Walker & Dunlop - Q1 2023

Transcript

Willy Walker (Chairman and CEO)

Not only does Walker & Dunlop have the fund management business to raise and manage this type of capital, but we also have the distribution network with over 220 bankers and brokers across the country to deploy it. In addition to the capital raising opportunities that the bank pullback presents, there is also a long-term growth opportunity for our debt brokerage business. Banks have direct relationships with their commercial real estate customers, which means that a significant portion of the $1.7 trillion of commercial real estate loans on bank balance sheets today was originated without a mortgage broker. The role of our debt brokers becomes more important than ever in a capital-constrained market as borrowers need a broker's expertise to look broadly across the market for the most competitive capital source.

In the short term, there is no doubt that a lack of liquidity to the broader market will put pressure on our debt brokerage business. Over time, these opportunities could be a significant driver of growth in our brokered volumes. There's plenty of concern of commercial real estate exposure on bank balance sheets, particularly like Walker & Dunlop's or any asset class outside of multi-family are at risk for existing or exceeding healthy, as evidenced by the benefit for credit we recognized in Q1. From our experience, it was a dramatic increase in the unemployment rate impact multifamily fundamentals broadly. The unemployment rate today sits at 3.5%. While Reserve is trying to cool employment and raise unemployment to 5.5%, even that elevated level is radically below the 9.4% unemployment reached in 2009 during the pandemic.

After 9.5% unemployment in 2009, Walker & Dunlop's at-risk portfolio will reach 1.64% of loans 60 days delinquent in Q2 of 2010. As the economy healed into 2011, loans got current, and the total losses to our portfolio after the great financial crisis and 9.5% unemployment was accumulated 16 basis points. This is not to say there will not be multifamily loan defaults. We're already seeing defaults in other lenders' portfolios on poorly acquired and financed properties from the past several years. Given current employment levels and the ability for the Fed to start cutting rates should the economy falter, we are currently concerned about broad credit losses in our multifamily portfolio.

Housing affordability is a real concern as the average entry-level monthly payments for an existing home increased 32% in 2022, nearly tripling the prior record increase of 13% in 2013, according to Zelman & Associates. Stretched affordability has been fueled by 2022's sharp mortgage rates on top of recent home price growth, challenging future homeownership, likely keeping residents in rental housing longer. Walker & Dunlop's acquisition of Alliant, one of the largest affordable housing owners and tax credit syndicators in the nation at the end of 2021, was very well-timed. Alliant's Financial Performance is terrific. W&D's capabilities and brand in the affordable housing industry are greatly enhanced due to Alliant. Zelman is another recent acquisition that has performed exceedingly well.

Zelman's research on all sectors of housing continues to grow its subscription base and making Walker & Dunlop increasingly insightful on single family, build-for-rent, and multifamily. As Steve will detail in a moment, Zelman's Investment Banking Division had a strong Q1 and sets W&D up well to advance that capability to commercial in the next cycle. Finally, we continue to integrate the technology we acquired with GeoPhy into our appraisal and small balance lending businesses. As transaction points have fallen, so needs surprises behind for balancedsignificant lending. Yet banks point has a dramatic impact on the small space. Banks dominate the small multifamily lending space, and any pullback significantly for Walker & Dunlop's small balance business. I'll now turn the call over to Steve to discuss our Q1 Financial Performance, 2023 Financial outlook in detail.

I'll come back with some thoughts about what we see ahead. Steve?

Steve Theobald (EVP and COO)

Hey. Good morning, everyone. As Willy discussed, challenging conditions in the commercial real estate market persisted in Q3, putting pressure on first quarter revenues and earnings. The EPS was $0.79 per share from $2.12 per share in the year ago quarter. As a reminder, the first quarter of 2022 included a $40 million benefit due to the revaluation of our appraisal business upon closing the acquisition of GeoPhy. This boosted revenues and added $0.92 per share to diluted EPS in the year ago quarter. Importantly, adjusted core EPS, which eliminates the large swings that can occur from non-cash revenues and expenses and acquisition-related activity, grew to $1.17 per share this quarter, up 10% over last year.

