Walker & Dunlop, Inc. Q3 FY2025 earnings call

• Third quarter total transaction volume was $15.5 billion, up 34% year-over-year, driven by strong activity in lending, sales, debt financing, etc.
• GSE lending saw a shift from 10-year to 5-year loans, impacting mortgage servicing rights valuations but setting up for future refinancing opportunities.
• Investment sales volume was up 30% to $4.7 billion, outperforming market growth, with activity in gateway cities and preparation for Sunbelt rebound.
• Debt financing team placed $4.5 billion in Q3, up 12% year-over-year, with liquidity driving down cap rates.
• Technology-enabled businesses like small balance lending and appraisals grew, with appraise revenues up 21% and small balance lending revenues up 69%.

The Capital Markets segment saw revenues grow with loan origination fees up 32%, property sales broker fees up 37%, and MSR revenues up 12% year-over-year. The Servicing and Asset Management (SAM) segment had total revenues up 4% year-over-year, with cash servicing fees up 4% and placement fees and other interest income up 5%. The Capital Markets segment's total revenues grew 26% year-over-year, with net income up 28% and adjusted EBITDA improving 83% to a loss of less than $1 million. The SAM segment's net income declined 1%, but adjusted EBITDA grew 2% to $119 million.

• Expect gradual increase in commercial real estate capital markets activity to continue.
• Q4 pipeline is strong, indicating continued momentum.
• Anticipate growth in 2026 and beyond as capital markets reflate and transaction volumes increase.

• Indemnification of $100 million loan portfolios to Freddie Mac related to borrower fraud, with expected credit losses in Q4.
• Isolated nature of fraud investigations, but monitoring continues to prevent recurrence.

Q: Just to start off with on the 2 new loan repurchase requests. So far this quarter, we have seen some of the agency multifamily lenders, particularly Greystone take charges, JLL and Arbor also have taken charges. W&D's credit has been pristine through this cycle. So this is a modest surprise, although I don't think it's huge. But just can you give any context as to how widespread the issue might be? I think the last repurchase requests you received were in 2024.

A: Yes, Jade, thanks for joining us. As Greg underscored, this is isolated to the portfolios that have been identified by us and by Freddie, so we do not have any other investigations underway with either GSE. And so we feel good about that. And at the same time, as Greg said, we never like it when this happens, but feel very good that we have the people, the processes and the systems in place to make sure that this doesn't happen again.

Q: Willy, my question was going to be would you see the possibility of a refi wave coming later this year as the Fed cuts and maybe the bond market rallies a little bit? It sounds like you're in one. And if you could comment on that -- those vintage, the post-COVID vintage loans, the nature of those transactions, do you think that those borrowers had a shorter mindset? In other words, was it more opportunistic money and that's why you're seeing some exiting of properties as opposed to simply doing a rate and term refinance? Just your thoughts on if the nature of the recent originations is really what's causing the prepayments that you're seeing now.

A: Sure, Steve, thanks for joining us. I think you have to underscore the recycling of capital as one of the major drivers of the market we're in today. Many, many of the large participants in the broader commercial real estate markets and more specifically the multifamily markets are fund businesses that have finite lives and have a tremendous amount of capital that needs to be recycled back to investors before they are going to be able to go and raise that next fund. And with essentially very limited to -- you can't say no deal activity in 2023 and 2024, but very muted deal activity in '23 and '24, we sort of arrived in '25 with a lot of people sitting there saying, I've got to start recycling capital back to my investors if I have a chance of going and raising my next fund. And so a lot of the sales activity and financing activity that we've seen in 2025 has not been because cap rates have been, if you will, exceptionally low or exceptionally exciting for someone to sell into. It's been that need to recycle capital that has driven the transaction markets. And what that's also done is it's closed off the bid ask. A lot of sellers have sat there and said, I don't really like the price that I'm selling at. And yet at the same time, they have to recycle that capital. So they have, to some degree, capitulated on the pricing of the market and allowed the buyer to step in and buy the asset at a price that they find to be attractive. And so throughout the year, we've seen that bid-ask shrink. The beginning of the year was much wider and it's gotten tighter and tighter. Interest rates have obviously played into that, making it so that both on the buy side, you're buying the asset at a relatively cheaper price. And we've also seen cap rates come down modestly. I think that what we're now looking at is with that transaction volume going on, you now have buyers and sellers back in the market. That bid-ask has come down, which just drives that transaction activity. And it's getting a lot of people off the sidelines, if you will. And so you know this, Steve, we're in a cyclical business. We have been in a down cycle for the last 3 years since the great tightening began. And we're now starting that next cycle, and it's not just happening at Walker & Dunlop. If you look at the commentary of all of our competitor firms on their Q3 capital markets activity, there is pretty widespread commentary that transaction volumes are picking up. I would also say that everyone has been very tempered in their commentary to say this is a slow build back to where we were at the end of the last cycle. I don't think anybody is saying there's some massive amount of activity that's going to happen in the upcoming quarter because I think everyone is quite honestly a little scared to get over their skis and say, hey, this is going to be game on. But we clearly, from looking at our transaction volumes from Q1 to Q2, Q2 to Q3 and what we're looking in our forward pipeline for Q4, are seeing a resurgence of activity in the real estate capital markets.