Walker & Dunlop Inc

NYSE:WD

Earnings Call Analysis

Walker & Dunlop Sees Strong Recovery and Growth in Q2 2024

Walker & Dunlop reported a promising Q2 2024 with signs of market recovery. Transaction volumes totaled $8.4 billion, and adjusted core EPS surged by 26% to $1.23. Despite a drop of 18% in diluted EPS to $0.67 due to lower GSE volumes, the company experienced a 15% increase in adjusted EBITDA to $81 million. The servicing portfolio remains robust at $133 billion, generating stable income. They foresee stronger GSE activities in the latter half of the year, driven by improved interest rates and increased market activity. With strategic investments in technology and growing market share, Walker & Dunlop is well-positioned for continued growth through 2024.

Market Recovery and Positive Trends

The Q2 2024 earnings call for Walker & Dunlop (W&D) marks a significant moment in the company's trajectory, reflecting a broader recovery in the commercial real estate market. After a challenging two years characterized by rising interest rates, the sentiment among investors and stakeholders is shifting towards optimism. The CEO, Willy Walker, highlighted that Q2 was the first quarter in almost two years with a stable interest rate environment, particularly with the 10-year Treasury yield dropping below 4%. This stabilization is expected to enhance transaction activities, paving the way for increased business momentum and recovery in commercial real estate transactions.

Strong Financial Performance

For Q2 2024, W&D reported a transaction volume of $8.4 billion, a robust figure against prior quarters. While diluted earnings per share (EPS) dropped to $0.67—an 18% decline year-over-year primarily due to lower volumes from Government-Sponsored Enterprises (GSEs)—the adjusted core EPS saw a remarkable 26% increase, climbing to $1.23 per share. Adjusted EBITDA also grew by 15% to $81 million, underscoring the firm's resilience and strong operational execution during difficult market conditions.

Dynamics of Capital Markets and Other Business Segments

W&D's Capital Markets segment showcased a rebound with debt brokerage activity reaching $3.9 billion, growing 16% year-over-year. However, financing volumes involving GSEs experienced a notable decline of 23% year-over-year to $2.7 billion, a factor attributed to past lending sluggishness. Moving ahead, management expects higher GSE volume in the latter half of 2024, driven by increasing market activity. On the servicie front, the Servicing & Asset Management (SAM) segment continues to thrive, with a $133 billion servicing portfolio generating sustainable cash revenues amid a backdrop of increasing demand.

Investment in Future Growth and Technology Advancement

W&D is committed to investing in growth by enhancing its team with bankers and brokers to better serve existing and new asset classes. As the commercial real estate sector recovers, W&D is tactically aiming to capture deal flow and integrate technology effectively through tools like Galaxy and Client Navigator to improve client service. Such investments position W&D not just for recovery but for substantial growth when markets normalize, with pipeline indicators suggesting a thriving second half of 2024.

Outlook and Guidance for Future Performance

Management maintained guidance for 2024 earnings growth, forecasting mid-single-digit to low teens growth in adjusted EBITDA and adjusted core EPS. To achieve these goals, W&D anticipates the GSEs will need to reach a capital provision of $100 billion in the multifamily market during the second half of the year. As transaction volumes increase and interest rates stabilize further, these expectations appear manageable and reinforce the company's strategic positioning. W&D also expressed confidence about a potential uptick in HUD financing activity, with a 26% year-over-year growth in HUD volumes highlighting the emphasis on affordable housing.

Commitment to Credit Quality

W&D's commitment to maintaining a disciplined approach to credit risk has been integral during the recent downturn. The firm's portfolio, primarily focusing on multifamily properties, remains strong with only minimal losses reported. The long-term outlook for multifamily remains favorable, and W&D is positioned well against potential risks, which adds an extra layer of security for investors.

Conclusion: A Strategic Position for Investors

With a solid financial foundation and an optimistic market outlook, W&D presents a compelling opportunity for investors. The focus on sustainability in earnings through a robust servicing platform, combined with a strategic response to evolving market conditions, suggests a potential for meaningful returns. The combination of technological advancements and proactive management reinforces W&D's commitment to maximizing shareholder value in a recovering market.

Earnings Call Transcript 2024-Q2

[Operator]

Good day and welcome to the Q2 2024 Walker & Dunlop, Inc. 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, ma'am.

