Earnings Call Transcript - WD Q1 2023

Kelsey Duffey, Senior Vice President of Investor Relations

Good morning, I’m Kelsey Duffey, Senior Vice President of Investor Relations at Walker & Dunlop, and I'd like to welcome you to Walker & Dunlop’s First Quarter 2023 Earnings Conference Call and Webcast. Hosting the call today is Willy Walker, Walker & Dunlop Chairman and CEO. He is joined by Greg Florkowski, Executive Vice President & CFO. Today’s webcast is being recorded, and a replay will be available via webcast on the Investor Relations section of our website. At this time, all participants have been placed in a listen-only mode and the line will be open for your questions following the presentation. 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 will now turn the call over to Willy.

Willy Walker, Chairman and CEO

Thank you, Kelsey and good morning everyone. Walker & Dunlop’s business and the broader commercial real estate industry faced continued pressure from uncertainty around interest rates and volatile market conditions during the first quarter of 2023. Our financial results reflect the challenges of the current market environment, and while working closely with our clients, our team closed $6.7 billion of total transaction volume, down 47% year-over-year. Our multifamily property sales volume of $1.9 billion was down 46% year-over-year, compared to a 74% decline in the broader market as reported by CoStar. It is important to note as we review quarter-over-quarter numbers that the Federal Reserve began its tightening cycle at the very end of Q1 2022, making it the final quarter of the post-pandemic easy-money cycle. Q1 total revenue was $239 million, down 25%, and diluted earnings per share were $0.79, down 63% from Q1 of 2022. Please remember that Q1 2022 included a one-time gain triggered by the GeoPhy acquisition that contributed $0.92 to our EPS of $2.12. Yet despite dramatically lower transaction volumes due to market conditions, along with revenues and EPS, our adjusted core EPS, a metric we introduced last quarter that strips out large non-cash revenues and expenses to give investors better insight into our current income statement, was up 10% versus Q1 2022, and adjusted EBITDA was up 9% to $68 million. I want to underscore this point, in a quarter where transaction volumes were down 47% from the previous year, we grew adjusted core EPS by 10% and adjusted EBITDA by 9%, thanks to our servicing and asset management businesses that generate significant and consistent revenues. Due to dramatically lower transaction volumes across the industry and at Walker & Dunlop, in mid-April we right-sized our business and reduced headcount by 110 employees, or 8%. With this action, and other cost-cutting measures that Greg will outline in a moment, we have significantly reduced operating expenses to a level where we can withstand transaction volumes similar to Q1 for the rest of 2023. That is clearly not our hope, and as I will outline in a moment, we see plenty of potential upside. But for now, we had to take the hard step of right-sizing our company and saying goodbye to a group of valuable colleagues who contributed a great deal to our past success. We remain focused on achieving our Drive to 2025 business plan, which has always been highly ambitious, even before the current market dislocation. Yet Walker & Dunlop established its first five-year stretch business plan in 2007, and when the Great Financial Crisis hit, every indicator told us the five-year plan was off the table. Yet we remained focused, grew our counter-cyclical lending relationships with Fannie Mae, Freddie Mac, and HUD, and achieved every element of our five-year plan in 2012. We see a similar opportunity today by focusing on operational excellence and cost containment, and then leaping forward as the market heals. Where is there potential upside? The recent banking crisis pulled banks out of the commercial real estate lending market almost immediately. Fannie Mae and Freddie Mac’s multifamily lending volumes have increased significantly since then, and should these volumes be sustained throughout the year, as the largest GSE lender in the country in 2022, Walker & Dunlop’s GSE volumes will be significantly higher than what we are currently forecasting. Banks pulling back from commercial real estate lending in an effort to build more liquid balance sheets has broader implications than just increasing GSE lending volumes. Nearly 40% of the $4.5 trillion of total commercial mortgage debt outstanding today sits on bank balance sheets. If banks pull back 5 to 10% in commercial real estate lending, it could create the