Walker & Dunlop Inc

NYSE:WD

Earnings Call Analysis

Challenging Market Conditions Impact Earnings

The company weathered a tough environment, marked by a 57% decline in transaction volumes year-to-date. This has exerted pressure on financials, with diluted EPS down 57% at $1.61 and operating margin reduced to 14% from 25% last year. Even as adjusted EBITDA dropped to $139 million and core EPS to $2.14, the stability from the asset management segment and an improved cash balance, now $228 million, offer some relief. The adjusted 2023 outlook anticipates a stronger Q4, sticking to a prudent lower guidance range owing to continuing market uncertainty. Despite challenges, including a sole defaulted loan resolved after four years, the company keeps its commitment to a $0.63 quarterly dividend.

Federal Reserve Tightening and Its Impact

The recent earnings call reveals the company grappling with challenges posed by the Federal Reserve's aggressive interest rate hikes, increasing the Fed funds rate by 525 basis points since March 2022. This tightening has significantly dampened transaction volumes within the commercial real estate industry. Despite this setback, Walker & Dunlop—a firm mentioned for its robust lending businesses and steady servicing and asset management revenues—has managed to cushion the financial blow. The firm remains hopeful that the worst is over and looks forward to transaction volume recovery.

Financial Performance Amidst Economic Headwinds

Financially, Walker & Dunlop has demonstrated resilience amidst an economic downturn. Their Q2 total transaction volume saw a steep 63% decline from the previous year, but a relatively lesser 20% dip in revenues to $273 million. The decline in Adjusted EBITDA and earnings per share also reflects the impact of lower non-cash mortgage servicing rights and related revenues. However, the leadership expresses hope for a recovery and upcoming growth.

Multifamily Acquisitions and Debt Brokerage: A Mixed Picture

In Q2, the multifamily acquisitions market stalled, causing a significant drop in sales volumes, which dovetails with an overall trend of decreased debt brokerage volume in the banking sector, influenced by broader financial crises. Private capital is now stepping in to fill the gap, and the company believes there will be an increased demand for debt brokerage services going forward.

Strategic Investments and Cost Management

In the face of market adversity, Walker & Dunlop has continued to strategically invest in its businesses, including technology and raising funds, while reducing general and administrative costs. They are adapting to the market's new reality by making significant personnel adjustments, expecting to fully benefit from these changes in later quarters.

Quarterly Segment Performance and Incremental Benefits

The Capital Markets segment showed decreased transactions and revenues year-over-year but had an uptick in comparison to Q1. The Servicing and Asset Management segment has seen a promising rise in revenues, and with the Federal Reserve's recent rate increase, an incremental financial benefit is anticipated.

Outlook and Guidance for the Future

The narrative around outlook is cautiously optimistic. The company has managed its risk well, with a strong at-risk servicing portfolio showing only minimal defaults. Although market conditions remain uncertain, and it's challenging to forecast activity, there's an expectation that market recovery will boost Q4 transaction volumes more so than Q3. The company maintains liquidity and commits to investment in growth and technology, alongside ensuring strong cash flows.

Long-term Financial Goals Amidst Market Challenges

Walker & Dunlop's long-term financial targets for 2025 include hitting $2 billion in total revenue and $13 of earnings per share. Though achieving these goals may be challenging due to unpredictable transaction volumes, the company is poised for strong growth as the market recovers, and they continue to invest in various strategic initiatives.

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and welcome to the Q2 2023 Walker & Dunlop, Inc. Earnings Call. Today’s call is being recorded. [Operator Instructions]

At this time I will like to turn the conference over to Kelsey Duffey. Please go ahead.

[Kelsey Duffey, Senior Vice President-Investor Relations]

Thank you, Ruth. Good morning, everyone. Thank you for joining Walker & Dunlop's second quarter 2023 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 to 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 disclaims 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 Chief Executive Officer]

Thank you, Kelsey. And good morning everyone.

The great tightening started by the Federal Reserve in March of 2022 has added 525 basis points to the Fed funds rate and dramatically reduced transaction volumes across the commercial real estate industry. We believe the majority of tightening is behind us and expect pricing to adjust and transaction volumes to recover in the coming quarters.

In the midst of dramatically lower transaction volumes in the first half of 2023, Walker & Dunlop’s countercyclical lending businesses, exemplary credit track record and consistent servicing and asset management revenues provided us with the financial strength to continue investing in the business for long-term growth and success.

Q2, total transaction volume of $8.4 billion was down 63% in the second quarter of 2022. Yet revenues were down only 20% to $273 million. Thanks to durable revenue streams from our servicing and asset management businesses.

Adjusted EBITDA was down 26% year-over-year to $71 million, again showing the strength of our nont transaction related revenues.

Diluted earnings per share, which is impacted by lower non-cash mortgage servicing rights was down 49% to $0.82 per share. And adjusted core EPS was down 44% to $.98 per share. It is our hope and expectation that the first half of 2023 was the low point of transaction volumes due to the Fed tightening cycle and we continue to build back from here.