[Kelsey Montz, executive]

Thank you, Lisa. Good morning, everyone. Thank you for joining Walker & Dunlop's Second 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 this call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe our current expectations and actual results may differ materially. Walker & Dunlop is under no obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise. 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. We held Walker & Dunlop's Annual Summer Conference in Sun Valley, Idaho 2 weeks ago with some of the largest and most active investors in commercial real estate. The sentiment at the conference was that after 2 years of rising interest rates and limited investment activity, it is time to get active again.

Q2, 2024 was the first quarter in almost 2 years with consistent rates, and the ability for commercial real estate owners to transact. And with the 10-year treasury falling below 4%, momentum is building in the market. W&D is very well positioned to benefit from the recovery of the commercial real estate transactions market and new growth cycle.

As shown on Slide 3, Q2 transaction volume was highlighted by debt brokerage of $3.9 billion, up 16% year-over-year. This growth is reflective of our talented Capital Markets team finding a diverse and deep market of capital for our clients borrowing needs.

Financing volumes with the GSEs were down 23% year-over-year to $2.7 billion. The GSEs have been sluggish in their lending over the past 18 months, but we are seeing them lean in on deals over the past month, and expect higher volumes from them in the second half of 2024.

Investment sales volume of $1.5 billion is a good start to the market recovery, up 31% from Q1 of this year. I'd like to make sure we understand both where the market was and what the W&D team can do. We did $7.9 billion of multifamily investment sales in Q2 of 2022 versus $1.5 billion this past quarter. The market has a long way to recover, and our team has tremendous capacity.

Our investment sales pipeline continues to grow, and it is very evident that with lower rates and the need for CRE owners to return capital to investors and deploy new capital, transaction volumes are growing nicely. Our investment sales market presence and team is extremely strong. And as property sales volumes pick up, it will benefit investment sales, debt placement, valuation services, investment banking and our affordable housing business. Apprise, our technology enabled evaluation business, saw volumes grow 26% year-over-year as property sales return to the market.

Walker & Dunlop Affordable Equity closed on its newest fund of $163 million at the start of Q2, and is seeing demand from both investors and developers of affordable housing. Capital raising and deployment are the day-to-day drivers of this business, as is investment realization when assets exit the rent restriction period. W&D Affordable Equity has not sold many assets over the past 2 years, but as the market heals we will see a pickup in sales and realized gains.

Our small balance lending business has maintained market share with Fannie and Freddie, and we are focused on using our technology to enhance and market our product that will allow us to take market share from the regional banks. This business has significant opportunity to grow as transaction activity resumes.

HUD financing, part of our affordable housing group, grew volumes 26% year-over-year, and while HUD volumes are relatively small in comparison to our other debt businesses, HUD loans are a fantastic financing option for our customers, and generate great mortgage servicing rights.

Finally, Zelman research and investment banking revenues were down slightly on the quarter, but will grow as the market recovers and transaction volumes accelerate.

Total Q2 transaction volume of $8.4 billion, coupled with the consistent and growing servicing income generated by our $133 billion loan servicing portfolio, generated Q2 diluted earnings per share of $0.67, down 18% year-over-year, mostly due to lower GSE volumes, and the commensurate non-cash mortgage servicing rights.

Adjusted core EPS, however, which strips out non-cash revenue and expenses, grew 26% to $1.23, while adjusted EBITDA grew 15% to $81 million on the quarter. Having weathered the brunt of the great tightening and beginning to see transaction volumes return, these financial results are very strong and reflective of our teamwork, excellent business model, recurring revenue streams, and ability to invest in our people, brand and technology during the past 2 years of market volatility.

As we look forward to a market recovery in transaction volumes, we will continue to invest in our business, by adding bankers and brokers who focus on meeting not only the needs of the owners of traditional assets where our people live, work, shop and play, but also in new economy assets where people work, where they sleep, play without moving their bodies, travel without staying in a hotel, and where the housing of data and digits is increasingly important for the future of our society and our world.

As Greg will discuss in a moment, W&D's credit portfolio remains extremely strong. Our discipline of taking credit risk only on multifamily properties continues to pay dividends as other asset classes incur losses. And while our portfolio is neither perfect nor without losses, given we were the largest lender on multifamily properties in the United States in 2020 and the seventh largest provider of capital to commercial real estate in 2023, as shown on this slide, our credit discipline and minimal losses are truly outstanding.