need for $225 billion to $450 billion of new capital from life insurance companies, CMBS securitizations, or private debt funds raised by registered investment advisors like Walker & Dunlop. Not only does Walker & Dunlop have the fund management business to raise and manage this type of capital, but we also have the distribution network with over 220 bankers and brokers across the country to deploy it. In addition to the capital-raising opportunities that the bank pullback presents, there is also a long-term growth opportunity for our debt brokerage business. Banks have direct relationships with their commercial real estate customers, which means that a significant portion of the $1.7 trillion of commercial real estate loans on bank balance sheets today was originated without a mortgage broker. The role of debt brokers becomes more important than ever in a capital-constrained market, as borrowers need a broker’s expertise to look broadly across the market for the most competitive capital source. In the short-term, there is no doubt that a lack of liquidity to the broader market will put pressure on our debt brokerage business, but over the long-term, these opportunities could be a significant driver of growth in our brokered volumes. There is plenty of concern about commercial real estate exposure on bank balance sheets, particularly as it relates to office loans. Walker & Dunlop has zero credit risk on any office loan, or any asset class outside of multifamily. Our at-risk multifamily servicing portfolio continues to be exceedingly healthy, as evidenced by the benefit for credit losses we recognized in Q1. From our experience, it would take a dramatic increase in the unemployment rate to impact multifamily fundamentals broadly. The unemployment rate today sits at 3.5%, and while the Federal Reserve is trying to cool employment and raise unemployment to 5.5%, even that elevated level is dramatically below the 9.5% unemployment rate reached in 2009 during the Great Financial Crisis. After 9.5% unemployment in 2009, Walker & Dunlop’s at-risk portfolio reached 1.64% of loans 60 days delinquent in Q2 2010. And as the economy healed in 2010 and 2011, loans got current and the total losses to our portfolio, after the Great Financial Crisis and 9.5% unemployment, was a cumulative 16 basis points. That is not to say there will not be multifamily loan defaults. We are already seeing defaults in other lenders’ portfolios on poorly acquired and financed properties from the past several years. But given current employment levels, and the ability for the Fed to start cutting rates should the economy falter, we are currently not concerned about broad credit losses in our multifamily portfolio. Housing affordability is a real concern, as the average entry-level monthly payments for an existing home increased 32% in 2022, nearly tripling the prior record increase of 13% in 2013 according to Zelman & Associates. Stretched affordability has been fueled by 2022’s sharp rise in mortgage rates on top of recent years’ home price growth challenging future home ownership, likely keeping residents in rental housing longer. Walker & Dunlop’s acquisition of Alliant, one of the largest affordable housing owners and tax credit syndicators in the nation, at the end of 2021, was very well timed. Alliant’s financial performance is terrific, and Walker & Dunlop’s capabilities and brand in the affordable housing industry are greatly enhanced due to Alliant. Zelman is another recent acquisition that has performed extremely well. Zelman’s research on all sectors of housing continues to grow its subscription base and make Walker & Dunlop increasingly insightful on single family, build-for-rent, and multifamily. And as Greg will detail in a moment, Zelman’s investment banking division had a strong Q1 and sets Walker & Dunlop up well to expand our investment banking capabilities into the commercial market in this next cycle. Finally, we continue to integrate the technology we acquired with GeoPhy into our appraisal and small balance lending businesses. As transaction volumes have fallen, so has the need for appraisals, so Apprise is behind for 2023, as is our Small Balance Lending business. Yet banks pulling back from commercial real estate lending has a dramatic impact on the small balance space. Banks dominate the small multifamily lending space and any pullback presents a significant opportunity for Walker & Dunlop's Small Balance Lending business. I’ll now turn the call over to Greg to discuss our Q1 financial performance and 2023 financial outlook in detail, and then I’ll come back with some thoughts about what we see ahead.

