Earnings Call Transcript - WD Q1 2025

Operator, Operator

Good day and welcome to the Q1 2025 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.

Kelsey Duffey, Chair of the Earnings Call

Thank you, Cynthia. Good morning, everyone. Thank you for joining Walker & Dunlop's first quarter 2025 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 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, and 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’ll now turn the call over to Willy.

Willy Walker, CEO

Thank you, Kelsey, and good morning, everyone. We started the year with very little carryover business from 2024 after the momentum of rate cuts last September turned into rising long-term interest rates and a wait-and-see attitude across the industry regarding rates, the economy, and the Trump administration. While rates came down throughout Q1 from 4.79% on January 13 to 4.23% on March 31, volatility due to policy announcements and market reaction kept many clients in a wait-and-see mode. Yet within that context, our team delivered a healthy Q1 total transaction volume of $7 billion, up 10% from last year, which drove total revenue growth of 4%. Q1 is typically our slowest quarter of the year, and with the political and economic backdrop of the quarter, we were pleased with our top-line growth. Our GAAP EPS was only $0.08 for the quarter, down significantly due to personnel costs to add new talent and remove underperforming employees; fees associated with the debt offering that now provides us with wonderful financial flexibility to continue investing and growing our business; and additions to our loan loss reserve that, while costly, are normal expenses associated with our lending business. In 2020, we laid out an ambitious 5-year growth plan called the Drive to ‘25. We quickly acquired or invested in the human capital and business lines to achieve our goals, and then the great tightening began, pushing up interest rates and bringing down transaction volumes dramatically. We cut costs yet maintained every business line we invested in to achieve the Drive to ‘25, knowing that when the market returned, the full suite of services would benefit W&D’s customers. We saw transaction volumes improve in 2024 and into the first quarter of this year, and there is a growing sense that the pent-up demand for financing and the need to deploy or recycle capital is going to push 2025 volumes higher. There is nearly $200 billion of equity dry powder looking to invest in North American commercial real estate, with the belief that 2025 is a strategic entry point to achieve rent growth over the coming years, particularly in the multifamily sector. 88% of our Q1 volume was in multifamily assets, with Fannie Mae originations up 67% from an exceedingly slow Q1 of last year. Investment sales volume was also up 58% from a slow start last year, showing the strength of the W&D brand as well as the beginnings of the next investment cycle. While nowhere close to the sales volume we saw coming out of the pandemic, the multifamily investment sales volume over the past 3 quarters has been in line, if not a little above pre-pandemic volume from 2015 to 2020. There is clearly changing sentiment in the multifamily sector with a significant desire to buy today, as I mentioned. If you recall the massive spike in sales volume just after the pandemic, look where investor sentiment was during that period, solidly in the sell camp because they saw fantastic rent growth and low cap rates to sell properties into. What will drive rent growth and cap rate compression to increase the desire to sell and create a more active acquisitions market? In 2024, we had historically high deliveries of multifamily units across the country. Yet unlike 2022 and 2023, when the deliveries were met with tepid demand and negative absorption, 2024 had positive absorption on record supply. This glut of capacity is about to disappear, particularly if demand stays strong. The record supply of multifamily units in 2024 was due to what you see on Slide 7, with construction starts hitting record levels in 2022 and peak deliveries hitting the market in 2024. But construction starts have plummeted over the past 2 years, which will make deliveries begin falling in 2025 and create an undersupplied market in 2026 and 2027. The only way an undersupplied multifamily market doesn’t turn into significant rent growth for apartment building owners in 2026 and 2027 is if single-family housing presents an abundant and affordable alternative, which seems unlikely. Slide 8 is a clear presentation of why single-family housing has become so unaffordable, and therefore, unlikely to compete with multifamily. Please look at the bottom left side of this graph. Five years ago, in February of 2020, the median-priced home in America cost $285,000. In February of 2025, the median-priced home costs $385,000, $100,000 more than it did in 2020. The average principal and interest cost of a mortgage on that $285,000 home was below the median rent. But now, the cost to service your mortgage on the $385,000 home versus the median rent illustrates a significant difference. This data is why transaction volumes are increasing in the multifamily sector. As rents improve and rates hopefully stabilize or come down further, the refinancing market will pick up. We are discussing this data with our multifamily clients every day, and they very clearly see the coming opportunity. They also see the headwinds to construction, both single-family and multifamily, due to existing and potentially higher tariffs, making owning existing assets even more attractive. Our debt brokerage team had a slow Q1 with $2.6 billion of volume compared to $3.3 billion in Q1 of ‘24. The volume decline was primarily a timing issue as a meaningful portion of our pipeline was pushed into the second quarter. Private capital providers are becoming more active, with Q1 being the highest CMBS origination quarter since prior to the great financial crisis, and our debt brokerage team is very focused on growing volumes over the remainder of the year. We have a deep foundation and brand recognition in the multifamily market, a sector with significant tailwinds that I just described. We have also invested over time to diversify our capabilities to meet the needs of our expanding client base. We recently made several important strategic moves that will drive transaction volumes across asset classes over the coming years. First, we added a senior banker to our New York Capital Markets team who ran the capital markets business at one of W&D’s largest competitors. Second, we entered the hospitality investment sales space at the end of 2024, and that team is gaining momentum on both the sales and financing front. Third, we opened a new office in London, England, focusing on the European and Middle Eastern markets. We spoke about this expansion during our last call, and it is very important for W&D to continue expanding outside the U.S. for both foreign deal flow and to connect with investors looking to put money to work inside the United States. Finally, the data center space has been exceedingly hot over the past several years, and we brought on a fantastic banker to lead our growth in this area. We have significant hiring momentum and are excited about where our business is headed in the coming quarters and years. Transaction activity continues to steadily build, and 1 month into the second quarter, we have already closed 60% of our Q1 transaction activity. We have seen almost no fallout in our pipeline in Q2. With the 10-year at 4.17%, we see a promising market for the second quarter and beyond. I will now turn the call over to Greg to talk through our Q1 results in more detail.