While I'm focused on credit, I'd like to thank our Chief Credit Officer, David Levy, for his magnificent career and 12 years of exceptional work at Walker & Dunlop. David has earned his retirement in many, many ways and we wish him much happiness going forward.

I will 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 ahead in the back half of the year. Greg?

[Greg Florkowski, executive]

Thank you, Willy, and good morning, everyone. On our last call, we spoke about interest rates stabilizing heading into this quarter as the market adjusted to higher for longer, an improvement in the supply of capital and transaction activity for non-multifamily assets, and the fact that our pipeline was building nicely. Our results reflect the market we described, and we delivered $8.4 billion of transaction activity this quarter, generating 15% growth in adjusted EBITDA year-over-year to $81 million, and 26% growth in adjusted core EPS to $1.23 per share.

Our diluted EPS decreased 18% to $0.67 per share, compared to the same quarter last year, and our operating margin and return on equity remain below historical levels at 10% and 5%, respectively. The last 2 years of the grade tightening have been difficult, but our ability to routinely deliver strong results is reflected not only of the quality of our team, but also the durable recurring revenue streams we built leading into this cycle that will provide the foundation of our future results as transaction activity recovers from here.

Turning to our segment results. Transaction activity for our Capital Markets segment rebounded from a slow first quarter, growing 32% from Q1, but coming in flat to the same quarter last year. Total revenues for the segment were $118 million, down 6% year-over-year. We have said repeatedly that our expectation is that GSEs will not meaningfully surpass their 2023 lending volume this year.

But Fannie Mae's lending activity slowed during the second quarter, leading to the decline in revenues. Yet there is still plenty of capital willing to lend on both multifamily and non-multifamily assets, and our broker transaction activity remains robust, growing 16% over the same quarter last year.

Overall net income for the segment declined $5 million, or 31% due to lower non-cash MSR revenues, while adjusted EBITDA improved 17% to a loss of $8 million due to the strength of our overall transaction activity. The positive signs are stable to lower interest rates. Improving supply of capital and increased activity from operators are continuing into the third quarter, and we feel very good about the opportunity ahead given the strength of our Capital Markets team.

Our Servicing & Asset Management segment, or SAM, continues to thrive, generating durable recurring cash revenues from our servicing portfolio, which totaled $133 billion at quarter end. Our SAM segment also benefits from the strength of W&D Affordable Equity, which closed a $163 million multi-investor fund during the second quarter and now manages over $15 billion of affordable assets, and W&D investment partners which recently closed a $370 million debt fund and now manages over $3 billion of assets and equity.

Our total managed portfolio grew 5% year-over-year to a total of $150 billion at June 30, 2024, driving the 4% increase in SAM segment revenues to $148 million. Net income for this segment grew 13% year-over-year, reflecting the revenue growth and benefit of our cost management efforts over the past 12 months.

Finally, adjusted EBITDA for the segment continues to grow, ending the quarter at $125 million, up 15% from Q2, 2023. The SAM segment also includes the impacts of our credit risk portfolio. During the quarter, we recorded a $3 million provision for credit losses. Last quarter, I provided a detailed update on 3 loans totaling $62 million where we either indemnified or repurchased the loan from the GSEs.

During the quarter, we foreclosed on 2 of those assets and performed thorough reviews of the property condition, and asset performance as we prepare to market them for sale. In the process of that review, we increased our loss reserve on the portfolio of loans by $3 million, representing the majority of our provision for credit losses this quarter, and bringing the total reserve for these 3 loans to $5 million. Importantly, we have not received any additional repurchase notifications beyond these 3 assets.

Turning to our at-risk portfolio. We completed our analysis of year-end financial statements during the quarter. And the weighted average debt service coverage ratio remains over 2x at December 31, 2023, which speaks to the overall health of our portfolio and the quality of our underwriting.

Further, the macro backdrop for multifamily remains favorable in the long term and we have only $1.9 billion of loans in our at-risk portfolio maturing in the next 12 months, meaning the vast majority of our customers have time for supply dynamics and interest rates to adjust before there is any maturity pressure.

We have a $60 billion at-risk portfolio with over 3,000 loans and only 5 of those loans are defaulted at the end of the quarter, a decrease from 6 loans at the end of the first quarter. We remain focused on credit risk in our portfolio and continue to feel good about how our clients are positioned and the risks we took leading into the great tightening. Although this cycle is not over, our credit quality is strong.