Greg Florkowski, Executive Vice President & CFO

Thank you Willy, and good morning everyone. As Willy discussed, challenging conditions in the commercial real estate market persisted into 2023, putting pressure on our first quarter transaction volumes, revenues, and earnings. Diluted EPS was $0.79 per share, down from $2.12 per share in the year-ago quarter. As a reminder, the first quarter 2022 included a $40 million benefit due to the revaluation of our appraisal business upon closing the acquisition of GeoPhy. This boosted total revenues and added $0.92 per share to diluted EPS in the quarter. Importantly, adjusted core EPS, which eliminates the large swings that can occur from non-cash revenues and expenses and acquisition-related activity, grew to $1.17 per share, up 10% over last year. As we have consistently seen through the volatility over the last year, our servicing and asset management businesses continue to generate durable and growing cash revenues, which in combination with our variable expense structure, has enabled us to consistently generate healthy adjusted EBITDA. Our escrow and interest earnings have also benefitted from the rapid increase in interest rates over the last 12 months, and offset some of the declines in transaction volumes. As a result, despite transaction volumes declining 47%, our Q1 adjusted EBITDA was $68 million, growing 9%. Adjusted EBITDA also benefitted from the performance of Alliant and Zelman, which contributed $33 million of primarily cash revenues during the quarter. Notably, Zelman closed the largest investment banking transaction in its history this quarter, providing an attractive upside to the consistent subscription revenue streams that come with its research business. We remain focused on adding multifamily investment banking capabilities to complement Zelman’s existing single-family expertise so that we will be well positioned to take advantage of M&A and other capital markets transactions that arise as the commercial real estate transaction market recovers. Our first quarter operating margin was 14% and return on equity was 6%, both below our target ranges, but not unexpected given the decline in transaction activity. For the past several quarters, we have been focused on reducing expenses to maximize our operating margins, and in April, we reduced our headcount by over 100 employees in reaction to lower than anticipated volumes, and continued uncertainty in the commercial real estate transaction market. As a result of this reduction, we will incur a $3 million expense, and expect the savings from the action to largely offset that charge in the second quarter of 2023, with the full benefit of the savings realized in the third and fourth quarters. As a result of the cost cutting we have implemented, we eliminated $15 million of annual controllable G&A costs coming into this year, and reduced annual personnel related costs by $25 million after the headcount reduction in April. These were necessary steps to improve our operating leverage in response to a challenging and evolving commercial real estate services landscape. Turning now to slide six and our three segments. Total revenues for our capital markets segment, which includes our transaction-related businesses, were down 38% to $104 million, driven almost entirely by the 47% decline in transaction volumes. The supply of capital to the commercial real estate market remains constrained, and our first quarter debt brokered originations were affected most, declining 58% to $2.4 billion. Until capital begins to confidently flow again, our brokered volumes will remain impacted. A lack of liquidity and higher interest rates is also putting downward pressure on commercial real estate asset values, and causing clients that would otherwise be sellers to hold onto their assets. Our Q1 property sales volumes outperformed the market, but still declined 46% to $1.9 billion. Agency volumes of $2.5 billion were also slow this quarter, but Fannie Mae, Freddie Mac, and HUD have a real opportunity to supply significant counter-cyclical capital while liquidity remains constrained, and we are well positioned as their largest partner. The sharp decline in transaction activity during the first quarter impacted the financial performance of the segment, which can be seen in the year-over-year declines in adjusted EBITDA and earnings. The first quarter is traditionally a slower quarter of activity for this segment, and the macroeconomic challenges we are facing slowed it down even further. Adjusted EBITDA and earnings for our capital markets segment will improve as capital and confidence return to commercial real estate. More than ever before, our clients are drawing on the expertise of bankers and brokers to navigate the challenging market conditions, and our team continues to deliver significant value on every transaction that crosses the finish line. The servicing and asset management, or SAM, segment includes our servicing activities and asset management business, both of which produce stable, recurring revenue streams. As a result, this segment is largely insulated from the transaction-related volatility reflected in the financial results of our capital markets segment. SAM revenues increased 25% year-over-year to $133 million due to growth in servicing fees and escrow earnings. Also included in our SAM segment is the impact of forecasted losses on our at-risk servicing portfolio. We are in the process of collecting year-end financial statements for all of our loans, and although that process is ongoing, the weighted average debt service coverage ratio remains above two times thus far. Importantly, the