Walker & Dunlop Inc

NYSE:WD

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to the Q3 2024 Walker & Dunlop earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kelsey Duffey. Please go ahead.

[Kelsey Montz, executive]

Thank you, Ruth. Good morning, everyone. Thank you for joining Walker & Dunlop's Third Quarter 2024 Earnings Call. I have with me this morning our Chairman and CEO, Willy Walker; and our CFO, Greg Florkowski. This call is being webcast live on our website, and a recording will be available later today. Both our earnings press release and website provide details on accessing the archived webcast. This morning, we posted our earnings release and presentation to the Investor Relations section of our website www.walkerdunlop.com. These slides serve as a reference point for some of what Willy and Greg will touch on during the call.

Please also note that we will reference the non-GAAP financial metrics, adjusted EBITDA and adjusted core EPS during the course of this call. Please refer to the appendix of the earnings presentation for a reconciliation of these non-GAAP financial metrics.

Investors are urged to carefully read the forward-looking statements language in our earnings release. Statements made on 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, executive]

Thank you, Kelsey, and good morning, everyone. Our third quarter financial results reflect an improving market that benefited from healthy fundamentals in commercial real estate that are attracting capital to the market and driving an increase in acquisition and financing activity. It is our expectation the market continues to improve over the next several years and that our investments in the people of Walker & Dunlop, our brand and our technology position us very well to grow our results on the top and bottom line and continue expanding our market presence in the commercial real estate financing and services market.

We closed $11.6 billion of total transaction volume in Q3, up 36% from Q3 2023 and and up 37% sequentially from Q2 2024. Due to increase yield flow in revenues, we grew diluted earnings per share 33% year-over-year to $0.85 per share. Adjusted EBITDA and adjusted core EPS, which strip out noncash revenues and expenses were both up 7%.

As shown on Slide 4, $11.6 billion of Q3 transaction volume included $3.6 billion of property sales, up 44% year-over-year. Property sales volume grew from $1.2 billion in Q1 to $1.5 billion in Q2 to $3.6 billion in Q3 and with a healthy Q4 pipeline shows a terrific trend in multifamily sales activity. While these volumes are still well below our pre-tightening peak in Q2 of 2022, our national presence and exceptional brand will allow us to scale transaction volumes significantly without adding headcount. Fannie Mae and Freddie Mac were sluggish market participants in the first half of the year, but both stepped back in the market in the third quarter. We closed $3.5 billion of loans with the GSEs in Q3, a welcome pickup in volume. Year-to-date, the GSEs deployed a combined $68 billion and have plenty of lending capacity in Q4 before they get close to their $140 billion 2024 lending caps.

Our GSE financing pipeline is robust, setting us up for a strong finish with both Fannie and Freddie. We will continue booking noncash MSRs to drive future earnings and adjusted EBITDA. The 3 factors that can contribute to an increase in MSR revenue for higher GSE loan volumes, higher servicing fees and longer loan duration.

We saw a meaningful uptick in GSE loan volumes in Q3. And as such, MSR revenue was up 23% year-over-year. The other 2 variables, average servicing fee and loan duration did not change significantly in Q3 from the previous several quarters and are still below our historical averages.

Servicing fees, which compressed dramatically as interest rates and borrowing costs rose should revert to historic levels as the yield curve and rates normalize. With regard to duration, borrowers have been picking shorter duration, typically 5 years for their borrowing with the belief that rates will come back down. Depending on the rate environment and the U.S. government's fiscal outlook, it is our assumption that borrowers start going long again and increasing loan terms back to 10 years.

Given that mortgage servicing rights are the present value of future servicing income, continued increases in loan volume with a reversion to normalized servicing fees and term should have a significant impact on W&D's revenues and GAAP earnings over the next cycle.

W&D affordable housing is an important growth area as Fannie, Freddie and HUD focus on affordable lending and the need for low income housing tax credits expands. Our HUD lending volumes grew over 200% to $272 million in Q3, while W&D affordable equity revenues were down 37% due to a decline in tax credit syndications and asset dispositions during the quarter.