Looking at our consolidated results for the first half of the year, total transaction volumes are down 2%. But the stability of earnings from our SAM segment helped offset the slowdown in transactions. Diluted earnings per share was $1.02, down 37% from the first half of 2023, while year-to-date adjusted EBITDA and adjusted core EPS were both up 12% to $155 million and $2.39 per share.

At the start of the year, we provided guidance that our diluted earnings per share, adjusted EBITDA, and adjusted core EPS would increase in the mid-single digits to low teens this year. 2 quarters in, we feel very good about our outlook for adjusted EBITDA and adjusted core EPS. To hit our diluted EPS target, we expected the GSEs to deliver $100 billion of capital to the multifamily market.

Activity is picking up across our business and we believe there will be sufficient demand for GSE capital in the back half of the year for them to close the gap to achieve $100 billion of volume. And that would provide a significant boost to MSR revenues and earnings during the second half of the year.

We are also looking to our other business lines to drive the earnings we are expecting in 2024. With our second half pipelines building nicely, we are maintaining the diluted EPS guidance we gave at the beginning of the year.

Turning to our balance sheet. There's been a strong market for high quality corporate issuers thus far in 2024. And during the second quarter, a window opened for us to reprice the $200 million tranche of our term loan B and reduce the spread over SOFR from 300 basis points to 225 basis points, lowering our cost of borrowing by $1.5 million annually.

The resiliency of our business and the strength of our adjusted EBITDA positioned us well to take advantage of that repricing window with our lender group. The continued strength of our cash generation also allowed us to end the quarter with $208 million of cash and our Board of Directors approved a quarterly dividend of $0.65 per share yesterday, payable to shareholders of record as of August 22.

Our results demonstrate the resiliency of our platform, and the strength of our team. The macro backdrop continues to strengthen as the path for exiting the rate tightening is coming into focus. With lower interest rates and an increasing supply of capital to the commercial real estate sector, we are optimistic about the opportunities to capture deal flow and grow as the commercial real estate market recovers from the last 2 years of restricted interest rate.

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

[Willy Walker, executive]

Thank you, Greg. As Greg just underscored of our servicing and asset management businesses, along with cash origination fees from debt financing and property sales, allowed us to generate strong year-over-year growth in adjusted EBITDA and adjusted core EPS.

One of the analysts who covers W&D recently did an analysis of peak earnings in 2022 to trough earnings in 2023 for W&D and several of our largest competitors. What the data shows, essentially contrary to many investors' perceptions, is that W&D's adjusted EBITDA was down dramatically less than the competition, at just 8% versus an average of 36% for CBRE, JLL and Newmark.

The conventional thinking is that those platforms, with scaled workforce solutions and asset management platforms, would endure a downturn better than W&D due to long term low margin facilities management and outsourcing contracts. Not so. And that is due to the strength of W&D servicing and asset management businesses. And what is really exciting is that as we enter this next cycle, W&D's Capital Markets' focus will benefit disproportionately from increased transaction volumes in financing, property sales, appraisals, research and investment banking.

As W&D investors know, originating loans with mortgage servicing rights is a large and important component of W&D's revenues and GAAP EPS. Over the past 2 years, we have endured something of a perfect storm with regard to MSRs due to reduced GSE lending volumes, reduced servicing fees and reduced loan duration. Going forward, we believe all 3 of these components should improve significantly.

The GSEs only do one thing, lend on residential real estate, and they happen to have the cheapest cost of capital of any market participant. They will play their role as the market recovers, and as they grow their lending volumes, so will W&D. Regarding servicing fees, we are seeing a recovery in pricing due to lower rates and investor spreads remaining tight.

Finally, regarding term, over the past several years, many borrowers went short and put on fixed rate debt for only 5 years, thinking rates would come back down and they could refinance. To put numbers to this, in 2020, 45% of all Fannie Mae multifamily loans were 10-year loans and 0% were 5-year loans. In the first 6 months of 2024, the percentage of 10-year loans at Fannie Mae dropped to 26%, while the volume of 5-year loans grew from 0% to 32% of total lending.

As the yield curve normalizes and CRE owners can acquire assets with positive leverage once again, we will see more borrowers go long and request 7- and 10-year paper. Higher financing volumes, normalized servicing fees and longer loan terms will benefit our mortgage servicing rights substantially in the coming years.

