Steve Delaney: Got it. Willy, I know there is 20 some of these commercial mortgage REITs out there, like everything in life, there is some really good and some really bad. Most of their problems are obviously office or maybe some hotel, not so much multifamily. But I think both with the CM REITs and even the commercial banks, I think there will be – they are in kind of a pullback hunker down mode on anything other than residential real estate. Is this a year or the next 2 years for W&D to maybe step up a little bit in non-agency multifamily or single-family residential housing given the fact that capital flows from those two industry sectors are likely to be constrained?
Willy Walker: I would say, Steve, yes, but with a very significant aspects or caveat to that statement, which is just that we have been super disciplined in the risk that we have been willing to take. And as again, I would reiterate you know from watching us in various times over the past 13 years as a publicly traded company. There have been lots of opportunities for us to step in and do office loans to do floating rate CLO loans. And at every turn, we have sort of said that’s just not the risk profile of W&D and it has paid massive benefits. And believe me, I met with plenty of investors in ‘21 and ‘22 who watch what some of the CLO originators were doing and said, oh, you are missing market share, you are not growing fast enough.
And we said that’s fine. That’s not a risk that we want to take. We don’t like the fundamentals of that business when interest rates are this low and the credit loss that you would incur by doing those loans is that high. So, I think the bottom line, as you well know, we are not going to not look at anything. We will look at everything. And we have plenty of other capital providers coming to us saying, hey, you have got the distribution network. Can we give you a pool of capital to go deploy, and depending on the risk sharing agreement, depending on how much we are getting paid for the risk we are taking, we will obviously underwrite all of that and make decisions on what we will and won’t do. But I think your general comment is exactly right.
I think there will be plenty of opportunities, but I would also reiterate to investors that you are invested in a company that takes a very conservative credit outlook. And while the opportunity they present itself, that does not necessarily mean that W&D is going to do it.
Steve Delaney: Well, thank you both for the color and congrats on a solid close to a difficult year for everyone. Thanks.
Willy Walker: Thanks Steve.
Greg Florkowski: Thanks Steve.
Operator: We will move to our next question with Jay McCanless from Wedbush Securities. Please go ahead.
Jay McCanless: Hey. Good morning everyone. Thanks for taking my questions. Greg, could you talk to the – I think you said potentially for 1Q, somewhere between $0.40 to $0.60 in earnings, maybe talk about, what would have to happen to get to the high end versus the low end of that range?
Greg Florkowski: Yes. Thanks Jay. Certainly, I think look, ultimately, it’s a matter of what transaction activity is going to look like in the first quarter and then whether some of our other businesses that – whether it would be investment banking can generate some fees in the first quarter, what our dispositions or syndication activity looks like in our affordable business. So, there is a range there because we have got, obviously, different opportunities within the platform, but those are the big variables, I would say as transaction activity and then the likelihood of other revenue streams from either affordable or investment banking coming through.
Jay McCanless: Okay. And then maybe just for the full year and underpinning some of the full year assumptions, maybe talk about where you guys think the 10-year ends up? And are we going to continue to see some of this volatility we have seen? Just trying to get a sense of what your assumptions were for the full year guide regarding EPS and EBITDA?
Willy Walker: So, I will jump in there, Greg. So, Jay, a couple of things. First of all, I talked about this on the Walker webcast yesterday with some of my colleagues. We were out at NMHC, the National Multifamily Housing Council meeting and meeting with a number of W&D clients who are sitting on a pile of capital, pile of capital. There is so much equity capital sitting out there to be deployed. And in one of the meetings, one of the client said, we are not active right now because we don’t like negative leverage. And my question to the individual was, okay, let’s play this out. We get a Fed funds rate cut, the Fed funds rate comes down, do you really think the 10-year rallies much from here if the Fed starts to cut, the client sort of said, maybe a little bit, I said, great.
So, do you think that cap rates are going to stand still when you get a rally in the short end of the curve, as well as the long end of the curve and the client said to me, no. And I said, so then when do you think you are going to get yourself back to a positive leverage position? And the client said, well, you make a good point. And then the client said that we probably ought to be taking a look at acquisition based on IRR and on replacement cost and not so much on negative leverage. And I think that we are seeing more and more people realize that if you want to deploy capital into this market that you should probably take as an assumption that the 10-year sits somewhere in the band that it’s been in for the last 1.5 months, which is obviously it’s gotten down into the high-3s, but just say 4 to 4.25 to your specific question, where do you think the 10-year goes this year.