As we have consistently seen through the volatility over the year, our servicing and asset management businesses continue to generate durable and growing cash revenues. We think our variable expense structure has enabled us to consistently generate healthy adjusted EBITDA. Interest earnings have increased in interest rates over the last 12 months to offset some of the declines in transaction volumes. As a result, despite transaction volumes declining 47%, our Q1 adjusted EBITDA was $68 million, growing 9%. Adjusted EBITDA also benefited from the performance of Alliant and Zelman, which contributed $33 million of primarily cash revenues during the quarter. Notably, Zelman closed the largest investment bank transaction in its history this quarter, providing an attractive upside to the consistent subscription revenues that come with its REIS business.

We remain focused on adding to family investment banking capabilities to complement Zelman's existing single-family expertise, so we will be well-positioned to take advantage of M&A and other capital markets transactions as the commercial real estate transaction market recovers. Our first quarter operating margin was 14% and return on equity was 6%, both below our target ranges, but not unexpected given the decline in transaction activity. For the past several quarters, we've been focused on reducing expenses to maximize our operating margin. In mid-April, we reduced our headcount by over 100 employees in reaction to lower than anticipated volumes and continued commercial real estate transaction market.

As a result of this reduction, we will incur a $3 million expense and expect the savings from that action to largely offset that charge in the second quarter of 2023, with the full benefit of the savings realized in the third and fourth quarters. As a result of the cost-cutting we have implemented, we eliminated $15 million of annual G&A costs coming into this year, annual personnel-related costs by $25 million after the headcount reduction enabled. These were necessary steps to improve our operating budget in response to a challenging commercial real estate services landscape. Turning now to revenues for our capital market segment, which includes our translated businesses, were down 38% to $104 million, driven almost entirely by the 37% decline in transaction volumes.

The supply of capital to the commercial real estate market remains constrained, and our first quarter debt brokered originations were affected, most declining 58% to $2.4 billion. Until capital begins to confidently flow again, our brokered volumes will remain impacted. A lack of liquidity and higher interest rates is also putting downward pressure on commercial real estate asset values and causing clients that would otherwise be sellers to hold on to their assets. Our Q property sales volumes outperformed the market but still declined 6% to $1.9 billion. Agency volumes of $2.5 billion were also slow this quarter. Fannie Mae, Freddie Mac, and HUD have a real opportunity to supply significant counter-cyclical capital while liquidity remains constrained, and we are very well positioned as their largest partner.

The sharp decline in transaction activity during the first quarter impact the financial performance of the segment, which can be seen in the year-over-year declines in adjusted EBITDA and earnings. The first quarter is traditionally a slower quarter for this segment, and our economic challenges we are facing put it down even further. Adjusted EBITDA and earnings for our Capital Markets segment will improve as capital and confidence return to the commercial real estate market. More than ever before, our clients are going on the expertise of bankers and brokers to navigate the challenging market conditions, and our team continues to deliver significant value on every transaction across the finish line. The servicing and asset management or SAM segment includes our servicing activities and asset management business, which produce stable recurring revenue trends.

This segment is largely insulated from the transaction-related volatility reflected in the financial results of our capital market segment. To $133 million due to growth in servicing fees and escrow earnings. Also included in our SAM segment is the input for asset losses on our at-risk portfolio. We're in the process of collecting year-end financial statements for all of our loans, and although that process is ongoing, the weighted average debt service coverage ratio remains above two times thus far. Importantly, the book continues to perform exceptionally well, and we have only seven basis points of defaulted loans in the at-risk portfolio at March 31. During the first quarter, we performed our annual update to the CECL loss factor, a 10-year look back at our historical losses that is used in our loan loss reserve calculation.

We updated the calculation with 2023 data, a year of near zero losses, and the loss factor declined from 1.2 basis points to 0.6 basis points as a year with relatively few higher losses fell out of the 10-year look back period. Importantly, our methodology also includes a forward-looking adjustment called the forecast period, which takes into account current economic conditions. We continue to apply an upward adjustment to the forecast period, currently four times greater than our historical loss factor, to reflect the challenging macroeconomic conditions, which partially offset the overall reduction to our allowance from updating the historical loss factor.