book continues to perform exceptionally well, and we have only seven basis points of defaulted loans in the at-risk portfolio at March 31st. During the first quarter, we performed our annual update to the CECL loss factor, a 10-year lookback at our historical losses that is used in our loan loss reserve calculation. We updated the calculation with 2023 data, a year of near zero losses, and the loss factor declined from 1.2 basis points to 0.6 basis points, as a year with relatively higher losses fell out of the 10-year lookback period. Importantly, our methodology also includes a forward-looking adjustment, called the forecast period, which takes into account current economic conditions. We continue to apply an upward adjustment to the forecast period, currently four times greater than our historical loss factor, to reflect the challenging macro-economic conditions; which partially offset the overall reduction to our allowance from updating the historical loss factor. The update to our CECL methodology, combined with the exceptionally strong credit fundamentals underpinning our at-risk portfolio, resulted in a net benefit of $11 million in the first quarter of 2023, compared to a benefit of $9.4 million in Q1 last year. Our corporate segment represents the corporate G&A of our business, which includes the majority of our fixed overhead expenses and an allocation of our corporate debt expense. In the first quarter 2022, other revenues for this segment included the one-time $40 million gain resulting from the GeoPhy acquisition, causing the majority of the decline in total revenues for this segment. On a consolidated basis, interest expense on corporate debt totaled $15.3 million, in line with the annual estimate of $50 million to $60 million that we gave on our last earnings call. Neither of those items impact adjusted EBITDA for the segment, so the $6 million improvement in adjusted EBITDA is driven partially by the cost saving measures we put in place two quarters ago, and partially by an improvement in interest earnings on our corporate cash balances and pledged security portfolio. Forecasting transaction activity within today’s rapidly changing market is extremely difficult. Higher rates and constrained liquidity continue to impact our business and commercial real estate transaction activity. We do not have clarity on whether markets will recover in the back half of the year so we are revising our guidance for 2023, shown on slide nine, to provide a range for our key financial metrics. The low end of our range reflects Q1 macroeconomic conditions persisting, causing debt brokerage and property sales transaction volumes to remain near Q1 levels for the rest of the year. This downside scenario would result in a 35% year-over-year decline in diluted EPS, an operating margin in the mid-teens, and an ROE in the high single digits. Our servicing and asset management revenues are not impacted by sustained declines in transaction activity, and will continue to provide stability to our revenues and overall financial results. As a result, our adjusted EBITDA and adjusted core EPS would decline by no more than 10% year-over-year in this severe downside scenario. The upper end of our range reflects our original guidance that was based on a stabilization of interest rates and a recovery for the transaction markets in the latter half of the year. The Fed’s actions yesterday were certainly a step in that direction, but the timing and extent of a recovery remains uncertain. Our property sales team is outperforming our competitors, and our debt brokerage group will continue to add value for our clients. Importantly, the GSEs are providing liquidity to the multifamily market today, and given the pullback in other capital sources, if these conditions are sustained, the GSEs are likely to lend to their full caps, giving us a path to achieving the upper end of our range; flat diluted EPS, a low 20% operating margin, and a low-teens return on equity and double-digit growth in adjusted EBITDA and adjusted core EPS. Turning to capital allocation, we ended Q1 with $188 million of cash after paying corporate taxes, company bonuses, earnout installments and our dividend during the quarter. We not only maintain a strong liquidity position, we are also generating a healthy amount of cash from our core businesses, as reflected by the growth in adjusted EBITDA. Importantly, as historical investments on our balance sheet mature in the coming quarters, such as our interim loan portfolio, we will retain that cash to further strengthen our cash position. We will continue to allocate capital to our shareholders, and yesterday, our Board of Directors approved a quarterly dividend of $0.63 per share, payable to shareholders of record as of May 18th, consistent with last quarter’s dividend. We view the dividend as an important part of our value proposition to investors, and maintaining the dividend at its current level reflects our confidence in our business model and our ability to manage through the current conditions impacting the commercial real estate sector. One month into the second quarter of 2023, the commercial real estate industry continues to face a challenging rate environment, concerns over credit fundamentals of non-multifamily assets, and speculation around the long-term impacts of the banking crisis. Despite all of these unknowns today, we remain focused on our long-term financial and operational goals. We feel very good about the team we have in place, the value we provide to our clients, and our ability to manage through the current obstacles to deliver long-term value to our shareholders.