W&D affordable equity has been a very consistent contributor to our financial performance, and we are confident that syndication disposition volumes will pick up. The growth in HUD volumes on the quarter is fantastic to see. And due to our team's strong finish to the HUD fiscal year, W&D moved up from the fifth largest HUD multifamily lender in the country to the second largest in 2024.

This is wonderful news and makes W&D #1 with Fannie, #2 with HUD and #3 with Freddie. This is exactly the success and scale we envision for W&D in the agency financing market. We ended the third quarter with $134 billion servicing portfolio that continues to generate stable recurring revenues with very strong underlying credit fundamentals.

The cash flows from servicing bolstered Walker & Dunlop's adjusted core EPS and adjusted EBITDA throughout the great tightening and will continue to generate consistent high-margin earnings going forward. As we enter the next cycle, growth in loan origination volumes will increase the mortgage servicing rights we book and provide the opportunity to raise and deploy more capital at Walker & Dunlop Investment Partners. The servicing and asset management revenues that these 2 businesses generate are wonderful sources of revenue and earnings and up cycles and also paramount in down cycles.

This is W&D's long-standing business model, build a capital markets platform that helps our clients acquire and finance assets in up markets, and also have the recurring revenue streams from servicing and asset management to weather the inevitable down cycles in commercial real estate.

As we transition away from the great tightening, and towards a more robust investing and refinancing market for commercial real estate, W&D's business model and team are well positioned for growth.

I will now turn the call over to Greg to discuss our financial and credit performance in greater detail and then return with some thoughts about what we see in the fourth quarter and beyond. Greg?

[Greg Florkowski, executive]

Thank you, Willy, and good morning, everyone. The growth in transaction activity and improvement across nearly all our key financial metrics signal the beginning of a recovery within the commercial real estate market. Total transaction volumes grew 36% this quarter to $11.6 billion and generated diluted earnings per share of $0.85, up 33% year-over-year. .

We continue to produce strong and stable cash flows, supporting a 7% increase in adjusted EBITDA and adjusted core EPS with increasing clarity around the path of short-term interest rates and a growing supply of capital to the commercial real estate sector, the macroeconomic landscape is strengthening and W&D's financial position, diversified platform and differentiated business model position us to outperform as the market continues its recovery.

Turning to our segment results. Capital Markets transaction activity accelerated this quarter. Our platform has been steadily rebounded throughout 2024 with sequential increases in our GSE debt brokerage and property sales volumes since Q1. As shown on Slide 6, the surge in transaction volumes this quarter produced 210% growth in net income for the segment to $22 million, while adjusted EBITDA also improved to a loss of $4.6 million.

We are particularly encouraged by the significant growth in property sales transaction activity, which increased 135% from last quarter, reflecting a stabilization of asset prices and a robust pool of buyers confident in the long-term fundamentals of multifamily assets.

Additionally, the momentum Willy described in our GSE transaction volumes is promising, and we anticipate this trend to continue into the fourth quarter. The current interest rate environment, coupled with an expanding supply of capital suggests we are at a turning point for the segment performance as we transition into the next commercial real estate cycle.

Our SAM segment continues to deliver healthy recurring cash flows from our scaled servicing and asset management activities. We ended the quarter with a total managed portfolio of $152 billion, including a $134 billion servicing portfolio and $18 billion of assets under management. Revenues from our SAM segment declined 2% this quarter despite a 3% increase in servicing fees and related revenues.

The revenue decline is primarily driven by the decrease in new fundraising activity by Walker & Dunlop affordable equity that generated lower syndication revenues this quarter. We have a healthy pipeline of fourth quarter funds and expect syndication activity to improve in the fourth quarter.

Walker & Dunlop Investment Partners has steadily grown assets under management this year, establishing a pool of equity and debt capital that has been routinely deployed into our clients' transaction. Year-to-date, 36% of WDIP's debt fund investments were sourced from WD bankers and brokers, reflecting the synergies we expected when we entered the asset management business.