Looking at W&D’s performance on a sequential basis, as shown on Slide 6 Q2 2023, total transaction volume of $8.4 billion was up 25% from $6.7 billion in the first quarter. Driven by growth in agency lending with Fannie Mae, volume is up 64%; Freddie Mac volumes up 24% and HUD volume is up 16% on the quarter.

Through the first half of 2023 the GSE has only deployed 30% or $44.3 billion of their $150 billion annual lending capacity, leaving plenty of capacity to lend as the market recovers.

We continue to focus on refinancing every loan maturity in our portfolio, finding new refinancing opportunities and other lenders portfolios using our Galaxy database and placing financing on every sale transaction, our investment sales team is marketing.

The multifamily acquisitions market stalled in Q2 as sellers waited for rate stabilization and cap rate clarity before putting assets on the market. Our multifamily property sales volumes were down 81% year-over-year and down 21% from Q1. If our current Q3 sales pipeline is any indication, Q2 was the low point in this cycle for multifamily sales activity and we're in an upward trajectory from here, but slowly.

Q2 debt brokerage volume of $3.3 billion was down 64% from the second quarter of last year, yet up 40% from Q1. The banking sector had a full on crisis in Q2, with the failure of SVB, Signature and First Republic dropping capital flows to commercial real estate dramatically. We appear to have averted a meltdown of the U.S. banking system and is our expectation that banks pulling back from CRE lending will increase demand for commercial real estate debt brokerage services going forward.

Private capital is coming into the CRE market to replace bank capital. Walker & Dunlop Investment Partners continues to deploy and raise private capital funds that is not only valuable to the returns and growth of our asset management business, but provides our bankers and brokers with proprietary capital to meet their clients’ financing needs. We continue to invest in our business even after our April reduction in force. The vast majority of our bankers and brokers are still with us. Our technology-enabled businesses of small loans and appraisals continues to scale. We raised Alliant’s a 117th low income tax credit fund during Q2 and we broaden our investment banking capabilities from predominantly single family by hiring a new Managing Director focused on the commercial real estate market. We can make these investments thanks to the cash flow generated from our non-trans based servicing and asset management businesses.

I will now turn the call over to Greg to discuss our financial results and then come back with some thoughts on our longer term outlook. Greg.

[Greg Florkowski, Chief Financial Officer]

Thank you, Willy. And good morning everyone.

Market conditions this quarter, were generally consistent with the trends we described in our first quarter earnings call. Although our overall financial results for both the second quarter and first half of 2023 reflect an extremely different market today than during the same periods of 2022, we saw sequential growth across almost all business lines this quarter when compared to Q1 as the pace of monetary tightening has slowed and the commercial real estate market has slowly adapted.

Q2 total transaction volume was down significantly, but recurring revenues from our servicing and asset management segment continued to grow and adjusted EBITDA remained strong at $71 million, a testament to the strength and durability of our business model.

We continue to focus on cost containment to drive improvements in operational efficiency. Coming into the year, we took steps to reduce annual controllable G&A cost by at least $15 million and our Q2 results reflect the full benefit of those decisions. SG&A costs are down 15% compared to the same quarter last year.

We also reduced our headcount by over 100 employees in April creating $25 million of annualized personnel related savings. As a reminder, the action had little impact on our financial results this quarter due to the separation costs, but we expect to see the full benefits of the headcount reduction in the third and fourth quarters.

Turning to segment operating performance, Q2 of last year reflects a very different transaction market for our Capital Markets segment than the second quarter of 2023.

As shown on Slide seven a year ago, our team had its second best quarter by volume in our company's history. Although transaction volumes this quarter decline 63% compared to that near record quarter, total revenues for the segment were down only 42% to $126 million as we saw slight improvement in gain on sale margins across most products year-over-year.

A more important comparison is the sequential comparison from Q1 to Q2, which as shown on Slide 8, saw transaction volumes increased 25% and total revenues for the segment increase 21%. The pickup in transaction activity drove an increase in net income for the segment from just above breakeven in Q1, to $16.1 million in Q2 and a 45% improvement in adjusted EBITDA to a loss of $10.3 million in Q2. Our clients will continue to draw on the expertise of our bankers and brokers to navigate these challenging market conditions. And as they do, the financial performance for this segment will steadily improve.

The servicing and asset management segment for SAM, includes our servicing activities and asset management business, both of which produce stable, recurring revenue stream. As shown on Slide 9, SAM revenues were up 14% year-over-year to $143 million due to growth in servicing fees and escrow earnings. The Fed’s 25 basis point increase last week was expected and will benefit our bottom line.

Although the cost of our term debt increases with short-term rates, we also manage just over three times the balance of our term loan in interest earning assets that also grow in tandem with short-term rates. So we will see a slight incremental benefit from the recent rates. Of note Alliant revenues were $26 million this quarter as we close $271 million of new equity syndications in Q2, bringing our year-to-date total to $407 million, 13% ahead of a year ago and putting Alliant on pace for its best capital raising year ever.

As we have shared for the last several quarters, our at-risk servicing portfolio continues to perform well with only seven basis points of defaulted loans in the portfolio. As shown on Slide 11, as of December 31, 2022, the weighted average debt service coverage ratio was 2.32 times and the underwritten loan to value was 61%, reflecting a cash flowing portfolio was substantial equity cushion across the majority of our loans.

