bridge business.

Strong Foundation and Innovation

The bedrock of Walker & Dunlop’s unwavering fortitude roots back to their steadfast business model and the indomitable strength of their team. The company’s robust balance sheet, healthy credit book, and exceptional brand stand as testaments to years of astute investment and unwavering focus. Their dedication to innovation and long-term vision has not only bolstered financial performance but also translated into superior investor returns over the past decade.

An Optimistic Yet Cautious Outlook

While the horizon is tinged with cautious optimism, the company remains mindful of the undulating market currents. The tumultuous undertow of 2023, with a nearly 50% decline in financing and sales volume, did not deter Walker & Dunlop. In the face of challenging markets, the company steered the ship, generating a commendable $300 million in adjusted EBITDA, only 8% below the figures of 2022.

Perseverance and Strategic Vision

Embracing the paradigm of adaptability, Walker & Dunlop has weathered the storms while keeping their gaze steadfastly fixed on the long-term targets of the Drive to ’25. Strategic acquisitions have propelled their growth trajectory, underscoring the company’s unwavering determination to surmount obstacles and realize ambitious goals with sagacity and valor. The business strategy underpinning the Drive to ’25 remains the compass guiding their unwavering resolve, independent of the caprices of macroeconomic conditions.

Walker & Dunlop’s CEO Reflects on the Company’s Performance and the Commercial Real Estate Market in 2023

Walker & Dunlop (W&D) is closing the chapter on an eventful year as its president, Howard Smith, retired at the end of the year. The CEO, Willy Walker, expressed gratitude for Smith’s contributions to the company and emphasized the exciting prospects ahead with the existing management team and a surge of talent from key competitors.

The CEO’s Reflection

Willy Walker, the Chairman and CEO of Walker & Dunlop, expressed gratitude and excitement during a recent address. He highlighted the company’s management team and the addition of new talent in the banking and brokerage sectors, providing a glimpse into W&D’s achievements and its trajectory for the future.

Credit Performance and Portfolio Analysis

In the Q&A session, concerns were raised regarding credit performance and the outlook for the company’s portfolio. Greg Florkowski, the Executive Vice President and CFO, addressed these concerns by affirming the strong credit performance, citing the limited number of delinquent loans and the overall positive position of the portfolio.

Both Walker and Florkowski provided a thorough breakdown of the portfolio’s stability, focusing on key statistics such as fixed-rate loans, loan maturities, and the absence of significant refinance risks. They emphasized their confidence in the company’s portfolio, showcasing a strong sense of assurance for the future.

CECL Reserve and Forward-Look Basis

The Chief Financial Officer, Greg Florkowski, elaborated on the company’s Current Expected Credit Loss (CECL) reserve, reflecting on the historical credit performance and the rationale behind the reserve level. Florkowski assured investors of the adequacy of the company’s reserves, drawing on historical data and forward-looking projections to underscore the company’s preparedness in managing credit risks.

This aligns with the company’s prudent approach to financial matters, amplifying a sense of responsibility and strategic acumen in navigating potential risks.

Guidance and Growth Prospects

The dialogue also touched on guidance and growth prospects, shedding light on the factors contributing to the company’s projected growth. Greg Florkowski responded by highlighting the addition of bankers and brokers, alluding to the expansion of origination channels and its impact on future growth.

This insightful discussion emphasized the company’s sense of adaptability and foresight, underscoring its proactive approach to sustaining growth in a dynamic market.

The Q&A session exemplified the company’s commitment to transparency and its meticulous approach to addressing investors’ concerns, offering a window into the strong strategic footing and the robust operational framework of Walker & Dunlop.

The Future of W&D: A Conservative Approach Amidst Market Opportunities

A Deep Dive Into W&D’s Business Approach

During a recent earnings call, Chairman and Chief Executive Officer, Willy Walker, and Executive Vice President, Chief Financial Officer, Greg Florkowski spoke candidly on the company’s strategies and prospects in a rather turbulent real estate market. Highlighting their financial conservative approach, Walker reiterated the company’s disciplined risk-taking, which has proven to be advantageous for the past 13 years, eschewing high-risk opportunities even in the face of growing investor pressures.