Greg Florkowski, CFO

Thank you, Willy, and good morning, everyone. Despite significant volatility in the broader capital markets throughout the first quarter, W&D’s transaction activity increased across most products, with the largest gains in our Fannie Mae and property sales executions, reflecting the strong fundamentals underlying the multifamily industry that Willy just described. As shown on Slide 10, growth in transaction activity drove revenue growth of 4% during the first quarter. However, due to specific increases in expenses and additions to our loan loss reserves, diluted earnings per share declined to $0.08. Adjusted EBITDA declined to $65 million, and adjusted core earnings per share declined to $0.85. During the first quarter, we incurred $10 million of expenses associated with three discrete decisions or events. First, we refinanced our corporate debt in March. In the process, we extinguished a portion of our outstanding term loan and wrote off a portion of the deferred issuance costs, totaling $4 million. The advantages of recapitalizing our balance sheet at historically low spreads far outweighed the impact of the accelerated costs and set us up with a balance sheet to continue investing in our business. Second, we recognized a provision for loan losses of $4 million this quarter compared to $500,000 a year ago. The majority of that provision relates to a single loan. And while our loan portfolio continues to perform extremely well, defaults happen. Finally, we made the decision to separate several low-performing salespeople during the quarter that will cost us around $5 million during the first half of the year, with a little over $2 million expensed in the first quarter. The first quarter is typically our slowest of the year, and while the credit expense is clearly unwelcome, it is a part of our core business. The one-time charges for the debt offering and personnel separations are expenses we decided to take to make W&D better and stronger. With that backdrop in mind, let me now turn to segment results, starting with Capital Markets. Total revenues for the segment grew 25% to $103 million, driven by stronger revenues year-over-year across nearly every area of the segment. Of note, our research and investment banking business, Zelman, grew revenues 129% to $11 million as a result of closing several investment banking transactions during the quarter. A 10% increase in total transaction volume to $7 billion boosted origination fees, MSR income, and property sales broker fees. Fannie Mae lending volume was up significantly by 67%, and total agency volumes were up 30% year-over-year, driving a $7 million or 33% year-over-year increase in non-cash MSR revenues. Capital Markets segment net income totaled $2 million, a $9 million improvement from Q1, ‘24, and adjusted EBITDA grew by $6 million or 31%. First quarter transaction activity showed solid growth, but not the acceleration we anticipated, as deals scheduled to close late in Q1 ended up slipping into the second quarter due to market volatility in the days leading up to Liberation Day. Our pipelines over the next 60 days put our capital markets team on track for a very strong second quarter. While we do not yet have clarity around tariffs or near-term monetary policy, the strength of multifamily fundamentals, the stabilization of long-term rates since Liberation Day, and the competitiveness of agency capital have enabled our clients to transact. We will react to changes due to tariffs and resulting monetary policy, but it’s clear that the investments we made over the past 2 years to add to our capital markets platform should allow us to capitalize on any market improvements this year. Our Servicing and Asset Management, or SAM segment continues to generate strong cash revenues from our growing servicing portfolio and assets under management. Despite a 3% year-over-year increase in servicing fees off our $136 billion portfolio, total segment revenues declined 7% from Q1, ‘24 for a few reasons that are not unexpected. First, our investment management fees declined by $4 million or 28% due to lower capital raising and realizations. This is a timing issue as both our investment