The update to our CECL methodology, combined with the exceptionally strong credit fundamentals underpinning our at-risk portfolio, resulted in a net benefit of $11 million in the first quarter of 2023, compared to a benefit of $9.4 million in Q1 last year. Our corporate segment represents the corporate G&A of our business, which includes the majority of our fixed overhead expenses and an allocation of our corporate debt expense. In the first quarter of 2022, other revenues for this segment included the one-time $40 million gain resulting from the GFI acquisition, causing the majority of the decline in total revenues for this segment. On a consolidated basis, interest expense on corporate debt totaled $15.3 million, in line with the annual estimate of $50-60 million that we gave on our last earnings call.

Neither of those items impact adjusted EBITDA for this segment, so the $6 million improvement in adjusted EBITDA is driven partially by the cost-saving measures we put in place two quarters ago and partially by an improvement in interest earnings on our corporate cash balances and pledged security portfolio. Forecasting transaction activity within today's rapidly changing market is extremely difficult. Higher rates and constrained liquidity continue to impact our business and commercial real estate transaction activity. We do not have clarity on whether markets will recover in the back half of the year, so we are revising our guidance for 2023, as shown on slide 9, to provide a range for our key financial metrics. The low end of our range reflects Q1 macroeconomic conditions persisting, causing debt brokerage and property sales transaction volumes to remain near Q1 levels for the rest of the year.

This downside scenario would result in a 35% year-over-year decline in diluted EPS and operating margin in the mid-teens and an ROE in the high single digits. Our servicing and asset management revenues are not impacted by sustained declines in transaction activity and will continue to provide stability to our revenues and overall financial results. Our adjusted EBITDA and adjusted core EPS would decline by no more than 10% year-over-year in this severe downside scenario. The upper end of our range reflects our original guidance that was based on a stabilization of interest rates and the recovery of for the transaction markets in the latter half of the year. The Fed's actions yesterday were certainly a step in that direction, the timing and extent of a recovery remains uncertain.

Our property sales team is outperforming our competitors, and our debt brokerage group will continue to add value for our clients. Importantly, the GSEs are providing liquidity to the multifamily market today, and given the pullback in other capital sources, if these conditions are sustained, the GSEs are likely to their full caps, giving us a path to achieving the upper end of our range. Flat diluted EPS, a low 20% operating margin, a low teens return on equity, and double-digit growth in adjusted EBITDA and adjusted core EPS. Turning to capital allocation. We ended Q1 with $188 million of cash after paying corporate taxes, company bonuses, earn out installments, and our dividend during the quarter. We not only maintain a strong credit position, but also generating a healthy amount of cash from our core businesses as reflected by the growth in adjusted EBITDA.

Importantly, as historical investments on our balance sheet mature in the coming quarters, such as our interim loan portfolio, we will retain that cash to further strengthen our cash position. We will continue to allocate capital to our shareholders, and yesterday, our board of directors approved a quarterly dividend of $0.63 per share payable to shareholders of record as of May 18, consistent with last quarter's dividend. We view the dividend as an important part of our value proposition to investors, and maintaining the dividend at its current level reflects our confidence in our business model and our ability to manage through the current conditions impacting the commercial real estate sector. One month into the second quarter of 2023, the commercial real estate industry continues to face a challenging rate environment, concerns over credit fundamentals of non-multifamily assets, and speculation around the long-term impacts of the banking crisis.

Despite all of these unknowns today, we remain focused on our long-term financial and operational goals. We feel very good about the team we have in place, the value we provide to our clients, and our ability to manage through the current obstacles to deliver long-term value to our shareholders. Thank you for your time this morning. I will now turn the call back over to Willy.