This quarter, we resolved the only defaulted loan in the history of our interim loan program. The loan defaulted back in 2019 and four years later we finally sold the property, returning $9 million to our balance sheet, while charging off the $6 million loss reserve. Although the sale improved the health of our balance sheet and had no impact on GAAP earnings, adjusted EBITDA and adjusted core EPS are both reduced this quarter by the $6 million charge off.

Turning back to our consolidated results for the first half of the year, as shown on Slide 12, our total transaction volumes are down 57% year-to-date. But the stability of earnings from our SAM segment offset a large portion of the slowdown in capital markets activity. Diluted earnings per share was $1.61 down 57% from the first half of 2022. While year-to-date adjusted EBITDA is down just 12% to $139 million; and adjusted core EPS was down 24% to $2.14 per share.

Finally, year-to-date operating margin was 14% compared to 25% in the same period of 2022, while return on equity was 6% versus 16% in 2022. Our first half financial results reflect a material shift in market conditions that began impacting the market a year ago as the Fed aggressively increased interest rates. The Fed appears to be winning its battle over inflation, but it's clear that interest rates will remain elevated for longer and liquidity supplied by large banks is likely to remain restricted in the near term.

On our last call, we provided an updated range for our 2023 guidance as shown on Slide 13, reflecting the market uncertainty and difficulty forecasting financial performance this year due to the macro environment and the potential that a recovery would be pushed into 2024. After four consecutive quarters of declining transaction activity, we're encouraged by the sequential pickup in activity we saw from Q1 to Q2, and we're optimistic that the pace and magnitude of interest rate changes will continue to slow and our clients will continue adjusting. However, it is still very difficult to forecast transaction activity for the third and fourth quarters.

Based on what we see today, the lower end of our annual guidance range is the most likely outcome and we expect the fourth quarter to be stronger than the third quarter as the markets recover over the coming months, and our asset management businesses generate stronger fourth quarter earnings. Although our earnings and operating metrics remain under pressure due to the declining transaction volumes and tighter servicing fees, we are most focused on delivering strong adjusted EBITDA during this time in the cycle.

Our ability to generate free cash from our core businesses allows us to service our debt, invest in our people in businesses and create long-term sustainable value for our shareholders. This quarter, our cash balance increased $40 million ending the second quarter with $228 million of cash, up from $188 million at the end of Q1 due to the strong cash generating capabilities of our business and the repayment of a portion of our interim loan portfolio. We are operating in a challenging environment and we will continue to focus on building our liquidity to best position the company for the long-term and at the same time, we remain committed to our quarterly dividend. And yesterday our Board of Directors approved a quarterly dividend of $0.63 per share payable to shareholders of record as of August 17th.

Two quarters into what has been an extremely challenging year, we feel very good about a number of things. First, our business model continues to produce steady high margin cash flows that allow us to maintain profitability and build up a strong capital position despite the current market headwinds. Second, we are focused on multifamily and have access to large sources of countercyclical capital to support our transaction businesses. Third, multifamily fundamentals are holding up well from a credit perspective and our historical underwriting has us feeling very good about our at risk portfolio today. Fourth, we managed our costs to navigate the current environment, but retain the talent we need to capitalize when growth returns to the market. And finally, our entrepreneurial spirit combined with financial flexibility puts us in a position to take advantage of growth opportunities as we continue to pursue our long-term strategy.

Thank you for your time this morning.

I'll now turn the call back over to Willy.

[Willy Walker, Chairman and Chief Executive Officer]

Thank you, Greg.

Commercial real estate investors today are extremely rate sensitive with 10 to 15 basis points having the potential to make or break a deal. Transaction volumes will ebb and flow in the second half of the year depending on rates and capital flows. Our outlook is the following.

We believe the Fed has done the majority of its work, whether it's one, two, or even three more rate increases, the majority of their tightening is done. Second, with long-term rates determining the cost of capital to most commercial real estate deals, the timing and size of the treasury department's new bond issuances will impact the cost of financing to commercial real estate for the next several quarters. Third, Fannie Mae and Freddie Mac have plenty of capital to provide to the multi-family industry and is our clear objective to partner with them to deploy as much of that capital as possible. And fourth, multi-family credit particularly in our at-risk servicing portfolio where 90% of our loans are fixed rate should remain very healthy.

Let me dive a little deeper on a number of those points. While the Federal Reserve has added 400 basis points to the Fed funds rate over the past 12 months, the 10-year treasury has only moved 130 basis points. A 4% 10-year treasury is a reasonable and somewhat normal interest rate to work with. It's just the adjustment in cap rates, which will allow owners to determine pricing can only happen once financing costs stabilize. According to our research team at Zelman, multi-family cap rates adjusted to an average of 4.9% in Q2 2023 compared with 4.25% in Q2 2022.