Willy Walker, Chairman and CEO

Thank you, Greg. The 25 basis point increase in the Fed Funds rate yesterday was anticipated, and Chairman Powell’s commentary that a pause is forthcoming is welcome news. This is still restrictive monetary policy, but is the first sign that there may be an end to the Fed’s tightening cycle since it began in March of last year. We remain extremely focused on operational excellence, cost containment, and winning every piece of business we can. Walker & Dunlop is known for operational excellence, our margins have been industry-leading since we went public in 2010, and our net promoter score of 95 reflects amazing client satisfaction with our operations and service. Yet we can always do better. Our recent headcount reduction presents career opportunities for our remaining team members, and also the opportunity to use more technology. We put Steve Theobald in the position of Chief Operating Officer to drive efficiencies and coordination across Walker & Dunlop, and his team is doing just that. It is during challenging times like these when everything is questioned, analyzed, and hopefully made better. With regards to cost containment, Greg just explained in detail our cost reduction efforts. Yet we need to be careful not to be penny wise and pound foolish. We continue to invest in our client relationships. We continue to invest in technology. And we continue to invest in our employees, such as not cutting our Wellness program that is 100% focused on employee mental and physical health. Yet we are delaying our All Company meeting from 2023 until 2024, even though we still see the value in pulling people together to share experiences and our common identity as W&Ders. But that is why I have met with our team members in Bethesda, Denver, Atlanta, Los Angeles, and Irvine over the past week, and will continue to travel the country to meet with our team, thank them for all they do for our customers every day, and ensure that the amazing culture that makes Walker & Dunlop so unique only grows during these challenging times. Finally, we are exceedingly focused on winning every piece of business we possibly can. Clearly, our scale with Fannie Mae and Freddie Mac is extremely beneficial to winning business. With a limited number of lenders with access to GSE capital, and there only being one number one, our debt capital markets team led by Don King is taking advantage of our market positioning and winning all we can. Our multifamily property sales business's volumes were dramatically down in Q1, yet the number of valuations and broker opinions of value that Kris Mikkelsen and his team generated were as busy as any quarter ever. That investment of time and effort should pay dividends when the transaction market resumes. As I mentioned earlier in the call, it is our expectation our debt capital markets group will become more relevant to the market than ever given the pull-back by banks. But finding financing today, particularly for non-multifamily assets such as office and retail, is extremely difficult. Every broker on our debt capital markets team is part of the largest GSE lender in the country, and they are actively selling that execution. Our HUD business continues to struggle from a volume standpoint primarily due to HUD inefficiencies, but we are working closely with HUD to help them deploy more capital and meet borrowers' needs, particularly for multifamily construction loans given the pull-back by banks. I mentioned earlier the pullback in need for appraisals due to lower transaction volumes, as well as the uptick in volume in our small balance lending business due to the bank pullback. Finally, Alliant and Zelman, two great acquisitions, continue to generate stable revenues and earnings and present wonderful growth opportunities for Walker & Dunlop in affordable housing and investment banking. We have an incredibly powerful business model that, within a healthy market that is actively transacting, has the ability to deliver exceptional financial performance, and we see a huge opportunity for growth across the business when the market stabilizes. I’m fortunate, and honored, to have twenty years of experience at Walker & Dunlop and fifteen as CEO. Our President, Howard Smith, has over forty years of experience at Walker & Dunlop. No day, week, year, or cycle is the same, yet during challenging times, experience matters. Howard and I sat in his office the day that the GSEs were taken into conservatorship by the Federal Government in 2008 and didn’t have a clue what the future held. It turned out pretty good for Walker & Dunlop. Howard and I talked the day the world shut down due to the COVID pandemic, and then again the day that the Federal government made forbearance available to every loan guaranteed by Fannie, Freddie or HUD. We didn’t have a clue what the future held, but it turned out pretty good for Walker & Dunlop. So, while we don’t know what will happen tomorrow, or how quickly the market heals or further deteriorates, we do know what will invariably happen. Rates will stabilize. Cap rates will stabilize. Investors will transact again. And Walker & Dunlop will benefit tremendously due to our people, brand and technology. That we know. And that is what we are managing towards each and every day. I’d like to finish by backing up to the financial metrics I mentioned at the top of the call. We saw transaction volumes drop by 47% in Q1 over 2022 and yet we still grew adjusted core EPS by 10% and adjusted EBITDA by 9%. We have a fantastic core business model that allows us to continue investing in our clients, people, brand, and technology during challenging markets. And with any luck, and a ton of hard work, we will grow from here and return to the type of growth and financial performance that investors have come to expect from Walker & Dunlop. Many thanks to all of you for your time this morning. And finally, I’d like to thank our incredible team for all their hard work. Kelsey will now open the line for questions.