The SAM segment also includes the impacts of our credit risk portfolio. And during the quarter, we recognized a $3 million provision for credit losses. Last quarter, I provided an update on 3 loans totaling $62 million that we either indemnified or repurchased from the GSEs. As we navigate the challenges with these assets and prepare to bring them to market, we updated our expected loss estimates resulting in an additional $3 million reserve this quarter and bringing our total reserve to the assets to $8 million. Fannie Mae recently requested we repurchased 2 additional loans totaling $26 million, both of which are defaulted loans in our portfolio. The loans were a borrower that is reportedly being investigated by the DOJ fraud.

We have already recognized a $2 million loan loss reserve for these loans when they defaulted 3 quarters ago. At the end of the quarter, we had only 7 defaults within our at-risk portfolio, totaling $60 million or 10 basis points.

We are currently estimating losses of $7 million on these defaulted loans, which compares to our overall risk sharing allowance of $30 million. The credit quality of our broad $61 billion at-risk portfolio remains strong, and we believe that our current loan loss reserves sufficiently cover any additional challenges that may arise in the portfolio as we transition to a new cycle.

Although transaction activity started slowly this year, our consolidated year-to-date financial results improved this quarter as a result of the growth in transaction activity and consistent cash flow generated by our business. Diluted earnings per share for the first 3 quarters of the year is down 17% to $1.87 per share due to low transaction activity in the first half of the year.

Year-to-date operating margin is 10%, and return on equity is 5% compared to 13% and 6%, respectively, last year. The SAM segment continued to generate durable cash flows, which, in combination with a strong third quarter for the Capital Markets segment drove year-to-date adjusted EBITDA of $234 million and adjusted core EPS of $3.60, up 10% and 11%, respectively.

As a reminder, and as shown on Slide 9, for the full year, we are targeting growth in diluted earnings per share, adjusted EBITDA and adjusted core EPS in the mid-single digits to low teens. The FOMC reduced the Fed funds rate by 50 basis points in September, which had little impact on our Q3 results, but will reduce our net interest earnings from deposits, warehouse interest and long-term borrowings by $4 million to $5 million in the fourth quarter.

Importantly though, the building momentum and transaction activity in the fourth quarter should more than offset that decline. As a result, our year-to-date financial results have us on a path to achieving our targets for adjusted EBITDA and adjusted core EPS. With respect to diluted EPS last quarter, we underscored our expectation that transaction activity would accelerate in the back half of the year, which would allow us to hit our diluted EPS target.

Q3 delivered on that expectation. While long-term interest rates drive commercial real estate transaction activity and the sell-off in the bond market over the last few weeks caused volatility, we believe the current level of long-term interest rates will support a healthy amount of deal activity in the fourth quarter.

We entered the fourth quarter with momentum and a strong pipeline of business that gives us a path to achieving the low end of our guidance range for diluted EPS. We ended the quarter with $180 million of cash on the balance sheet with an additional $30 million of cash invested in several short-term opportunities that drove transactions for our clients and fund management businesses.

Throughout this cycle, we routinely reinvested capital in our business in pursuit of our long-term growth objectives while also returning capital to our shareholders through our recurring quarterly dividend. Yesterday, our Board of Directors approved our quarterly dividend of $0.65 per share, payable to shareholders of record as of November 22, 2024.

Our third quarter reflects another period of solid progress within a gradually recovering market with clear indicators of improving performance across the business with an active Q4 underway and a healthy macroeconomic backdrop. We are excited about the opportunities ahead for W&D as we continue to manage our business to deliver long-term growth to our shareholders.

Thank you for your time this morning. I'll now turn the call back over to Willy.

[Willy Walker, executive]

Thank you, Greg. As shown on Slide 10, market research shows that 2024 will be a peak year for apartment completions with 600,000 units expected to come online. And yet Walker & Dunlop Research Company, Zelman, is projecting 1.8% rent growth in 2024 as many assets and regions are still growing rents. Healthy Family assets have held up extremely well against a massive influx of supply because the cost of homeownership is simply unaffordable for many Americans.

Until we get a dramatic increase in the supply of single-family housing or a dramatic decrease in mortgage rates, cost of homeownership will remain out of reach for someone making a median income in America. Add to this macro outlook, the construction starts on new multifamily properties have dropped dramatically in 2024, to only 250,000 units, down 58% from 2022's peak, creating an undersupplied market in 2026 and 2027.