10-year shouldn’t move that much as the short end of the curve comes down, it really shouldn’t. I have a big bet with one of our clients. He thinks the 10 years at 3.50 at the end of the year, I think it’s closer to 4.50 at the end of the year. And as I have said to him, I win both ways. If it’s at 3.50, we are going to be doing a ton of business and I am happy to pay you my losses. And if it’s 4.50, I win the bet. The point being there is I think that the amount of dry powder sitting on the sidelines realizes that it needs to move. There is a dramatic amount of refinancing volume that is needs capital this year, which is why I underscore the point that Fannie and Freddie saying they think they are going to do the same amount of volume in ‘24 as ‘23 to – is a ridiculous statement.
And then the final piece to it is that, if you do get rates coming down, it is going to provide some relief to floating rate borrowers, which will make the credit outlook better, which should then stabilize the sales market and get transaction volumes coming back there. But that is not a pre-requisite to overall financing volumes picking up in ‘24 from ‘23, just based on the volume of loans that need to be redone. And so the name of the game for ‘24 is re-financings and going out and getting them and as we have underscored in these comments and in our public statements, we don’t have a lot of re-financings in our portfolio. So, what we need to do and have done very consistently in the past is go out and refinance loans that are sitting in other people’s portfolios.
And in one instance, fortunately with banks, some of them don’t want to redo those loans, so those aren’t difficult in the sense of trying to pull them away, in other situations where there are other lenders who have as solid a company as Walker & Dunlop and as positive an outlook as Walker & Dunlop, there is swift competition to win those deals away from them and we could be competing for them.
Jay McCanless: Great. Thank you, Willy. With all the buzz recently about rent-regulated properties in New York City, is there any exposure on Walker & Dunlop’s balance sheet to those rent-regulated entities and/or are there going to be some potential opportunities with the debt fund you recently raised to get involved in that market?
Willy Walker: Number one, no, as it relates to our – first of all, we don’t have a lot of exposure to New York in our agency portfolio. Agencies have never been terribly competitive in that market. So, as it relates to our Fannie Mae at-risk portfolio, I don’t have an actual number in front of me, but I can tell you from having been in this company for a very long period of time, we do not have anything in that, I can’t say anything. We have very limited exposure in our at-risk portfolio on Fannie Mae loans in New York City. And as it relates to our bridge portfolio, I am quite certain we have none. So, no rent control risk as it relates to New York City. Is it a market that we would like to dive into, that’s a good question.
In the affordable housing space, we actually love the affordable housing space and with operators who understand how to work in a rent-controlled market, those are great loans. On more market-based deals, you have got to make sure that you are lending to the proper operator who understands the market they are in. And so while there is probably opportunities, I go back to what I have said to Steve previously. We are going to look at everything. If we like the risk-adjusted returns, we will do the deal, but the investors shouldn’t expect Walker now off the back of the bus on risky deals in challenging markets just because we can do a loan.
Jay McCanless: Great. And then the last question I had, I think when I have asked you about this before, Willy, you were kind of not as positive as some people, but office conversions continues to be a topic of conversation in the general press and looks like there are some funds being committed towards it. Would love to get your updated thoughts on that space? And are there opportunities for Walker & Dunlop to get involved there if you feel like – if you have a more positive outlook on that now?
Willy Walker: Look, I mean we did a deal in Q4, Jay, that was in L.A. It was an office conversion and we did the takeout loan. Wells Fargo had done the actual construction conversion loan and we did an agency takeout on the property, fantastic property. It had a couple of very unique things to it. The owner had owned it since the early 1990s, so the cost basis in the building was exceedingly low. The second is, it was a small footprint. So, the conversion from office to multi was very, if you will, applicable or doable given the smaller footprint. And the final piece to it is, he had the zoning to be able to do it. And we love doing that. And we will continue to do that on people who are as talented and successful as that borrower has been in the office to multi conversion.
I think the reason I have been somewhat, if you will, tempered on my comments about it is just that lot of people are saying, oh, that’s the solve for all this office inventory and I don’t believe that it is. There is a ton of office buildings that are impaired because of the footprint, because of the location and because of the cost basis. And so what I am just saying is people shouldn’t think that this is the panacea for creating a whole bunch of new supply in multifamily by converting these office buildings into multifamily properties. But I do see an opportunity for us to do good loans like we did in Q4 and the one that I just outlined of a takeout loan of a very good conversion. And then the final thing is, would we put construction debt into the actual conversion process, sure.
With the appropriate operator and with an asset that was primed for conversion, we find the capital and put it into that type of a deal to help someone get that done.
Jay McCanless: Great. Very helpful guys. Appreciate it.
Operator: It appears there are no further questions at this time. I would like to turn the conference back over for any additional or closing remarks.
Willy Walker: I thank everyone, particularly those who asked questions this morning. Thank you very much for your time and interest in W&D. Congrats again to the W&D team on a very solid Q4 and 2023. And we look forward to talking to you all after Q1 2024 and I hope everyone has a great day.
Operator: This concludes today’s call. Thank you again for your participation. You may now disconnect and have a great day.