Let me give an example of a W&D client going long as it is instructive on a number of fronts. The client's existing loan was $34 million and the new loan only sized to $30 million. The fundamentals of the property were sound, so the borrower put $4 million of fresh equity into the property to pay off the $34 million loan. In the process, they bought down the interest rate by 30 basis points from 5.80% to 5.50%. And at that coupon rate, they decided to go long and lock up the financing for 10 years.

There are several themes to this loan. First, there is plenty of equity capital to be invested in properties. Second, all-in borrowing costs, particularly on multifamily properties, are not that high and are getting lower fast. And with good assets and appropriate financing, many owners are starting to go long and push out long term.

This example is not unique to multifamily. Some of you may have heard about the refinancing of 277 Park Avenue in Manhattan. This is not a financing Walker & Dunlop worked on, but is instructive of today's market. The property had a $750 million loan at a 3.60% interest rate that matured this year. The new loan only sized to $500 million, the new interest rate being almost double the old one.

So the owners wrote a $250 million check to pay-off the maturing mortgage -- building, recently signing 175,000 square feet of new leases to bring the building back to 98% occupancy. This is a trophy asset in America's largest office market, but a $250 million cash in refinancing is not a minor deal, reflecting that there is still plenty of debt and equity capital in the market for great assets, and that new office leases are actually being signed.

Let me shift from the market to technology for a moment. We continue to invest in data analytics to find new business and better serve our clients. Our Galaxy application continues to generate new client opportunities, and in Q2, 77% of our refinancings were new loans to Walker & Dunlop. While new lending opportunities come to us in myriad ways, client coverage, referrals, sales transactions and in some instances, just dumb luck, Galaxy has been an incredibly powerful tool that shows our team the composition of a client's entire debt portfolio.

And given the very small volume of loan maturities in W&D's existing loan portfolio for 2024 and 2025, the name of the game for our team is winning new loans and new customers away from the competition, and Galaxy helps tremendously with this.

Our technology team also created a new digital experience for W&D servicing clients named Client Navigator that allows our borrowers to do analytics on their loans and interface with W&D through a dramatically enhanced user interface. We currently have over 3,000 active users on Client Navigator. And as you can see on this slide, our customer service ratings on Client Navigator is above some of the top financial services institutions in the world.

As the market continues to recover and then grow, extremely well positioned. We have the bankers and brokers today to achieve our drive to '25 loan origination target of $65 billion and our investment sales target of $25 billion if the market returns to normalized transaction levels. W&D is known for being one of the very best at multibillion dollar multifamily financings and our team is currently being asked to pitch on large portfolio financings that have not existed in the market over the past 2 years.

What is new and very exciting is that our multifamily investment sales team is also being asked to pitch on large portfolio transactions. Add to that our valuation services, search and investment banking capabilities, and our go-to-market presence has never been stronger.

Howard Smith, our longtime President who retired at the beginning of 2024, stepped down from the W&D Board in May. Then in June, our longtime lead Independent Director, Mike Malone, died suddenly and tragically from a heart attack. Mike was an amazing Director and friend, and he will be missed by our fellow Board Members and senior executives dearly.

Jeff Hayward, Executive Vice President, Fannie Mae, prior to retiring in January of 2024, joined the W&D Board in Q2 and has had an immediate impact due to having run the Fannie Mae DUS program for 12 years. And also in Q2, McKinsey partner and Chairman of McKinsey North America, Gary Pinkus, joined our Board. And while we will miss Howard and Mike's contributions greatly, we are very excited to have Jeff and Gary's insights and wisdom going forward.

As Greg said earlier, we feel very good about our current pipeline of business and our expectations for deal volumes and financial results in the back half of 2024. Lower interest rates and the need to recycle and invest equity capital should push property sales, financing, appraisals, research and investment banking volumes higher. What is imperative is that we remain focused on our clients and exceeding their expectations.

We need to retain and expand our team as the market recovers. We need to reinforce our credit discipline as new opportunities arise. And as I noted earlier, we need to be constantly evolving to meet the needs of the new economy, not just the established economy where we have been so successful over the past 2 decades.

Thanks to the people of Walker & Dunlop and our business model, our financial results during the great tightening were impacted significantly less than the competition. And now that we sit at the doorsteps of a recovery and new cycle, we feel extremely well positioned to benefit from the macroeconomic shift. Thank you for joining us this morning.

Operator, please open the line for any questions. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Jade Rahmani with KBW.