The greater conviction on rents and future supply is driving investment sales volume today, which will lead to higher capital flows, which will lead to lower cap rates, which will lead to higher returns. This is what happens at the beginning of every real estate cycle, and we believe we are starting one right now.

As we look forward to a recovery in transaction volumes, it is important for investors to understand Walker & Dunlop's ability to grow both our top and bottom line. We made the decision to hold on to the majority of our bankers and brokers during the great tightening even as transaction activity fell off dramatically because we could afford to because we knew the cycle would eventually turn.

As shown on this slide, in 2019 before the pandemic and under relatively normal market conditions, we had 174 bankers and brokers at Walker & Dunlop, who closed on average $184 million in transaction volume per banker or broker. As you can see in the middle column, we have grown the number of bankers and brokers at Walker & Dunlop from 174 in 2019 and to 231 today and in a recovering market over the past year, that was 231 professionals, originated $155 million in volume per banker broker.

What is really exciting is to look at the column on the right-hand side of this slide. In the highly active market of 2021, when our bankers and brokers closed $311 million of transaction volume per banker broker. It's hard to predict what the new normal in transaction volume will be this next cycle.

It is clear that W&D's expanded team, brand and market presence have a tremendous amount of capacity to grow our top line without adding more personnel to then grow our bottom line and margins. We continue to use data analytics to make our bankers and brokers more effective at winning new business and serving our clients. Our proprietary data analytics tool, Galaxy continues to be a key differentiator that allows us to win new loans and clients from the competition.

Year-to-date, 68% of the refinancings we rate locked were new loans to our portfolio and 19% of total transaction volume was done with new clients to W&D. Beyond our traditional debt financing and property sales platforms, we are seeing great growth from our technology-enabled businesses, and small balance lending. grew revenues each quarter in 2024, and from $2.4 million in Q1 to $2.7 million in Q2 to $3.3 million in Q3. used technology to increase the efficiency of our valuation process, increasing the number of valuation reports per appraiser from 10 per month last year to 15 this year.

Similarly, our small balance lending revenues grew from $3.7 million in Q1 to $5.1 million in Q2 to $8.6 million in Q3. The combination of our people, processes and technology is allowing us to be more efficient and insightful with our customers.

We are now processing twice as many loans per underwriter compared to 1 year ago, which should allow us to scale our small balance funding volumes meaningfully as the market recovers. Finally, it's impossible to speak of without mentioning AI. We are integrating AI into W&D's processes every day.

Beginning with our first AI-related acquisition in 2019, we continuously build and improve our machine learning algorithms to drive efficiencies in our loan underwriting and processing. We will continue to test and implement AI efficiencies into our small balance loan process that will be migrated to our large loan business over the coming quarters.

We also developed an automated valuation model that gets smarter with every set of property data that we input and as we grow the number of loans we originate, properties we sell and properties we appraise data gets even larger, making our data output more informed and valuable.

We will continue to build and use AI as part of our overall data and technology strategy in areas of our business where it improves our processes and allows us to better serve our clients. Q3 feels like the beginning of the next commercial real estate cycle. There may be some stops and starts as the Fed policy takes hold, the Trump administration takes office and overall economic conditions play out.

Similar to after the great financial crisis and up demand for assets and financing will drive investment and transaction volumes up over the coming years. W&D is poised for growth with the people, brand and technology to remain a market leader. Thank you for your time this morning. I will now ask the operator to open the line to any questions.

[Operator]

[Operator Instructions] We'll go first to Derek Sommers with Jefferies.

[Derek Sommers, analyst]

Just on the property sales volume. I know for the past couple of quarters, we had talked about an expanded kind of broker opinion of value pipeline in the quarter, how much of the property sales volume was pulled through from that pipeline? And how much was kind of opportunistic?

[Willy Walker, executive]

I'm not -- Derek, could you be a little bit more -- I'm not exactly sure what you're looking for there in the sense of we don't -- the pipeline, sort of, if you will, is the pipeline and -- so are you asking what deals materialized in Q3 versus had been in the pipeline in Q2?

[Derek Sommers, analyst]

Correct. Yes.