Kelsey Duffey, Senior Vice President of Investor Relations

The line is now open for questions. Our first question comes from Jade Rahmani of KBW. Jade?

Jade Rahmani, Analyst

Thank you very much for taking the questions. I was impressed by the resiliency of credit performance across the bank space. We're seeing increased CECL reserves across the commercial mortgage REIT space, similar trends, as well as a spike in loans on nonaccrual. Yet, Walker & Dunlop, if I read correctly, has just three loans that are in default across $125 billion of servicing. Can you talk to the multifamily credit trends? I know in the past, you've given that service coverage ratio on the Fannie Mae at-risk book. I think that's around two times. What are you expecting in terms of credit? And how's the performance held up?

Willy Walker, Chairman and CEO

Good morning, Jade, and thank you for joining us. As you noted, our credit performance has been exceptional. It's important to remember that Walker & Dunlop has remained focused on our core lending business with agencies regarding credit exposure. Consequently, all loans in our portfolio were underwritten with a 1:5 debt service coverage ratio. Our client base consists of very high-quality clients. Many of our competitors pursued lending through debt funds, CLOs, and took on significant bridge exposure, but we chose not to engage in those areas. We also had chances to lend on office buildings and retail centers, but we consciously decided against it. While we have always experienced strong revenue growth, we could have accelerated revenues and earnings during favorable economic conditions, but we opted for a disciplined approach, which benefits us today. Recently, we finalized a $120 million fixed-rate deal with Fannie Mae that had a 1:5 debt service cover and a 53% loan-to-value ratio. This discipline reflects the standards established by the agencies, and Walker & Dunlop remains actively engaged in lending in this responsible manner. While the client might have preferred higher leverage, we adhere to our principles, which contribute to the health of our servicing portfolio.

Jade Rahmani, Analyst

As it relates to the debt service coverage ratio on the at-risk portfolio, do you have that number approximately?

Willy Walker, Chairman and CEO

Greg mentioned it briefly. We are still compiling our year-end financials, so we don’t have an update from September. The last figure we provided was over two times in September. So far, we have completed more than 50% of our financial analysis, and we continue to have a debt service coverage ratio well above two times. However, we do not yet have this information for the entire portfolio.

Jade Rahmani, Analyst

What are your thoughts around interest rate caps expiring this year? Do you expect that to create a material credit headwind?

Willy Walker, Chairman and CEO

It was a topic of discussion earlier this year, Jade. We were working on a significant financing to convert a floating rate loan into a fixed-rate loan, but the borrower opted to purchase a three-year cap instead. This client is well-capitalized and was able to make that decision. While some clients are struggling with high cap costs compared to last year’s pricing, it has not escalated into a crisis. Certain special servicers are open to discussing adjustments to caps, while others have been less cooperative. Although there are borrowers seeking some relief, neither agency seems overly concerned about the issue at this time.

Jade Rahmani, Analyst

And just the last question would be on capitalization. And the reason I ask is, in this environment of uncertainty, how are you feeling about the balance sheet liquidity, about leverage, access to financing, and also counterparty risk, if there's any regional bank exposure on that front?

Greg Florkowski, Executive Vice President & CFO

We have a very strong cash position and are generating liquidity, as indicated by our adjusted EBITDA growth. We're confident in our business model and management. Some of our maturing assets will bring in additional cash in the upcoming quarters, and we will take advantage of that. We have no concerns on that front. Our relationship with our banks is solid, and we regularly communicate with them. All our corporate capital is with large national banks, within the FDIC-insured limits. We are also aware that some customers prefer smaller banks, and we are assisting them in navigating the changing landscape. Overall, we have no concerns regarding our situation.

Jade Rahmani, Analyst

Thanks for taking the questions.

Greg Florkowski, Executive Vice President & CFO

Yes. Thank you.