[Jade Rahmani, analyst]

Can you give some further color as to what's going on with the GSEs? It seems like there's been a regular stream of media reports about them adding more scrutiny, tightening their processes, which seems to express some caution on their part, not just about interest rates having an impact, but about the entire system that they're exposed to. And most recently, JLL, in their earnings, did note about 0.5% of their agency portfolio had fraud. So just want to get some color as to your thoughts and insights into this phenomenon that's going on.

[Willy Walker, executive]

Jade, thanks for joining us this morning. And I saw your note this morning as it relates to our numbers versus your projections. And I would take my hat off to you for being right on top of where we came in on the quarter.

As it relates to the GSEs, the article that was in the Wall Street Journal earlier this week, I would say that article probably should have been written a year ago, not today, in the sense that, as you know, the GSE's sort of shift in a view on asset management was prompted by some of the issues that that Wall Street Journal article mentioned as it relates to one GSE lending partner sort of being blacklisted by the GSEs, and the ensuing focus on both fraud as well as overall asset condition. And for the past year, the agencies have been very focused on that.

I would say that they are both now very much on the front foot as it relates to their focus, what they're looking at and how they are working with their DUS and Optigo lenders, versus a year ago it was sort of they were moving very quickly in ways that we've never seen them move before. And so I would say this is not anything new. We've been working very closely with both Fannie and Freddie for the past year.

As Greg and I both said, we feel very good as it relates to our overall portfolio. And I think the most important thing is that while they have been somewhat distracted over the past year as it relates to asset management and looking at their past book of business, we're very encouraged to see both of them, if you will, focusing to the future as it relates to new loan originations and processing business with both us as well as our competitor firms.

[Operator]

And we'll move to our next question from Steven Delaney with Citizens JMP.

[Steven Delaney, analyst]

I appreciate Jade asking the question because it's a lot of conversation out there among clients about how far this GSE thing and the Meridian thing might go.

Want to talk just about the earnings statement, if I might. I think your frontline numbers are GAAP and I think most of the analysts where the numbers we put into our consensus. I'd like to just make the point that I think -- well, let me ask you this, Willy and Greg. Adjusted core EPS seems to take out a lot of the noise from fair value marks and servicing, et cetera. Internally, does management and the Board focus more on adjusted core or more on GAAP earnings when you're looking at your -- evaluating your profitability? Let's start there if we can.

[Greg Florkowski, executive]

Steve, it's a heck of a good question because I will tell you that while the growth in adjusted core as well as an EBITDA show the incredible strength of the platform and the enduring cash flow that we have been able to create, we also know that the booking of mortgage servicing rights is extremely important for the next cycle. So the reason we've done so well over the last 2 years is because we were so successful at building up $133 billion loan servicing portfolio that would kick off cash during times when transaction volumes went down. And we have been the net beneficiary of that over the last 2 years.

But we also realize that -- Michael will be, whether it's 5 years from now, 7 years from now, let's hope it's 10 years from now. But in the next cycle, what will get us through that next cycle is booking lots of mortgage servicing rights over the next 3, 5, 7 years. And so one of the things that we are very focused on is that there is no shifting of focus inside of Walker & Dunlop away from booking mortgage servicing rights because that is the business model.

And so while our financial results I, as I said in the call, feel very good about, it is up to us to continue to have our loan originators going out and finding lending opportunities that generate significant mortgage servicing rights, which will benefit non-cash earnings and non-cash revenues as we book them, which will then pay huge dividends 3, 5, 7 years from now when we hit the next downturn where transaction volumes come down. And that's the resiliency of the platform, but it's also very much our strategy and that has not changed one iota.

[Steven Delaney, analyst]

So what you're saying in it, when you think about the W&D and the origination side of your business, your GSE business, obviously the MSR is the fair value -- recognition of that discounted fair value is critical, right, to your accounting and your profitability. So I guess what I'm hearing you say, Willy, in a normal origination focused environment, which we'll have here with hopefully with lower rates, that MSR recognition in the current period is an important part of your business model. So I guess I was asking for taking away noise. But what you're telling me is we can't have it both ways, right? I mean if we're going to look at the MSRs as revenue as they're booked, then we're just going to have to live with any adjustments going through, other than the normal amortization going forward.

[Willy Walker, executive]

Yes. I mean, Steve, let me just -- let me put a finer point on this, if I can. I just, in the call, talked about some of our larger scale competitive platforms. And the thinking always was that because they were broad and diversified and had these lower margin services contracts, that in the downturn they would do better than Walker & Dunlop. And as Jade's analysis showed, they didn't. Okay. So then go to the other extreme, which is some of our other competitor firms that are all transaction volume focused.