When cap rates adjusted and financing costs were between 4.75% and 5.25%, we saw transaction volumes pick-up. This dynamic between financing costs and cap rates will continue and as the Federal Reserve's involvement in the market diminishes rates and cap rates should stabilize and transaction volumes will pick-up. As Greg’s and my previous comments underscore, multifamily fund fundamentals and credit quality remain very strong. Our at-risk portfolio includes only multi-family loans and 90% of those loans are fixed rate with very attractive interest rates. We have only $184 million of at-risk loans maturing for the rest of 2023 and another $1.3 billion in 2024. So only 2.6% of our at-risk loans mature in the next 18 months; that is a gift to our borrowers and to the credit quality of our portfolio.

While our financial performance in the first half of 2023 isn't what we would like it to be, our business model is performing to design. Our $127 billion servicing portfolio and $17 billion asset management businesses produce stable high margin revenues that allow us to not only maintain our banking and brokerage teams and infrastructure, but continue investing in our high growth businesses and technology. As it relates to our focus on technology, we have successfully used our proprietary data analytics and technology to win re-financings from the competition. During Q2, 60% of the re-financings we originated were new loans to Walker & Dunlop.

Let me double click on that point and tie it back to my commentary on our servicing portfolio. We are using technology and our exceptional bankers and brokers to win loan re-financings from the competition. 60% of our total volume in Q2, which means we are not relying upon re-financing our own portfolio, which has very little re-financing activity over the next 18 months, which is very positive from a credit perspective. A year ago with inflation running rampant in the Fed raising rates by up to 75 basis points per month, the outlook was uncertain and our deal pipeline started to deteriorate.

Today the outlook is markedly different, while inflation is clearly still a concern, markets have begun to stabilize and transaction volume appears to have bottomed and is starting to recover. Our day-to-day focus is on executing for our clients, winning every piece of business we possibly can, and continuing to invest in our people, brand and technology to deliver exceptional long-term shareholder returns.

In July, our longtime President and my partner in building this great business, Howard Smith announced that he will be retiring on January 1, 2024 after 43 years with Walker & Dunlop. Howard has been instrumental in helping W&D grow from a small family owned business with one office to the scaled industry leading enterprise we are today. Howard's announcement was not unexpected, and we have two exceptional leaders in Kris Mikkelsen and Don King to assume Howard's primary duties as co-heads of our Capital Markets Group. Howard will be greatly missed, but I'm excited to see Don and Kris step into their new roles and for other members of our senior management team to take responsibility and provide leadership across the company going forward.

We established our five-year highly ambitious business plan called the Drive to '25 in 2020, knowing that the economy and our business would not remain static, and after the COVID pandemic and great tightening, those were pretty good assumptions. What is important for investors to know is that we remain focused on the Drive to '25 and have a pathway to achieving it. The Drive to '25s, two major financial targets are $2 billion in total revenue and $13 of earnings per share in 2025.

Given what the great tightening has done to transaction volumes, reaching the ambitious financing and property sales volume targets of Drive to '25 is unlikely, yet not necessary due to the growth in our servicing and asset management segment. The Mortgage Bankers Association estimates that by 2025, the commercial real estate debt financing market will return to the financing volume scene in 2021. In 2021, our capital markets team closed $68 billion of transaction volume and generated $260 million of net income to Walker & Dunlop.

That team of bankers and brokers is still at Walker & Dunlop, and we have every confidence that if the markets return to 2021 levels, our people, brand and technology can deliver similar results in our Capital Market segment. And as we grow back to 2021 transaction volumes, our servicing and asset management segment will continue to outperform. After the acquisition of Alliant in 2021 and the rapid rise in short-term interest rates, increasing our interest earnings dramatically, our servicing and asset management segment is on track to generate $175 million of annualized net income in 2023, up from $105 million in 2021.

So a return to 2021 transaction volumes in our capital market segment, coupled with the current net income from our SAM and corporate segments, would bring us to over $10 per share of EPS. And as we continue adding bankers and brokers investing in growth initiatives to scale our small balance lending and appraisal businesses and raise more capital through our asset management platform, we have a pathway to achieving our Drive to '25 financial targets of $2 billion of revenues and $13 of earnings per share.

While there are no guarantees and rates, capital flows, credit quality, spreads and average servicing fees will impact our business. We have the team, business model and focus to achieve the Drive to '25 goals. Knowing what our long-term goals are and setting our amazing team loose to achieve them is what has made this company so successful. We have an exceptional team at W&D, a diverse business model that allows us to perform in both good times and bad and the very real opportunity ahead to grow dramatically as the market recovers from the great tightening.

Thank you for joining us on today's call.

I'll now ask Ruth to open the call for any questions.

[Operator]

Thank you. [Operator Instructions] We'll go first to Steven DeLaney with JMP Securities.

[Steven DeLaney, JMP Securities]

Good morning everyone. And Willy really applaud the proactive response that management has taken in the first half to respond to this new commercial real estate market reality we have. And nice to hear that it sounds like you'll see more, more benefit from that in the second half. So I want to get that out at the start.

I guess the most obvious thing in multifamily as you highlighted Willy, is how slow or let's say not slow, but how far below Freddie and Fannie collectively have been in terms of their caps. It looks like through June on a combined basis there's about $30 billion of catch up, not to mention the $75 billion that we would normally expect in the second half. So like how close, I mean, do you see an acceleration there and an effort by leadership at the GSCs to try to get closer to their full year caps? And as part of that, can we expect them to cut their loan pricing relative to benchmark rates in order to try to accomplish that? Thanks.