Kelsey Duffey, Senior Vice President of Investor Relations

Thank you, Jade. Our next question comes from Jay McCanless of Wedbush Securities. Jay?

Jay McCanless, Analyst

Hey, good morning, everyone. So, my first question, does the low end of the updated guidance assume a steady state from 1Q 2023 in terms of liquidity? Or is the expectation in that low end that it would get worse from here, either from a liquidity standpoint and/or transaction standpoint?

Greg Florkowski, Executive Vice President & CFO

It's essentially, Jay, a pretty steady state from Q1 forward. I think, as Willy mentioned, the GSEs are starting to be a bigger part of the market. But as we finished Q1 and really thought about speaking to you all today, we had to take a hard look at what it would look like if the Q1 conditions persisted. And that's where we tried to share the bottom-end of the range based on that set of conditions.

Jay McCanless, Analyst

Thanks. And then my next question if I look at the opportunities that you talked about in the prepared script, you have small balance lending. You also have opportunities on the commercial real estate side, and then the GSE business. I guess right now, what's most actionable, given where liquidity is, in opportunities for Walker & Dunlop to grow business?

Willy Walker, Chairman and CEO

So, Jay, first of all, thank you for joining us. As the largest agency lender in the country, we have significant scale and a strong brand, along with some of the best bankers in the industry. Fannie Mae recently released their annual top banker list, and among their top 10 bankers nationwide, four are from Walker & Dunlop. No one else had more than one. This highlights our strong platform, brand, and market share. As Greg mentioned, the agencies are starting to re-enter the market more significantly compared to Q1, which is a great opportunity for us. We are fortunate to have both access to and scale with these agencies. Moreover, both our debt and property brokerage businesses are working hard to secure every deal. Clients have various needs, including selling multifamily assets to raise capital for other commercial investments. We are seeing some activity in multifamily sales, and as Greg noted, our multifamily investment sales volumes declined less dramatically than the overall market in Q1. I am confident that due to the strength of our brokers nationwide, we will continue to outperform the market as it recovers. On the debt brokerage side, it's more challenging. Half of the capital we deployed in Q1 came from banks, and banks have significantly reduced their participation. However, there has been $70 billion in private capital raised for commercial real estate recently. I met with a large institutional investor yesterday who has reviewed numerous private debt opportunities in commercial real estate. There is a substantial opportunity for private capital once it gets deployed and we reach clearer terms regarding loan rates and asset values. Many are anticipating that the Fed will soon signal a pause in rate hikes, which could stabilize the market and enable transactions to resume. Regarding the SBL side, if you examine the top 15 small balance lenders in the country, you'll find that 13 are banks, with 11 being regional or local banks. JPMorgan and Wells Fargo are the largest players, but many of the others are currently facing significant challenges. As one of the few non-bank lenders in this space, we have a strong chance to capture market share. It’s essential for us to continue executing our strategy while also raising private capital to ensure our bankers and brokers have the resources they need to serve our clients effectively.

Jay McCanless, Analyst

Great. And then, staying on small balance lending for a second. Willy, I can't remember. Did you give the actual dollar value opportunity things out there maybe with those 15 banks, or with the market in general? What type of dollars are we talking about?

Willy Walker, Chairman and CEO

So, we did $1 billion of SBL last year, and we're trying to grow that business to doing $5 billion on an annual basis. And the opportunity is right in front of us. It's never been a wider landscape for us, Jay, to go after, given the pullback by banks. And that space is dominated by banks. And the issue with it is those borrowers don't necessarily go out and go to industry conferences or, know who Walker & Dunlop or CBRE are. They go to their local branch office of either Wells Fargo, JPM, or PacWest and say, hey, I need a small balance loan for the multifamily property that I own. And they get it from their branch office. And so, if they go to a branch office that either is closed or they get we're not lending any more to you, they now are faced with where do I go? And that's the opportunity for us to step in.

Greg Florkowski, Executive Vice President & CFO

And, Jay, I'll just add that I think that the MDA data on that is just around $600 billion of total multifamily debt on bank balance sheets. So, I think that gives you a sense of the total addressable market that we're talking about here.

Jay McCanless, Analyst

Okay, $600 billion total multifamily debt.