[Willy Walker, executive]

The gestation period, if you will, as it relates to doing a BOV on a property then listing and having the actual transaction happen is longer than a quarter. So it's impossible to say to you, well, all of that was in Q2 and then got delivered in Q3.

I think as both Greg and I said in the call, we have seen a significant uptick in both the pipeline as well as transaction volumes as I went through in detail in the call. And even in the last 6 weeks as rates have gone up, we have seen the pipeline hold in. And to the extent that very few deals have been dropped, although there have been requests for adjustments in price that are sometimes accepted by the seller and sometimes not. But generally speaking, the investment sales pipeline is holding very strong into Q4.

[Derek Sommers, analyst]

Got it. That makes sense. And then in terms of purpose mix, is there any kind of shift between refinance and purchase deals recently, I guess, compared to longer-term averages?

[Willy Walker, executive]

No. The one thing that we've been very focused on as we head into Q4, particularly with the recent run-up in rates is how much of the pipeline is refinancing activity, which typically is perm-driven where someone has to refinance the property versus acquisition financing.

And as we look into it, we feel very good that the Q4 pipeline is overweighted towards refinancing activity versus acquisition activity. But then I would also say, as we look at the acquisition pipeline, as I just said, acquisitions are still moving forward and people are not pulling properties from the market given the run-up in rates.

[Operator]

We'll go next to Jade Rahmani with KBW.

[Jade Rahmani, analyst]

Can you hear me now?

[Operator]

Yes, we can hear you now.

[Willy Walker, executive]

Yes, we can.

[Jade Rahmani, analyst]

Okay. Sorry about that. What do you see happening if the 10-year treasury goes to 5%? Curious as to how you game out that scenario. There's some puts and takes with respect to transaction volumes, servicing, portfolio duration as well as implications for the multifamily market since likely single-family homes would have lower demand?

[Willy Walker, executive]

Yes, Jade, we haven't sort of, if you will, gained that out, as you just said. We're obviously watching where rates go. We saw a significant increase in rates yesterday post election. But it's impossible for us to predict where rates are going to go.

I would say that there is a general sense that we are at the beginning of the next cycle that after 2 years of tightening rates, it is likely that we're going to get another cut to the Fed funds rate and that we should remain in a relatively stable rate environment. Should that change, we'll obviously adjust to it as everyone who's an investor in Walker & Dunlop saw over the last 2 years, we adjusted very significantly to dramatic changes in rates that we were seeing, as you well know, 75 basis point increases in the Fed funds rate on an every other meeting or every meeting basis.

There is no project into that, but as you also focus on, our business is really much more based off of the long bond and the 10-year treasury than it is off of Fed funds rate. But we will react to whatever interest rate environment comes our way. You do underscore in your comment that as rates go up, that gap between multifamily and single-family would only increase, which means that people will remain renters, which will mean that occupancy will stay high.

And as you burn through the new deliveries, which we underscored in our call that have put downward pressure on rents albeit we still are going to see national rent growth in 2024 with an unprecedented volume of deliveries. That all bodes well to the underlying fundamentals of multifamily, which should continue to attract investment dollars, which then drives investment sales activity, which then brings capital to the market. And as capital comes to the market, cap rates go down and the value of assets inflate.

So hard to predict. We never do actually predict where rates are going to go. I have been saying for some time that the 10-year ought to settle in to a -- as we get into a normalized deal curve, somewhere between $400 million and $450 million. We're obviously at the high end of that range with the 10-year closing at 441 yesterday. But the encouraging thing is that our clients are still transacting.

And as I said to Derek's question a moment ago, we are not seeing the Q4 pipeline fade away as we've seen rates go up precipitously.

[Jade Rahmani, analyst]

On the GSE side, typically, the fourth quarter is seasonally the strongest, quite a meaningful uptick. And yes, I think one of your competitors noted some pressure on the throughput, the ability to get loans closed because there's now so many requests coming into the GSEs and they're looking to be more active. So they've gone from being kind of in a holding pattern to having to ramp up ability to close loans. Do you see that being a gating factor in the fourth quarter?