Willy Walker (Chairman and CEO)

Thank you, Steve. The 25 basis point increase in the Fed funds rate yesterday was anticipated, and Chairman Powell's commentary that a pause is forthcoming is welcome news. This is still restricted monetary policy, but it's the first sign that there may be an end to the Fed's tightening cycle since it began in March of last year. We remain extremely focused on operational excellence, cost containment, and winning every piece of business we can. Walker & Dunlop is known for operational excellence. Our margins have been industry-leading since we went public in 2010. Our Net Promoter Score of 95 reflects amazing client satisfaction with our operations and service, yet we can always do better. Our recent headcount reduction presents career opportunities for our remaining team members and also the opportunity to use more technology.

We put Steve Theobald in the position of Chief Operating Officer to drive efficiencies and coordination across Walker & Dunlop, and his team is doing just that. It is during challenging times like these when everything is questioned, analyzed, and hopefully made better. With regard to cost containment, Steve just explained in detail our cost reduction efforts, yet we need to be careful not to be penny wise and pound foolish. We continue to invest in our client relationships, we continue to invest in technology, and we continue to invest in our employees, such as not cutting our wellness program that is 100% focused on employee mental and physical health. We are delaying our all-company meeting from 2023 until 2024, even though we see the value of pulling people together to share experiences and our common identity as W&Ders.

That is why I have met with our team members in Bethesda, Denver, Atlanta, Los Angeles, and Irvine in only the last week, and will continue to travel the country to meet with our team, thank them for all they do for our customers every day, and ensure that the amazing culture that makes W&D so unique only grows during these challenging times. Finally, we are exceedingly focused on winning every piece of business we possibly can. Clearly, our scale with Fannie Mae and Freddie Mac is extremely beneficial to winning business. With a limited number of lenders with access to GSE Capital and there only being one number one, our debt capital markets team, led by Don King, is taking advantage of our market position and winning all we can.

Our multifamily property sales business volumes were dramatically down in Q1, yet the number of valuations and Broker Opinion of Value that Kris Mikkelsen and his team generated were as busy as any quarter ever. That investment of time and effort should pay dividends when the transaction markets resume. As I mentioned earlier in the call, it is our expectation our debt capital markets group will become more relevant to the market than ever, given the pullback by banks. Finding financing today, particularly for non-multifamily assets such as office and retail, is extremely difficult. Every broker on our debt capital markets team is part of the largest GSE lender in the country, and they are actively selling that execution.

Our HUD business continues to struggle from a volume standpoint, primarily due to HUD inefficiencies. We are working closely with HUD to help them deploy more capital and meet borrowers' needs, particularly for multifamily construction loans, given the pullback by banks. I mentioned earlier the pullback in need for appraisals due to lower transaction volumes, as well as the uptick in volume in our small balance lending business due to the bank pullback. Alliant and Zelman & Associates, two great acquisitions, continue to generate stable revenues and earnings and present wonderful growth opportunities for W&D in affordable housing and investment banking. We have an incredibly powerful business model that, within a healthy market that is actively trading, has the ability to deliver exceptional financial performance. We see a huge opportunity for growth across the business when the market stabilizes.

I'm fortunate and honored to have 20 years of experience at Walker & Dunlop and 15 as this great company's CEO. Our President, Howard Smith, has over 40 years of experience at Walker & Dunlop. No day, week, year, or cycle is ever the same. During challenging times, experience matters. Howard and I sat in his office the day the GSEs were taken into conservatorship by the Federal government in 2008 and didn't have a clue what the future held. It turned out pretty good for Walker & Dunlop. Howard and I talked the day the world shut down due to the COVID pandemic, then again the day that the Federal government made forbearance available to every loan guaranteed by Fannie, Freddie, and HUD. We didn't have a clue what the future held, it turned out pretty good for Walker & Dunlop.

While we don't know what will happen tomorrow or how quickly the market heals or further deteriorates, we do know what will invariably happen. Rates will stabilize, cap rates will stabilize, investors will transact again, and Walker & Dunlop will benefit tremendously due to our people, brand, and technology. That we know, and that is what we are managing towards each and every day. I'd like to finish by backing up to the financial metrics I mentioned at the top of the call. We saw transaction volumes drop 47% in Q1 over Q1 2022, and yet we still grew adjusted core EPS by 10% and adjusted EBITDA by 9%. We have a fantastic core business model that allows us to continue investing in our clients, people, brand, and technology during challenging markets.