management businesses were in the market in Q1 raising money, and we feel very good about revenues moving forward. Second, placement fees and other interest income decreased by $6 million or 17% year-over-year due to the impact of a 100-basis point decline in the Fed funds rate. Our placement fees are tied directly to Fed funds, so depending on the movement in Fed funds rates, segment revenues will increase or decrease based on Federal Reserve action. Our corporate debt expense also moves with short-term interest rates, acting as a natural hedge against lower placement fees. Additionally, we expect that any reduction in the Fed funds rate would increase transaction activity as Walker & Dunlop clients decide to refinance and purchase properties. Turning to credit and our $64 billion at-risk loan portfolio, I previously highlighted the $4 million loss reserve, which primarily related to one large loan default in our portfolio. Out of the nearly 3,200 loans in our at-risk portfolio, only 8 are in default as of the end of the first quarter, totaling 17 basis points of the at-risk portfolio compared to 6 loans at the end of the fourth quarter. Higher interest rates and oversupply in some markets is impacting a small number of properties, which is natural to see at this point in the cycle. Our current at-risk portfolio was underwritten to an average 61% loan-to-value at origination and a minimum debt service coverage ratio of 1.25x, reflecting the discipline in our underwriting. I mentioned the debt refinancing we closed in March. When we launched that offering, credit spreads were near historic lows, allowing us to reduce our weighted average cost of capital immediately while simultaneously negotiating a further 25 basis point reduction in the cost of our senior secured term loan should our debt-to-EBITDA decrease below 2:1. It is currently at 2.7x. Importantly, we launched a debut bond in this unsecured market that was significantly oversubscribed. The debut bond provides us access to a new investor base, giving us financing alternatives to support our long-term growth. One final benefit of the transaction was adding over $50 million of liquidity to the balance sheet and securing a $50 million working capital line, providing us balance sheet flexibility to support our growth objectives. Given the strength of our balance sheet, yesterday, our Board of Directors approved a quarterly dividend of $0.67 per share, consistent with last quarter’s dividend and payable to shareholders of record as of May 15. Despite lower-than-expected Q1 earnings, our goals for the year have not changed. We established annual guidance at the beginning of February, shown on Slide 14, expecting significant increases in financing and sales activity throughout the year. While market volatility has clearly been challenging to manage for our clients and W&D, what we are seeing from our pipelines and business makes us comfortable reiterating our annual guidance. We are outlining goals across our business lines, so investors can benchmark our progress and clearly understand the expectations for our business lines. Our goal is for each banker and broker to originate an average of at least $200 million of transaction volume this year. Throughout the volatility over the last year, we continue to invest in our platform, adding 20 salespeople across business lines, establishing new products and entering new geographies. We expect significant contributions over the coming months and quarters from our new salespeople to help us meet our goal of increasing market share across our service and product offerings. Our valuation and Zelman teams are also expecting to grow with a goal of generating $40 million to $50 million of revenue this year, significant growth off last year when the M&A and valuation markets slowed considerably. We expect growth in various arms of our business, including the real estate investment management platform. Finally, we are launching WD Suite next week, a web-based software that we expect will engage and attract private clients that will ultimately transact through our service lines. Thank you for your time this morning. I will now turn the call back over to Willy.