Opportunities and Challenges in the Real Estate Sector

Walker acknowledged the multitude of opportunities in the market but firmly affirms that W&D is resolute in maintaining a conservative credit outlook. The company remains open to assessing all opportunities but underlines its cautious approach. With plenty of capital providers vying to partner with W&D, the company is meticulous in underwriting risks while being mindful of the potential returns, mirroring a high-stakes poker game where a keen eye and a cautious mind can be the ultimate trump card.

Prospect of Future Earnings and Market Forecasts

Diving into future earnings, Florkowski highlighted the dependence on transaction activity, investment banking fees, and the performance of other revenue streams from the affordable housing and syndication activities. This exposes the vulnerability and reliance on market dynamics for financial success. The predicament is akin to predicting the outcome of a horse race; it all depends on various critical factors and unforeseen variables that can make or break the prospects.

Insights on Market Predictions

At the helm of market predictions, Walker dwelled on the pivotal role of the 10-year outlook. Engaging in a bet with a client on the trajectory of the 10-year index, he emphasized the critical nature of market movements on the company’s fortunes, capturing the essence of an ambitious gamble backed by cautious market observations.

While the outlook is buoyant with an abundance of capital waiting to be unleashed, the company remains watchful of negative leverage and emphasizes approaching transactions based on IRR and replacement cost rather than succumbing to market pressures. This tightrope walk exemplifies a cautious approach amidst a sea of tempting opportunities.

Conclusion: Striking a Balance in Challenging Times

Amidst the tantalizing prospects and the ever-unpredictable market, W&D’s conservative stance might appear overly prudent to some. However, it is this measured approach that has fortified the company against market downturns and has proven to be a cornerstone of its sustainable success. As the industry navigates tumultuous times, it’s evident that W&D is charting its course with a steady hand, unwilling to be swayed by the siren call of short-term gains. In the cutthroat world of real estate investments, playing it safe might just be the masterstroke.

Walker & Dunlop’s Future Outlook

Willy Walker — Chairman and Chief Executive Officer

Number one, New York on the horizon

It’s a challenging time for industries across the board as the market braces itself for potential changes. Nevertheless, Walker & Dunlop’s outlook remains positively grounded despite the stirrings of change in New York City’s real estate sector.

With all eyes on New York City’s rent-regulated properties, the big question is: What’s the exposure of Walker & Dunlop’s balance sheet to those regulated entities?

Willy Walker asserts that, despite market concerns about rent-regulated properties in New York City, there is minimal exposure on the company’s balance sheet. Furthermore, he affirmed that New York is not a market where their agencies have significant competitiveness. The low market activity, particularly in the agency portfolio, underlines their limited exposure. In essence, New York City doesn’t pose a rent control risk for this forward-thinking firm.

While acknowledging the opportunities in the affordable housing space, Walker expressed a discerning approach, emphasizing that the company won’t undertake risky deals in challenging markets just for the sake of it. The bottom line is clear: calculated risks, wise investments. The market may fluctuate, but Walker & Dunlop remains focused on sustaining its business integrity.

Exploring Office Conversions

Another topic that sparked an intense dialogue is office conversions, which has been a hot topic in the press recently. The sentiments felt across the market have been mixed, as with any trend in business.

Walker expressed positivity by citing a successful deal the company made in Q4 in LA, which involved an office conversion. The deal showcased multiple unique selling points, including a small footprint and appropriate zoning. The success of this deal underscores the potential in this space. However, Walker also cautioned against viewing this solution as the one-size-fits-all remedy for office inventory challenges. This nuanced perspective reflects the company’s prudent approach to market dynamics: embracing opportunities without being blindly swayed by market hype.

Efficiency, adaptability, and prudent assessment, Walker & Dunlop stay true to these principles even as they seek to evolve in a market fraught with change and uncertainty.

Conclusion

As Walker & Dunlop continues to navigate these challenges, the company acknowledges the need for a keen eye, calculated risks, and prudent investments. It stands steadfast with an unwavering commitment to its values, even amidst market volatility.

The company’s outlook and strategic path exhibit a blend of resilience, agility, and stability. Amidst the cacophony of market noise, Walker & Dunlop stays attuned to the vital chords of thoughtful investment and integrity, a stance worthy of investor confidence.

The Motley Fool has positions in and recommends Walker & Dunlop. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.