[Willy Walker, executive]

I believe our competitor that made that call on their earnings call is a much larger Fannie Mae Optigo lender than they are a Fannie Mae DUS lender. And as you know, Jade, the Optigo business, those loans are underwritten by Freddie Mac and in the Fannie Mae DUS business, the loans are underwritten by the Fannie Mae DUS lender and partner.

And so I would just say to you that on the Fannie Mae side of things, we control our destiny a lot more than we would on Freddie Mac. And so I would not echo what our competitor firms set as it relates to the ability to process business.

[Jade Rahmani, analyst]

That's good color and good to hear. And then just finally, on the tax indication business, sounds like there was maybe a delay in recognition of placement fees and you expect that to be correct itself in the fourth quarter. But can you touch on your broader outlook for that business, say, in 2025, still on a positive trajectory? Do you expect growth from that business in 2025?

[Willy Walker, executive]

We certainly expect growth in that business in 2025. As I said in my comments, that's been an extremely consistent contributor to both revenues and earnings since we acquired Alliant several years ago, and it's a fantastic business. Q3 '24 was a slow quarter for us due to no syndication activity and no dispositions.

We are very focused on both of those 2 things, and I have great confidence that in the coming year, we will see that get back on track. We've made some significant changes in integrating that business into Walker & Dunlop. And as I underscored with Fannie, Freddie and HUD, all very focused on affordable housing and also the low income housing tax credit market needing more capital as one of the primary sources of equity capital for the construction of affordable multifamily properties.

We see great, if you will, dynamics in that business going forward. The one other thing I would say on that is that business took a step backwards when the Trump administration in 2017 passed the Jobs Act and Tax Reductions at that time, where the corporate income tax came down significantly. What has been talked about is either the extension or potentially a decrease in the corporate tax rate from 21% to 20%. Nothing close to the dramatic change that happened in 2017 as tax rate stepped down on corporate level significantly.

So if we either saw a 1% modification or a continuation of the tax rate, you would think that, that business stays in line and doesn't have the step back that it did last time the corporate tax rate came down as dramatically as it.

[Operator]

We'll go next to Steven Delaney with Citizens JMP.

[Steven Delaney, analyst]

congratulations on your strong third quarter. Obviously, transaction volume very strongly year-over-year, 36%. I noticed though that total revenues obviously only increased 9%. So it appears to something going on with the revenue mix or there was an outlier transient maybe last year. Could you just help me rationalize the difference between your volume of business and your revenue growth?

[Willy Walker, executive]

Sure, Steve. Go ahead, Greg.

[Greg Florkowski, executive]

No, go ahead, Willy, if you Look, I think, Steve, the thing to point out is just the balance of our business now between the Capital Markets platform and the SAM segment, where a significant portion of our revenues are coming from SAM, our SAM segment and the transaction activity doesn't impact that revenue base until down the road, right, when the loan closes, you then start on servicing fees during the next quarter. So a 36% increase in transaction activity generated the growth that we highlighted in revenues and earnings for the Capital Markets segment, which is in line with what you would expect and generated the 210% growth in net income that we highlighted on the call.

And so I'll look at it more on a segment basis than an overall basis because you're going to get some blending of the 2 segments when you just look at the transaction volume growth relative to our overall business growth.

[Steven Delaney, analyst]

Got it. Got it. So it's really not apples-to-apples. I hear what you're saying, it's the mix of where you're earning the money within SAM versus originations?

[Willy Walker, executive]

But let me -- Steve, just -- Steve, Steve, let me just jump in real quickly. You know our numbers well, you know our numbers well enough to know that you have identified one thing that did happen in the quarter, which was we did a large transaction that we made a less-than-normal fee on. It was highly competitive. We were very excited we won it, but it had a big number as it relates to the size of the transaction, but it didn't have a commensurate fee because it was very competitive in getting it. So what Greg said as it relates to the overall mix of business is exactly right on the overall business. But as you look into that, you identified in that, that as it relates to volumes, we had one transaction that was a very large size transaction, but we did not make a commensurate fee on it given how competitive it was to win it. We were thrilled to win it. But quite honestly, didn't love the fee we made on it.