[Willy Walker, Chairman and Chief Executive Officer]

Sure, Steve, and thanks for joining us this morning. There are a couple things I think that are important to keep in mind as it relates to the agencies and the overall market. The first thing is that in the first half of 2023 there simply wasn't a lot of demand for financing, right, acquisition, volumes fell through the floor as we just highlighted given our investment sales being down 81%, quarter-on-quarter between Q2 2022 and Q2 2023. And so there has not been a huge amount of need, if you will for their capital. With that said Fannie and Freddie have been very focused on two things, profitability and affordability. Profitability on deals that are non-affordable or market rate where it has been challenging to get pricing to a point where borrowers want to move on non-affordable financing. So we have underscored that point to them and are very hopeful that they realize that their capital is needed not only in the affordable part of the market, but also in the market rate section of the market.

The second thing I would say is on affordable Walker & Dunlop is well above our targets as it relates to supplying affordable deal flow to Fannie and Freddie. And so we benefit from that by having fed them affordable deals that allow them to meet their targets from a regulatory standpoint and therefore that frees them up if you will to price more competitively on market rate deals. And then the final thing that I would say is that there have been no portfolio transactions so far this year and I would expect us to start to see some portfolios in the back half of 2023 and into 2024. And I think, if you look at our year-on-year, we did a large transaction in Q2 of last year – multi-billion dollar financing in Q2 of last year and that had a big obviously impact on our Q2 2022 volumes.

And when you strip that out, the step down in volumes quarter-on-quarter isn't quite as pronounced as it was. Those types of deals will come back into the market. Sellers have been unwilling to put portfolios on the market thinking that they weren't going to get the cap rates they expected. And as we see stability in the market, Steve, I would expect we see some portfolios come onto the market. And as you know Walker & Dunlop has consistently been one of the very few providers that that teams that want to hire an agency finance team GoTo for multi-billion dollar transactions.

[Steven DeLaney, JMP Securities]

That's helpful background and I get your point about it's not their availability of capital to lend, but the demand obviously from the borrowers who seem to be a little bit frozen at the time, I guess waiting for rate certainty.

One final just cleanup thing, and this is – this week talking to a lot of the multifamily bridge lenders that reported, everybody loves multifamily as a property type, but I was surprised how many people mentioned that on a case-by-case basis, while rents are going up that operating expenses are going up significantly. And a lot of that has to do with maintenance, security, those kinds of things, and we're hearing a lot about economic rent and the amount of drag to revenue that you're getting from non-payers if you will. Some of that obviously goes back to COVID. In your conversations with your loan officers and your borrowers, is this an issue in the multi-family market that needs to be kind of worked on? And is it just a municipality by municipality or is it something broader than that? Thank you.

[Willy Walker, Chairman and Chief Executive Officer]

Sure, Steve. There are a couple things in that question that I think are important to underscore. The first is that we have taken very limited risk on any balance sheet lending. As Greg pointed out, we resolved one loan for 2019; that's the only loss we've ever had in our interim loan portfolio. But the great majority, we don't have any CLO exposure at Walker & Dunlop. And as we underscored in the call, 90% of our at-risk portfolio is fixed rate loans. So from a credit standpoint to W&D, we feel extremely good.

The second point is that if you look at the fundamentals of multifamily, while values have come down as cap rates have gone up, cash flows off of the assets have remained very strong, a lot of that is due to fixed rate debt, right? So if you are a buyer who went out and bought a property and put floating rate debt on it and bought it at a scary low-cap rate and those operating costs that you underscored have gone up, you've got problems because your cost of financing has gone up and also your operating cost has gone up. That's not a space where Walker & Dunlop has played much. We played there a little bit, but not much. Some of our competitor firms, they have benefited from having floating rate debt and they're benefiting right now from the cash flows that that our floating rate debt is giving to them. That's a risk profile of lending that we have not played in.

The third thing I would underscore is your point about economic vacancy. There was a letter that was written to FHFA three days ago by a number of democratic senators underscoring the Biden Administration's request for a Tenant Bill of rights to try and add renter protection. And after seeing the letter go, I reached out to a number of the senators who were signatories to that letter and I pointed out to them that what they are missing is two things.

The first thing, the amount of economic vacancy that is still in the market and that landlords across the country through the pandemic and post pandemic have worked tirelessly with renters to make sure that they could stay in safe and affordable housing. While there are clearly outliers, there are clearly tenants who have not been treated as well as any of us would like. The vast majority of owner operators that we work with have bent over backwards to support their tenants through the pandemic and post pandemic. And so you underscore an issue from an operating standpoint that we as an industry must raise to both the regulator as well as legislators who think that it's the tenant who has gotten the shorting of the stick and not the owner operator.