Willy Walker, CEO

Thank you, Greg. At the beginning of the year, we spoke about the tremendous amount of commercial real estate debt that needs to be refinanced and capital that needs to be deployed this year, and those underlying fundamentals remain intact. As Greg just outlined, our team is focused on specific business goals across the platform that will allow us to continue meeting our clients’ expanding needs and deliver strong financial results in 2025 and beyond. We intend to grow market share with our largest lending partners, Fannie Mae, Freddie Mac, and HUD in 2025, and we began the year by holding market share with the GSEs combined, after a strong quarter with Fannie and an okay quarter with Freddie. FHFA Director, Bill Pulte, appears to be focused on growing the GSEs and aggregating capital for a potential privatization. While it is too soon to tell how or if the GSEs get spun out of conservatorship, what's clear today is that teams at Fannie and Freddie are reenergized and focused on hitting their $146 billion multifamily caps in 2025. The new HUD Secretary, Scott Turner, has already made positive changes at HUD to streamline the origination process and refocus HUD on providing additional, much-needed affordable housing in the United States. We are extremely well positioned to benefit from any changes to the HUD products that make it more efficient and competitive. As the housing market continues to heal and transaction volumes grow, our loan originations and properties sold per banker broker will also expand. We ended 2024 with an average production per banker broker of $172 million, up by $35 million from 2023. Our team has a 2025 goal of generating an average of $200 million in transaction volume per banker broker and has made significant investments and cuts to our capital markets team to ensure we achieve this goal. While the macro market clearly impacts our industry and company, we sell into a large enough market to reach these numbers. Our investment management businesses must grow faster. WDAE had a slow start to the year due to leadership changes, but we just closed the largest multi-investor fund we have ever closed at $240 million at the beginning of April. We have a goal to raise $600 million in tax credit syndications in 2025, which would be 50% growth over 2024. We are confident we have the team and the addressable market to meet that goal. WDIP’s newest debt fund deployed $174 million in Q1, and as transaction activity picks up, we expect to hit our goal of $1 billion in capital deployment for the full year. Our appraisal business, Apprise, grew appraisal revenues 50% in Q1 over last year. We are using Apprise to turn around valuations quicker and more accurately on our multifamily debt financing transactions and expect our valuation revenues to drive positive earnings by the end of 2025. Our small balance lending team grew volumes by 28% in Q1 with 58% revenue growth. As we continue to scale, we need to partner with another capital provider beyond the GSEs. This is a fundamental goal we have set for 2025 that should allow us to expand our small balance lending volumes dramatically over the next several years. Our application of technology to both our appraisal and small balance lending businesses to make them more efficient, user-friendly, and transparent will benefit both our top and bottom lines over the coming years as we apply these technological innovations across all our businesses. Our research and investment banking business, Zelman, had a great Q1 with revenues up 129%, primarily due to investment banking fees. We are on track to achieve our full-year revenue target. The macro backdrop for commercial real estate and specifically multifamily is strong. As Greg highlighted, we have confidence in achieving our original 2025 guidance due to what we are seeing in the market today and our expectation that capital deployment and refinancing activity will continue. Deregulatory changes at our three largest capital partners should benefit our ability to deploy capital, particularly given our scale with Fannie, Freddie, and HUD. The administration is focused on housing, and there is a keen focus on cost-cutting, efficiency, and deploying more capital to bring the cost of rental and single-family housing down. We have strong momentum across our business, and while the macro markets continue to fluctuate, our Q2 pipeline is holding together nicely. We will continue to focus on completing the drive to ‘25, knowing that we have made the investments in the businesses and human capital to achieve these goals. Thank you for your time this morning. I will now turn the call over to the operator to take any questions.

Operator, Operator

We will take our first question from Jade Rahmani with KBW.

Jade Rahmani, Analyst

Thank you very much. In today’s current market, I know you gave an intra-quarter update as to the pipeline and volumes. But could you give any further insight on what you are seeing from investors? Are they underwriting more conservative assumptions due to the macro-outlook? Are they eager to do deals to lock in rates that have started to move lower? And also, behaviorally, what are you seeing from Fannie Mae and Freddie Mac?