If we were to forget about GAAP EPS, we would run after adjusted core EPS, which is the cash flow off the servicing portfolio. But it is also just cash transaction fees. And what happens is, if you're solely focused on cash transaction fees, you do really well on cash earnings, but you do not have that mortgage servicing right portfolio to hold onto when those transaction volumes come down. And so that's the beauty of the model.

And so if our compensation committee came to me and said, Willy, we think for you and the other senior managers we should start to focus on adjusted core EPS and less on GAAP EPS, I would say no way because it's the GAAP EPS and the generation of those mortgage servicing rights over time that will benefit this platform 5, 7, 10 years from now when we have another downturn in transaction volumes. That's the model and we'll stick to it.

[Operator]

And we'll move to our next question from Derek Sommers with Jefferies.

[Derek Sommers, analyst]

I was wondering -- I think in the prior quarter, we talked about a kind of large property sales pipeline. I was just kind of wondering how that compares at the end of this quarter, and what were the puts and takes that deal flow pulling through.

[Willy Walker, executive]

Yes, Derek. Pipeline is developing very nicely and sits. We haven't disclosed the actual number, but it's great. As I tried to give color, one of the -- our success in sales team and moving up in the lead tables is fantastic, not only from the flow business, but also being invited to pitch for some very large portfolio transactions where previously Walker & Dunlop wouldn't have been invited to those bake offs, if you will.

I will say that if you look at the first half of the year, a number of our competitor firms had some significant growth in their volumes year-over-year from 2023 to 2024, and our volumes were down slightly. That's disappointing as it relates to our overall competitive positioning, but we're still a top 5 multifamily investment sales platform. Pipeline is very strong and as I said in our comments, our team is doing everything right now.

So I feel very good about where we are positioned. And the combination of investment sales and lending has us right now, any multifamily owner, operator, investor in the U.S. who is thinking about selling either an individual asset or a scaled portfolio, Walker & Dunlop is going to be on their list of firms to talk to. And given the strength of our financing platform, those 2 things during this next cycle should benefit one another tremendously.

[Derek Sommers, analyst]

And then just to switch to the GSEs coming to the end of the year here, have there been any conversations about the multifamily caps? And then I guess given the election cycle, any kind of pertinent thoughts on working with different administrations?

[Willy Walker, executive]

Cool. I'll skip on the second one. On the first one, FHFA is always take Q3 to see where the GSEs are as far as their volumes and coming up with what they want to do in the scorecard in the coming year. I've spoken to the regulator, various people at FHFA, over the past couple months. And I think that they're looking at a lot of different data points right now. I think they see the market recovery coming and as a result of that, I would think that they lean towards maintaining the caps where they are rather than either shrinking or expanding them. But only time will tell, and that's obviously something that the regulator has complete discretion over.

And then I will only say, as it relates to the election, that we will likely have -- regardless of whether it is a Trump administration or Harris administration, we will likely have a change in the directorship of FHFA. I don't know Director Thompson's desires personally about whether she wants to stay on or go, but I would assume that with either one of those new administrations that there would be a new director at FHFA. And so always with the new director, there is change. And we've been pretty good at adapting to that change from some directors of FHFA who have had a very aggressive strategy on changing what the GSEs do to others who have been more in line, if you will, with the previous director.

But I would put forth that we'll see what happens in the election and we'll see what happens at FHFA in 2025. But we've sort of been to this rodeo before, if you will, having worked with Fannie and Freddie for as long as we have, and particularly since they went into conservatorship in 2008. And so none of that is terribly concerning at this point.

[Operator]

And moving to our next question from Brian Violino with Wedbush Securities.

[Brian Violino, analyst]

Just on escrow income, obviously that's been a benefit over the last few years with higher short-term rates. But just curious if we do see the Fed start to cut here. Could you kind of frame what the negative impact on escrow revenues would be for, say, each 25 basis point cut? And obviously, I know that would be offset by better transaction revenues, but just curious what the offset could be there and maybe the timing between the 2?

[Willy Walker, executive]

Greg, you want to take that thing?