The second piece to that point, Steve, is that the agencies right now are very, very focused on making sure that the assets that they lend on are at a standard of quality that makes it so that renters have a safe, affordable and maintained asset. And we have an incredibly strong track record at Walker & Dunlop as it relates to asset maintenance. But there are some situations where we and other lenders have borrowers who for the reasons you just pointed out, are not investing in their assets to keep them up and to make it so that they are safe, affordable and well-maintained assets. And so we as an industry need to step in and make sure that tenants have those types of properties to live in and that those properties that have agency financing on them are maintained according to the loan documents that sit on top of them.

[Steven DeLaney, JMP Securities]

That's great inside Baseball, Willy. Thanks and good to know about the proposed legislation. Thanks for all your comments this morning.

[Willy Walker, Chairman and Chief Executive Officer]

Sure.

[Operator]

[Operator Instructions] We'll go next to Jay McCanless with Wedbush.

[Jay McCanless, Wedbush]

Hey, good morning everyone. Thank you for taking my questions. The first one I had Willy, I know you had opined in the past that the GSEs would probably hit their caps this year, but just based on the transactions you see out there, do you think that's still on the table?

[Willy Walker, Chairman and Chief Executive Officer]

I don't think so, Jay. I'd say that, sort of looping back to Steve's question and now to yours. We saw a significant uptick in activity in sort of May – late April into May when we got into that band that I tried to describe as sort of precisely as I could in my prepared comments. Of cap rates moving up to the high 4s financing cost being between 4.75 and 5.25, and borrowers saying, I'm okay taking 25 to 50 basis points of negative leverage, I'll go.

And so volumes picked up there and that was right around when we did our Q1 call. So we saw an uptick and said, hey, if they keep going at this rate, they could hit their caps. The debt ceiling negotiations then the treasury department stepping in and starting their $1 trillion issuance program of treasury issuances between now and the end of the year to raise capital for the cost of the federal government put a lot of upward pressure on rates, rates started to move out again. And as I pointed out in my comments, we've never seen a market that's more rate sensitive. So you get 10 to 15 basis points of movement in the tenure that's pushing out overall coupon rates and people say, you know what, it's outside of my band on negative leverage; I'm going to pause.

So we, the numbers of the numbers that are at 30% of their annual capacity, we as I said are working as closely with Fannie and Freddie to deploy as much of that capital as possible. And I would go back to the point I made to Steve, Jay. If we see some large portfolios both be transacted upon from a sales standpoint or needing financing that could change the numbers materially. But at the current no large portfolios and Fannie and Freddie focusing on profitability and affordability rather than capital deployment, it will be very challenging for them to get to their caps.

[Jay McCanless, Wedbush]

Thank you, Willy. The second question I had, and apologies if I'm misconstruing this, but it sounded like you guys are potentially kind of doing a reset on single family for rent. Maybe talk about where your efforts are there now and it seems like from what we've seen from the headlines, the public SOFR companies are still getting pretty good same store rent growth. So maybe talk about where W&D is on that now? And then also kind of what you're seeing from the operators that you've worked with?

[Willy Walker, Chairman and Chief Executive Officer]

So we have a team that's very focused on the SOFR space, and they've been deploying quite a bit of capital. It's challenging in that the agencies don't lend on SOFR, they [indiscernible] non-BFR. So for those who don't know the acronyms that Jay and I are talking about, single family rental versus built-for-rent, the agencies will lend on build-for-rent. They won't lend on single family rental. And so finding capital Jay has been challenging and it's one of the reasons why as the banking sector gets displaced, we believe that there's going to be an increased demand for debt brokerage capabilities because the banker that developers have worked with four times says we are not lending anymore and they don't know where to turn to for capital. It would shock you if you looked through our Q2 debt brokerage list of capital sources.

How many of them, Jay, you don't know? They're not household names. They're small banks that you seemingly wouldn't think would make a commercial real estate loan in various markets that are showing up, to, because they need to deploy capital because they like the fundamentals of the commercial real estate that they're lending on. And so we believe that that's very positive for our debt brokerage business as the market feels and recovers.

The other thing that I would say is SOFR as an asset class is doing very well and should continue to do very well. What we are seeing is that because the majority of Americans who own a home have a very low interest expense, fixed rate mortgage on their home, they are not putting that supply into the market. So, the existing home sales market is in the gutter and will stay there for quite some time.

People will move, people will have needs to buy a new home because they have got a larger family, they’ve got a new job, what have you. But the existing sales market is very, very depressed right now because everyone has cheap financing on their home and they don’t want to lose that 3.5% mortgage for a 6.5% mortgage. That means that the only new supply coming onto the market is new construction. And those newly built homes are coming in at a price point that is thoroughly unaffordable to most renters in America. The cost of financing, the down payment and the overall cost of the home are unaffordable to most renters, which means that they have two options stay renting in an apartment building or move into single family rental. And so we see that space, both multi-family as well as single-family rental as having great growth dynamics over the next several years as the single-family market is really delivering new product at a price point that is not achievable by most renters and that the existing home market basically stays depressed because people don’t want to lose the benefit of that 3.5% fixed rate mortgage.

[Jay McCanless, Wedbush]

Got it. Where you were talking about the small banks and some names that we wouldn’t know on the list does, is that part of what you said in the prepared remarks that roughly 60% of your loans this quarter are new loans, new borrowers, new investors. I guess, I thought that was…

[Willy Walker, Chairman and Chief Executive Officer]

No.