Willy Walker, CEO

Good morning Jade, nice to have you on. I would say the following. As I just mentioned, having closed 60% of our Q1 volume in the first month of Q2, we have not seen deal flow fall out due to market volatility, which is, frankly, a surprising statement given the massive gyrations in the 10-year treasury, particularly at the beginning of April. Where we are seeing questions right now is on larger transactions where if someone is looking at taking out a larger portfolio, the question is, do we want to launch it now or do we want to wait? My comment to the owners of the assets was, unless you plan on waiting for 4 years to do something with these assets, you might as well go into the market today. The volatility we have seen in the first 100 days of the Trump administration is unlikely to subside. Some believe that the 90-day pause on tariffs may bring clarity back to the markets, but I'm not so sure. As a result, unless someone is set to pause for the next 4 years, they are likely considering going into the market now. The 10-year moving from 4.80% at the beginning of January down to 4.17% is extremely important to the commercial real estate industry. While tariffs present a macro backdrop that is challenging for business, what happens to the 10-year treasury is far more determinative concerning volumes.

Jade Rahmani, Analyst

Thanks very much. In terms of the GSEs, do you expect them to hit their caps this year? It sounded like, in your comments, you thought that was at least a possibility. And would you care to share your thoughts on the likelihood that they reach their caps?

Greg Florkowski, CFO

I don’t think I will give you odds on that, Jade, but I will provide this insight. We have not seen Fannie and Freddie competing in the market like they have for the last two months in 3 years. Our Fannie volumes were up significantly, but that was off an exceedingly low volume in Q1 of 2024. What we are experiencing right now is that both Fannie and Freddie are very engaged in the market, striving to win deals, which is a very welcome sign at the beginning of the year.

Jade Rahmani, Analyst

Great to hear. Thanks very much.

Greg Florkowski, CFO

Thank you.

Operator, Operator

We will take our next question from Steve Delaney with Citizens JMP Securities.

Steve Delaney, Analyst

Good morning everyone. Hello Willy.

Willy Walker, CEO

Hey Steve.

Steve Delaney, Analyst

Talk about non-interest expenses, and you mentioned specifically severance. It sounded like that was just a production, pruning the low performers. You did not mention that you exited any business lines, is that correct?

Willy Walker, CEO

We did not exit any business lines, and you are exactly right that it was the write-off of some signing bonuses and compensation expenses to remove underperformers.

Steve Delaney, Analyst

Understood. The last 2 years, when we look at total operating expenses, obviously, you are building a complex, fully integrated business, so we understand that. You don’t come in every day with the goal to have the lowest cost of operations; you come in to achieve the best bottom line, including growth for your shareholders. But the last 2 years, operating expenses have averaged right at 60% of total revenues. Can you give us a sense for 2025? Will this year be more expensive on that ratio of 60% or at what point do you see a potential for that 60% to drop to a lower figure with a five handle?

Willy Walker, CEO

That number should be down. As you know, we have always focused on maintaining that in the sort of 48% to 50% personnel cost as a percentage of revenues. The fact that it is up at 60% is directly related to volumes. We are focusing on driving average producer production from $170 million to $200 million per producer in 2025. Achieving that will help reduce that ratio. It really is a volume-focused metric. We have confidence in reiterating our guidance because we see the volumes in 2025. We did not anticipate the market volatility we encountered in the first 100 days of the Trump administration, but the underlying theme is that commercial real estate owner-operators have run out of time on delaying refinancings, the return of capital, and the deployment of new capital. As a result, they are now looking to sell, buy, or refinance their assets.

Steve Delaney, Analyst

Thanks for the comments Willy.

Willy Walker, CEO

Thank you, Steve.

Operator, Operator

It seems there are no further questions at this time. I will now hand the conference back to Mr. Walker for any final comments or closing thoughts.

Willy Walker, CEO

I appreciate everyone joining us this morning. Thank you for your hard work in Q1. I hope everyone has a great day, and thanks again.

Operator, Operator

This concludes today’s call. Thank you for your participation. You may now disconnect.