With any luck and a ton of hard work, we will grow from here and return to the type of growth and financial performance that investors have come to expect from Walker & Dunlop. Many thanks to all of you for your time this morning. Finally, I'd like to thank our incredible team for all their hard work. Kelsey, I'll now open the line for questions.

Operator (participant)

The line is now open for questions. At this time, if you have a question on the phone, please press star nine. If you're on your computer, please click the Raise Hand icon at the bottom of your screen. Our first question comes from Jade Rahmani of KBW. Jade?

Jade Rahmani (Financial Analyst)

Thank you very much for taking the questions. I was impressed by the resiliency of credit performance. Across the bank space, we're seeing increased CECL reserves. Across the commercial mortgage REIT space, similar trends, as well as a spike in loans that are non-accrual yet. W&D, if I read correctly, has just three loans that are in default across $125 billion of servicing. Can you talk to the multifamily credit trends? I know in the past you've given debt service coverage ratio on the Fannie Mae at-risk book. I think that's around 2 times. What are you expecting in terms of credit, and how's the performance held up?

Willy Walker (Chairman and CEO)

Good morning, Jade, and thanks for joining us. As you accurately state, the credit performance has been exceptional. I think it's really important to keep in mind that W&D has not really strayed outside of our core lending business with the agencies as it relates to credit exposure. As a result of that, all of the loans in the portfolio were underwritten with a 1-to-5 debt service coverage ratio. Our client base is sort of, if you will, cherry clients as you could possibly find. That has... You know, many of our competitors had the opportunity and did dive into lending with debt funds, doing CLOs, holding a lot of bridge exposure on their balance sheet, et cetera, et cetera. There were plenty of opportunities for us to jump and do that. We didn't.

There have been plenty of opportunities for us to lend and take credit loss on office buildings and retail centers. We made a conscious decision not to do that. While we always, as you know very well, have had fantastic revenue growth, could we have grown revenues and earnings a little bit faster during the pro-cyclical times? Of course. We decided not to, and obviously, today we benefit from that discipline. I would just say, you know, we rate locked a $120 million Fannie Mae five-year fixed rate deal yesterday and had a one-to-five debt service cover, and it was a whopping 53% loan-to-value loan. That's the discipline that has been implemented by the agencies, and that Walker & Dunlop has been a very active participant in lending in that fashion, in that manner.

Would that kind of liked more than 53% leverage? I'm certain of it. That's where we go, and that's what makes the servicing portfolio so healthy.

Jade Rahmani (Financial Analyst)

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

Willy Walker (Chairman and CEO)

Yeah. Steve mentioned it in passing, Jade. We're still pulling together year-end financials, we don't have an update from our September. The last number we gave on that was over two times in September. So far, we're through over 80% of our financial analysis, we're still well over a 2.0 debt service cover, we don't have it for the entire book.

Jade Rahmani (Financial Analyst)

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

Willy Walker (Chairman and CEO)

It was the topic du jour at the beginning of the year, Jade. You know, we had a very significant financing that we were working on to take a floating rate loan and turn it into a fixed rate loan. The borrower went out and priced new three-year caps, and rather than doing the conversion from float to fixed, they decided to just buy a three-year cap and move forward. It's a very well-capitalized client who could go and do that. While there are clearly some clients who are feeling the pain of having to fund cap costs at, you know, to their view, exorbitant numbers given where caps were priced only one year ago, so far it's not a crisis.

There are special servicers who have been willing to talk to clients about making adjustments to the caps and the calculation of caps and the length of caps. There are other special servicers who basically, or I should say master servicers, who've given them the hint. So far it has not turned into any kind of a crisis. There are clearly some borrowers who would like some relief there. I have to say, neither agency seems to be terribly concerned about that issue today.