[Jay McCanless, Wedbush]

Pretty interesting and encouraging stat, other side of it. Okay.

[Willy Walker, Chairman and Chief Executive Officer]

Yes, but these are – so it’s – they are new loans to Walker & Dunlop Jay. So, it’s not that it’s a new capital source. If I showed you the capital source list, it would probably be even more new providers of capital if you will. We did a loan in Q2 with a bank called Sunshine Bank. I have to tell you, no disrespect to Sunshine Bank, but I have never heard of Sunshine Bank before. And so, what we’re talking about in that 60% number is that 60% of the loans that we financed in Q2 were new loans to Walker & Dunlop.

So, the loan that we were refinancing was a loan that was originated previously by Wells Fargo, CBRE, some other provider and we went and refinanced that loan for the borrower, where the capital source came from is a distinct view, but we’re talking about the fact that in our portfolio, we do not need to rely on refinancing volume in our existing $127 billion servicing portfolio. We are going out and stealing financing from the competition because we’ve invested in Galaxy and because we have visibility into our clients’ portfolios to be able to go meet with them and say, this isn’t a Walker & Dunlop loan, but we would love to work on the refinancing of that asset. And that has been a huge value add to our bankers and brokers as it relates to having somewhat of an x-ray into our client and borrowers’ portfolios.

[Jay McCanless, Wedbush]

That’s great to hear, Willy. My last question, if you think about getting back on offense, are there potential M&A opportunities for WD out there, just given the fact that, like you talked about higher interest rates for everyone some people may have gotten off side in terms of how their capital structure looks.

[Willy Walker, Chairman and Chief Executive Officer]

So I would say, I mean we have always tried J to zig when others have sagged. We did quite a bit of work during the great financial crisis and did an acquisition when nobody, well first of all, we weren’t a publicly traded company yet, so no one was looking at us, but we did a large transaction in the midst of the great financial crisis. Coming out of the pandemic, we made three acquisitions that have materially helped Walker & Dunlop post-pandemic and quite honestly through the great tightening. So I feel very good of our M&A capabilities and our ability to zig when others zag.

I would say that from the lender standpoint I haven’t seen any knives that have fallen yet, if you will. Some of those, it took on a lot of floating rate risk seemed to be performing very well so far. And so there really hasn’t been anything there that we would look at as it relates to taking advantage of someone’s risk profile having changed dramatically. I think that does go to where we are in the cycle and the fact that most people’s underwriting was more conservative than when we were heading into the great financial crisis.

And then on the services side of things we are constantly looking. But first of all, anything we’re going to do now would have to be pretty significant in size and scale, just given our size and scale and wanting things to actually move the needle.

And the second thing is that as Greg went through in our numbers, while we don’t like the transaction volumes are down and we don’t like the overall financial performance, the business model is performing two design. $71 million of EBITDA in Q2 with deal volumes down over 60% is a fantastic quarter. It provides us with the cash flow to be able to keep our team in place, continue investing in our businesses and continue to invest in growth.

And so taking on someone else’s problems at this time, it would have to be a screaming opportunity for us to go and not just say, we’ve got the opportunity here to inflate everything back when the market recovers as it has started to do and what we’re seeing today and take advantage of that on our own rather than going and taking some significant risk of bringing in someone else’s problems.

But with that said, look, we’ve acquired 16 companies in Walker & Dunlop’s history and we’re constantly looking.

[Jay McCanless, Wedbush]

Okay, that’s great Willy. Always very helpful. Thanks for taking my questions.

[Willy Walker, Chairman and Chief Executive Officer]

Thanks Jade.

[Operator]

[Operator Instructions] We’ll go next to Jade Rahmani with KBW.

[Jade Rahmani, KBW]

Thank you very much for taking the questions. Just on the GSE outlook more interested in W&D’s volumes, do you think that you can exceed 2Q levels for Fannie and Freddie? I think Freddie for the second half of last year, you averaged around $2 billion a quarter. And Fannie was pretty strong sequentially. There is usually an uptick and it seems from your peers that multi-family inflows are picking up and the GSE volumes are set to sequentially improve. So, just wondering if you can make any comment on that.

[Willy Walker, Chairman and Chief Executive Officer]

I certainly hope so, Jade. We have fantastic relationships with both Fannie and Freddie, we have the client base and the bankers and brokers at Walker & Dunlop to continue to grow market share. Our market share with Freddie grew in the first half of 2023. Our market share with Fannie Mae was down through the first half, and that goes back to the large transaction we did in Q2 of 2022, which popped our market share with Fannie in the first half of 2022. Given the deliveries that we had to deliver to Fannie Mae and Freddie Mac in July after closing out Q1, I think, our positioning the lead tables will increase quite materially. And we continue to see very solid inflows as it relates to our agency pipeline.

And so while both Greg and I tried to underscore the difficulty in projecting volumes right now, given, going back to the comment I made to Jade, we had a window there in late April, early May where cap rates adjusted financing, costs adjusted, and borrowers said, go. And then all of a sudden externalities came in, the 10 year runs a little bit and borrowers say, don’t go.