[Steven Delaney, analyst]

Understood. That helps us exactly kind of what I was trying to identify if there was an outlier somewhere in the mix. Just looking -- stepping back big picture, Willy, and I appreciate we all know what's going on with rates here right now and understand the impact that, that can have on your borrowers. But looking back bigger, not so much the election, but let's tie that in. I guess when you look -- the GSEs are so critical to housing and to your business on multifamily, are there any lingering issues out there from sort of a political standpoint or just policy standpoint, anything that is out there that create problems for the GSEs as we go down the road that would affect your business? Yes.

[Willy Walker, executive]

I'll just -- without talking too specifically about the conversations that I have had. As you can imagine, Steve, we have in constant contact with both these and ours leading up to the election to make sure that whatever the outcome is, we have a good sense of any thoughts as it relates to what would happen to the GSEs under a Harris administration or a Trump administration.

And all I would say is having spoken to many, many Republicans, who either were previously engaged with the GSEs or are on, if you will, various lists of people who could potentially go in there. Everything that I am hearing is quite positive as it relates to a desire to get the agencies out of conservatorship, but to do it without a significant market disruption.

And there was, as you well know, significant work done in the first Trump administration to work on getting the GSEs out of conservatorship, and I would assume that, that work is picked up on in the next Trump administration. I would think 2025 is all about taxes and that there really won't be -- there will be work done in the background as it relates to potentially getting Fannie and Freddie out of conservatorship, but that '25 will be all about taxes and what the new tax bill will be at the end of the year.

And then I would think that you start to see some type of real work, honestly in '26 and '27 on getting them out of conservatorship. And I think the other piece to it is now that it's looking like you will have both a Republican Senate as well as a Republican house, who are the chair men or women of the various committees, House Financial Services Committee representative French Hill was the Chairman there and on the Senate Banking committee, if Tim Scott, who is the Chairman there. Both of those obviously are TBD. Both of those 2 gentlemen know well the role that the agencies play in the markets. And I would think both of them would look at doing something legislatively. But at the end of the day, Steve, if I had to handicap it, I would think that if Fannie and Freddie get out of conservatorship at any point in '26 or '27. It would be done through an administrative action/executive order and not through a congressional route, if you will.

But that's just -- that's trying to project a lot of different things. The final thing I would say is it really will matter who the treasury secretary is and whether he or she has the appetite to make GSE reform and the spin out of Fannie and Freddie, a priority in his or her tenure as Treasury Secretary.

[Operator]

We'll go next to Jay McCanless with Wedbush.

[Jay McCanless, analyst]

Willy, if I could pick up on a comment you made earlier that with rates moving higher, I think you said that the pending backlog in the book has not fallen off. People are still ready to get transactions done. Did I hear that correctly?

[Willy Walker, executive]

You did, Jay.

[Jay McCanless, analyst]

Okay. Great. That's good to hear. And then very encouraging what you were saying about the start of a new real estate cycle. Is there anything besides rates, of course, that we need to be monitoring that could be headwinds or even potential tailwinds that cycle above and beyond what's going on with rates?

[Willy Walker, executive]

So as we've talked about in the past, Jay, there's a tremendous amount of equity capital that has been sitting on the sidelines for the last 2 years that is either going to be deployed or return to investors. And as a result of that, I think you've got to watch that because most investors don't like returning capital to their end investors, if you will.

They like to put it to work. So I think, first of all, we're going to see that. The second thing that I think is important is M&A activity in commercial real estate has basically been more than for the last year. We had Blackstone take air communities private earlier this year. But other than that, and then a recently announced retail acquisition, again by Blackstone.

There's been very, very little M&A activity. And if you look at '21 into '22 into '23, there was significant M&A activity of either public, private or public, public as it relates to large REITs and as well as private equity firms buying publicly traded companies.

I would think, given the amount of excitement as it relates to the M&A market, that you will see a lot more activity there. And as the M&A market picks up, you obviously have both the need for all the things we do. Investment sales, valuation work and financing work.

And so I would think the M&A market picking up will also drive transaction volumes. And then the final piece to it is the private REIT and the role the private REITs have played in the market in '21 and '22 going to the sidelines in '23 and '24. And they all sit on a massive amount of properties and collateral that needs to either be financed, sold.