Jade Rahmani (Financial Analyst)

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

Steve Theobald (EVP and COO)

Look, I think, Jade is, we have a very healthy cash position. We're generating liquidity. I think our adjusted EBITDA growth shows that. We're confident in our business model and how we're managing this. We do have some, as I mentioned in my remarks, some assets that are maturing that will add some cash here over the coming quarters. We'll harvest that. I think no concerns there. Our banks are, we speak with them routinely. They're large national banks that fund our business. We have no issues there from an overall liquidity perspective. From a regional banking perspective, we spent a lot of time over the last month and a half on that.

At this point, all of our cash, the corporate capital that we hold with large national banks, many of the money centers, where we hold it on in a fiduciary capacity, we've tried to limit that exposure to no more than the FDIC insured amount. I don't see any material concerns there. There are obviously some customers that want to hold their cash with smaller banks, and we're just working with them to make sure they're on top of what's going on out there as the sector is changing rapidly. At this point, there are no concerns on our end.

Jade Rahmani (Financial Analyst)

Thanks for taking the questions.

Steve Theobald (EVP and COO)

Yeah. Thank you.

Operator (participant)

Thank you, Jade. Our next call comes from... I'm sorry, next question comes from Jay McCanless of Wedbush Securities. Jay.

Jay McCanless (Equity Analyst)

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

Steve Theobald (EVP and COO)

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

Jay McCanless (Equity Analyst)

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

Willy Walker (Chairman and CEO)

First of all, thanks for joining us. Being the largest agency lender in the community, we have real scale, we have real brand there, and we have the best bankers in the country. Fannie just put out their annual top banker list, and of their top 10 bankers across the entire industry, four of the 10 were Walker & Dunlop bankers. Nobody else had more than one. We've got an incredible platform and incredible brand and market share there. As Steve just said, fortunately, we are seeing the agencies back in the market to a distinct degree where they were in Q1. That's clearly opportunity number 1, and we're blessed to have both the access to and also scale with the agencies that we have.

The second is, both our debt brokerage businesses as well as our property brokerages businesses are trying to win every single deal. Clearly, clients have needs. There are some clients who are selling multifamily to raise capital for other commercial asset exposure. Therefore, we're seeing some sales there on the multifamily side. As Steve pointed out, our multifamily sales volumes down significant than the broader market in Q1. I'm quite confident that given the strength of our brokers across the country, that we will continue to outperform the overall market and pick up a lot as that market heals. On the debt broker side, it's challenging. Half of the capital that we put out in Q1 was bank capital. As I said in my prepared remarks, banks have pulled back precipitously.

There's also been $70 billion of private capital raised, focused on commercial real estate in the last six or 12 months. I was meeting with a large institutional investor yesterday, who has had every private debt opportunity on commercial real estate walk through their office. It's a huge opportunity for private capital once it gets raised and once we get to, if you will, clearing levels. Many people are waiting for some capitulation, as it relates to what is actual, you know, what is the rate you should be lending at and what are the terms and what's the value of the actual asset. As Steve alluded to, we've been waiting for the Fed to say, we're gonna pause.

While they didn't specifically say they're gonna pause yesterday, it's most people's expectation that yesterday was the beginning of them taking a pause next month. That's the type of stability in the market that will get it so rates and cap rates can stabilize and people can transact again. We see a great opportunity once things, if you will, calm down a little bit. The SBL side of things, Jay, is super opportunistic, if you will. If you look at the top 15 small balance lenders in the country, 13 of the 15 are banks, and 11 of the 15 are regional and locals. JPM and Wells Fargo are the two big ones in there, but all the others, there are a lot of the ones who are in the headlines today as it relates to having real trouble or going away.

For us, being one of the two non-bank lenders in that list, there's a really great opportunity for us to step into that market and pick up market share. Behind all of that is just, you know, making sure that we continue to do what we're doing, and then also raising that private capital so that our bankers and brokers have capital at Walker & Dunlop they can use to meet our clients' needs.