So, it’s a wildly rate sensitive market. And at the same time, every time we’ve seen the opportunity for clients to move forward, they are. So, it gives us optimism and at the same time, it also requires us to be tempered in our enthusiasm only because we’ve watched the market be sort of in sync for a moment and then back right away.

[Jade Rahmani, KBW]

Thanks for that. The gain on sale margins had a nice pickup. I haven’t been able to check the agency standalone margins versus last quarter, but sequentially margins did pick up nicely. You feel that they’ve kind of stabilized at this point and there isn’t as much pressure to provide borrowers with some savings through a lower imputed MSR gain. How are you feeling about the gain on sale margin outlook?

[Willy Walker, Chairman and Chief Executive Officer]

Yes so, I’ve mentioned a number of times, Jade, that the agencies are very focused on profitability and affordability. I looked at Fannie Mae’s Q2 financial results and their G-fees year-on-year are flat, our S-fees year-on-year down precipitously. They have passed on to us and other partners the burden of pricing in this market. And we’ve talked to them about it. They want to partner with us and they’re being good partners, but their G-fees have stayed static while all of their partners SB’s have come down precipitously to deal with the sensitivity in pricing.

So, we’re very hopeful that they realize that they’ve got a lot of capital to deploy that they have a – there is no obligation for them to hit their caps. But there is a sentiment if you think about it, Jade, there’s 600,000 homeless people in America, 600,000 homeless people in America today. And there was a study done by the Benioff Center at the University of San Francisco that was just published. It shows very clearly California has 12% of the U.S. population, 30% of the U.S. homeless population and 50% of the U.S. homeless non-sheltered population.

And the Benioff Center went and looked at it and there’s this narrative that says that people who become homeless in other states move to California because it’s got a large social safety net and it’s also got great weather. Wrong and wrong. 90% of the homeless people in California were living in an apartment or a home in California before becoming homeless. The reason they are homeless is housing affordability.

And what we have is an affordability crisis in America today. And what Fannie and Freddie, and HUD have an obligation to do is to provide capital to the market in market rate deals, in Small A affordable deals and in Big A affordable deals to make sure that there is adequate capital to the market to make it so that we do not have the affordability crisis in America that we have today. So the fact that Fannie and Freddie are at 30% of their annual caps through the first half of the year, I think, is a big reason why housing remains unaffordable for many people. The fact that HUD is significantly under its annual, authorized insurance cap is one of the main reasons why we’re not getting more HUD D4 financing to create new affordable supply into the market.

And so as we sit there and look at that letter that came out of the U.S. Senate going to the FHFA administrator talking about a tenant bill of rights, the real focus right now needs to be on capital deployment. One example that’s just incredibly clear as it relates to housing, affordability and homelessness in Los Angeles County, 79% of the property in Los Angeles County is zoned single-family, 79%. That makes it almost impossible to build new, affordable, multi-family.

If you go under the spectrum, Houston, Texas has dropped their homelessness rate by 61% over the last decade. And the reason for that is because of the lack of nimbyism and the lack of zoning, which allows for new product to be built. So, if you think about the difference between Los Angeles, California; and Houston, Texas; Los Angeles, California is a great place to be an owner, it’s a terrible place to be a developer or to be a renter. Houston, Texas is the complete inverse. Houston, Texas is a terrible place to be an owner, it’s a great place to be a developer and a renter. We need Fannie and Freddie, and HUD to lean in at this time to provide capital, the market across the spectrum to make it so that this housing affordability crisis that’s going on in America, gets their capital and brings the cost of renting down.

[Jade Rahmani, KBW]

Thanks for that. One of your peers took a large write-down in its valuation of prior PropTech investments and just wanted to ask about the outlook for GeoPhy apprise how you’re feeling about those two businesses.

[Willy Walker, Chairman and Chief Executive Officer]

So as you may recall, Jade, the GeoPhy acquisition had a very significant earn out to it. And so as it relates to the value that we actually paid for GeoPhy and then the total value that we will end up paying out for it I do not expect us to have any need to do a write-down on the GeoPhy acquisition given, if you will, the variable nature of that acquisition with a very large earn-out on the backend. That then leads into small balance lending and a prize. It should be no surprise to you or anyone else on this call that transaction volumes in the appraisal business as well as in the small balance lending business have come down as the market has digested the great tightening.

And while we are not where we would have liked to have seen those two businesses, we have fantastic teams in both, we are applying the technology every single day to make both of them far more efficient than our larger businesses and we see great growth opportunities in both of them to both scale them with the technology as well as use that technology to help us grow our larger scaled businesses once they get up and going and the technology gets proven.

So feel very good about GeoPhy as well as the investments we’ve made in our emerging businesses.

[Jade Rahmani, KBW]

Thanks very much.

[Willy Walker, Chairman and Chief Executive Officer]

Thank you.

[Operator]

There are no other questions at this time.

[Willy Walker, Chairman and Chief Executive Officer]

Great. Thank you everyone for joining us today. Have a fantastic day. And we’ll talk to you again next quarter. Thanks.

[Operator]

This does conclude today’s conference call. Thank you for your participation. You may now disconnect.