Willy Walker, Chairman and CEO

But that's صحيح.

Jay McCanless, Analyst

The MDA data indicates that there is approximately $600 billion of total multifamily debt on bank balance sheets. This provides a sense of the total addressable market we are discussing here.

Willy Walker, Chairman and CEO

No, Jay, just to be specific, that's all multifamily loans, not just small loans.

Jay McCanless, Analyst

Got it. And then, the last question I have, Willy, when you talked about the $225 billion to $450 billion range of CRE debt on bank balance sheets, could you clarify what's the difference between the high end and the low end there? Could you break that out a little bit more for me?

Willy Walker, Chairman and CEO

Yes, there are a couple of important points to note. There is $1.7 trillion of commercial real estate loans on bank balance sheets across the country. If banks reduce their lending by 5% to 10%, which I consider a conservative estimate, that would create a demand for as much capital as I mentioned. The range of $225 billion to $450 billion reflects that potential pullback. However, it's important to recognize that the market may not require that much capital since property values have declined. Thus, one could argue that an additional 5% to 10% may not be necessary given the current market conditions. This assessment is based on the market value at the end of 2022. The drop in values indicates less capital is needed at this time. Yet, if values increase again and banks do not step in, as we anticipate they won't, that capital will need to originate from somewhere else. We believe this presents a significant opportunity for life insurance companies, CMDs, and private capital. Given the scale of these numbers, for Walker & Dunlop, which is developing its asset management business, we have the capability to raise $1 billion, $3 billion, or even $5 billion in debt funds to satisfy that need. This represents a substantial opportunity for us that could have a major financial impact on Walker & Dunlop.

Jay McCanless, Analyst

Okay, very helpful. Thank you, Willy.

Willy Walker, Chairman and CEO

Thank you.

Kelsey Duffey, Senior Vice President of Investor Relations

Thank you, Jay. We now have a follow-up question from Jade Rahmani of KBW.

Jade Rahmani, Analyst

Thanks. I wanted to ask about competition on the brokerage level in the multifamily space. A lot of brokers in the commercial real estate sector are going to be suffering from a lack of business, and the office issues could be secular in nature. I think CBRE expects it to take twice as long for values to recover in office. So, as those brokers have a lack of business, they may be looking to more resilient sectors like multifamily. Do you expect an increase in competition? And how do you think about Walker & Dunlop's competitive positioning therein?

Willy Walker, Chairman and CEO

So, Jade, I guess, first of all, brokers can't really switch asset classes in that way. It's very siloed in the extent that the best multifamily investment sales teams do multifamily, the best industrial investment sales teams do industrial, and the best office teams do office. So, while there are some that play across asset classes, mostly people are focused on one asset class. The second thing I would say is that one of our competitors took on a very significant office sales team last quarter, and I'm not exactly sure what kind of volumes they underwrote to make that investment. But I would only say that I'm happy that we didn't make a big investment on office investment sales at this time in the cycle. And then, the final thing I’d say is Kris Mikkelsen has gone about building the very, very best investment sales team in the country because he got to build it from the ground up. We acquired Engler back in 2015, which was a one-office Atlanta-based investment sales team. And we built it from there and built the very best teams in every MSA in the country, other than two, Seattle and Phoenix. And so, to have that kind of a national platform that has been, for all practical purposes, handpicked, I think positions us. It's the reason we grew so fast. We went from less than $1 billion to $20 billion of annual investment sales over a six-year period. And so, I think we're exceedingly well positioned there. And obviously, it's a competitive market. Obviously, we go up against very, very talented and scaled teams with great brands, but we feel very good about where we're positioned there, and also the fact that we're only focused on multifamily.

Jade Rahmani, Analyst

Great. Thanks very much.

Willy Walker, Chairman and CEO

Sure.

Kelsey Duffey, Senior Vice President of Investor Relations

At this time, it appears we have no further questions. So, I will turn the call back over to Willy for closing remarks.

Willy Walker, Chairman and CEO

Great. Thank you to all of you who joined us today. Hope you have a fantastic Thursday. And I would reiterate my thanks to the Walker & Dunlop team for all you do every day. Have a great one everyone. Thank you.