Jay McCanless (Equity Analyst)

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

Willy Walker (Chairman and CEO)

We did $1 billion of SBL last year, and we're trying to grow that business to doing $5 billion on an annual basis. The opportunity is right in front of us. It's never been a wider landscape, Jay, for us to go after given the pullback by banks and that space is dominated by banks. The issue with it is, those borrowers don't necessarily go out and go to industry conferences or, you know who Walker & Dunlop or CBRE are. They go to their local branch office of either Wells Fargo, GNMA or PacWest and say, "Hey, I need a small balance loan for the multifamily property that I own." They get it from their branch office.

If they go to a branch office that's closed or any more to you, now are faced with, Where do I go? That's the opportunity for us to step in.

Steve Theobald (EVP and COO)

I think that the MBA data on that is that there's just around $600 billion of total multifamily debt on bank balance sheets. I think that gives you the sort of the total adjustable market that we're talking about here.

Jay McCanless (Equity Analyst)

Okay, $600 billion total multifamily debt.

Willy Walker (Chairman and CEO)

That's large-

Jay McCanless (Equity Analyst)

That's everything, bonds, large bonds.

Willy Walker (Chairman and CEO)

Jay, just to be specific, that's all multifamily loans, not just small loans.

Jay McCanless (Equity Analyst)

Got it. The last question I have. Willy, when you talked about the $225 billion high end and the low end there? Could you break that out a little bit more for me?

Willy Walker (Chairman and CEO)

There are a couple of things there. There's $1.7 trillion of commercial real estate loans sitting on bank sheets across the country, $1.7 trillion. What I was basically saying was if banks pull back 5%, 10%, which I think is a low estimate, take it at 5%-10%, that would create the need for that much capital you just referenced. That $250 to half a trillion dollars is just that pullback, if you will. The bottom line is two things. One, you could easily say that the market won't need that much capital because values have come down. Therefore, the market doesn't need for 5% or 10% to come down.

You have 2022, that values means that there's not that much capital to see today. If the values and the market goes back and step in as we don't, that capital has to come from. That's a great opportunity for life insurance companies, CMBS, private capital. The bottom line is all of those numbers are so huge that for WD that has an emerging asset management business, we go after $2 billion, $3 billion, $5 billion of debt funds to meet that need. That is a massive opportunity for us, has a very significant financial impact to WD.

Jay McCanless (Equity Analyst)

Okay. Very helpful. Thank you, Willy.

Willy Walker (Chairman and CEO)

Thank you.

Operator (participant)

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

Jade Rahmani (Financial Analyst)

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

Willy Walker (Chairman and CEO)

Jade, I guess first of all, brokers can't really switch asset classes in that way. It's very siloed in the extent that the best multifamily investment sales teams do multifamily, the best industrial investment sales team do industrial, and the best office do office. While there are some that play across asset classes, mostly people are focused on one asset class. The second thing I would say is that one of our competitors took on a very significant office sale last quarter, and exactly sure what kind of volumes they underwrote to that investment. I would only say that I'm happy that we didn't make a big investment on office sales at this time in the cycle.

The final thing I'd say is Kris Mikkelsen's gone about building the very, very best investment sales team in the country because he got to build it from ground up. We acquired Engle back in 2015, which was a one-office Atlanta-based investment sales team, and we built it from there and built the very best teams in every MSA in the country other than two, CF Phoenix. To have that kind of national platform that has been, for all practical purposes, handpicked, I think it's the reason we grew so fast. We went from less than $1 billion to $20 billion of annual investment sales over a six-year period. We're exceedingly well-positioned. Obviously, it's a competitive market.

Obviously, we go up against very, very talented and scaled teams, great brands, but we feel very good about where we're positioned there. Also, the fact that we're only focused on multifamily.

Jade Rahmani (Financial Analyst)

Great. Thanks very much.

Willy Walker (Chairman and CEO)

Sure.

Operator (participant)

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

Willy Walker (Chairman and CEO)

Great. Thank you to all of you who joined us today. I hope you have a fantastic Thursday, and I would reiterate my thanks to the WD team for all you do every day. Have a great one, everyone. Thank you.