And so I would think that, that market as well has a big impact on volumes in '25 and '26 as those major market players come back to either figure out whether they're holding, selling or refinancing properties.

[Jay McCanless, analyst]

That's great. And the last one for me. I guess if the 10-year stays where it is 440 right now, into '25. I guess how much risk should we think about for the loans in the servicing portfolio? I know you guys took another provision this quarter. Just wondering how you all are thinking about that book into next year if rates don't move off of where they are at this point?

[Willy Walker, executive]

So Jay, 91% of our at-risk portfolio is fixed rate loans. So the 10-year moving does not impact those loans. We also have a very, very small amount of loans that actually mature in 2025. So as a result of that, the refi risk in the portfolio is very low. So the real as it relates to the 10-year, either staying where it is moving up, moving down, that's not going to have a big impact as it relates to credit side of the equation. It will obviously have a big impact as it relates to the market continuing to transact or the marketing pulling back from transaction volumes.

And I would put forth that all the things that we just talked about as it relates to sort of the pent-up demand for transactions for refinancings, give us a good sense that we are at the beginning of the next cycle where things will have to move forward. But the bottom line is that we feel extremely good that we have a platform that can, if you will, work on either eventuality. And I would also say that a 440 10-year, we have to all remember that we just went through, what, 12, 13 years of incredibly low interest rates. And clearly, there is a massive amount of debt outstanding that has very low coupon rates on it, which means that as you're trying to redo those deals as you're thinking about going in selling those deals with a cost of capital for the higher, much, much higher than what you have on the asset, that's going to impact value. And at the same time, a 4- to 450 10-year go back and I'm dating myself here, but go back to 2004 to 2007, 10-year sat in a band between 2004 and 2007, or 4 to 450. And we had a very, very healthy market. A matter of fact, during that market, we had record CMBS volumes because of the stability in long-term rates.

And so I think that one of the things that we've consistently said and not only us, but our competitor firms, it's really more a consistency of rates that allow people to determine a cap rate and a cost of capital to transact that is important rather than what the aggregate rate level is, if you will. The market will adjust to whatever the cost of capital is, and that will impact values. What has been very challenging over the last 2 years is as rates went shooting up and it started to come back down, it was very difficult to determine what an actual cost of capital was and therefore, what an accurate cap rate was to actually sell or buy a property. So stability in rates is far more important to the market than the aggregate rate number. Obviously, the cost of capital has a big impact on the value of assets and what people will pay for it or what people will want to sell it for, but then that all ties back into maturity levels, and we have a huge amount of commercial real estate debt outstanding that is maturing and needs to be worked on. And so all of that will drive transaction values potentially not at a value that the seller wants. But at the same time, the term of that debt and in a healthy overall macro environment, that should all drive increased deal volume.

[Operator]

We'll go next to Jade Rahmani with KBW.

[Jade Rahmani, analyst]

Just wanted to confirm, the large deal you referred to, that was within the brokerage origination channel, right?

[Greg Florkowski, executive]

Yes.

[Willy Walker, executive]

Correct.

[Jade Rahmani, analyst]

Okay. That was the $1.2 billion mixed-use property?

[Willy Walker, executive]

You do your homework, Jade?

[Jade Rahmani, analyst]

It was in the press release. I just wanted to confirm because the gain on sale margins actually came in pretty strong. And I think the mix was quite favorable in terms of GSE volume.

[Willy Walker, executive]

Again, what you just did perfectly was point to the deal I was talking to and yet underscore what Steve -- Greg said in response to Steve's question.

[Operator]

This does conclude today's question-and-answer session. I would like to turn the call back over to Willy Walker for any closing remarks.

[Willy Walker, executive]

Great. Thank you, everyone, for joining us today. Thank you, Greg and Kelsey for all your work on this quarter's script and earnings release, and thanks, everyone on the W&D team for a fantastic Q3. I appreciate everyone dialing in this morning to listen to the call, and I hope everyone has a great day.

[Operator]

This does conclude today's conference call. You may now disconnect.