[Greg Florkowski, executive]

Yes, absolutely. So simply, we have about -- depending on the time of the year, we have between $2.2 billion and $2.5 billion of escrow reserves that we hold. So 1/4 quarter point is going to be multiplied by that balance and then you're going to just take that. Whatever the reduction in Fed funds occurs is effectively when our rate is decreased. So expect that to just be implemented as soon as the rate change occurs. That type of a change will occur to our revenues. Whatever you're projecting or thinking about from a forward curve perspective is what you'll see the impact be on our financials on the annualized basis from that point forward.

[Brian Violino, analyst]

Okay. And then just on the expense side, it sounds like there's plenty of capacity. But just curious how you're thinking about fixed expenses at this point. Would you see a more notable uptick in volumes, is it fair to say that you think the expenses is pretty set to where you see volumes at least going in the very near term?

[Greg Florkowski, executive]

Absolutely. We've made sure to maintain capacity. We've got, as Willy said on his remarks, plenty of capacity with respect to the team. He gave some stats on where our investment sales team was towards the peak of the market. So there's a lot of room for us to run from where we are today to there. There's absolutely going to need to be a little bit of incremental expense increase as we need to add just processing power, if you will, but nothing that would be outsized or too excessive. And I think as transaction volumes grow back, it'll be somewhat -- I don't think it'll be massive spike. So I think we'll be able to grow into the market pretty easily from here without a lot of -- have a lot of change there.

[Willy Walker, executive]

One other thing I'd jump in behind Greg on the escrows and origination volumes. First of all, to your specific point, that's exactly right that the growth in volumes will more than offset the stepdown in escrow income. But the other piece to it is that there's also -- the escrow income acts as a hedge to our borrowing cost as well. And so as escrow income comes down, so does our borrowing cost. So you know Greg talked about that as it relates to how you also have, as escrow comes down, so does our borrowing cost on our debt. So those 2 act as a hedge against one another. And then if you're in a lower rate environment, it's very clearly the assumption that transaction volumes step up.

And so net-net, that's all net beneficial to us in a rising rate environment. It was nice to have that hedge against the increased borrowing cost in the escrows. But as that steps down, the debt cost and the escrows work basically in tandem as the hedge, and then what you pick up is increased transaction volumes.

[Operator]

And our next question is from Jade Rahmani with KBW.

[Jade Rahmani, analyst]

Just wanted to ask about the Affordable Equity business, the business that used to be known as Alliant. Just on the LITHC outlook, now what are you seeing there? And I think you alluded to the lower rate environment outlook potentially benefiting that business.

[Willy Walker, executive]

A couple of things there, Jade. First of all -- just did not pass the bill that had had in it increased LIHTC for 2025, which was disappointing as it relates to specifically that issue. But the general consensus is that Congress needs to increase the amount of low income housing tax credits being issued at the federal level of both 9% as well as 4%. And I think that we're extremely well positioned as it relates to the need for more low income housing tax credits to drive the building of affordable housing across the country.

The second thing is that we bought Alliant 2 years ago. We've been integrating Alliant into Walker & Dunlop, raised our newest fund at the beginning of Q2, and we are starting to see that integration of Alliant into Walker & Dunlop and the general branding of our affordable housing business start to have real benefits.

We moved Sheri Thompson into running all of affordable housing earlier this year. And so bringing the formerly known as Alliant Business, Walker & Dunlop Affordable Equity, in with our affordable debt originations, our affordable investment sales and pulling all of that together I think is going to start to really show some benefits. And so we feel very, very good about it. We have a fantastic team that we brought across in that acquisition. And clearly the assets in that portfolio have been operating extremely well. And the additional EBITDA that we generate from that business has been very beneficial over the last 2 years.

[Jade Rahmani, analyst]

And then on the HUD business that picked up meaningfully and I know it's a high margin business, although dollar volumes, not that big. But what are your thoughts on the outlook there?

[Greg Florkowski, executive]

I think you just said it, which is that it's extremely valuable business. HUD volumes have been down. We're very focused on increasing those volumes. Their D4 product, which is their construction loan product, is a fantastic product for people who want to build and hold rather than build and sell. And we're very, very -- and we've got a fantastic D4 team, the very best in the country.

And one of the big issues that was driving our higher HUD volumes pre tightening was what are called interest rate reduction loans, where you put a HUD loan on back in, whenever, 2014 and because rates came down, we could go and redo that loan. That was a big driver of volumes pre great tightening. That volume obviously fell off as we moved into this higher rate environment.

And there hasn't been a whole lot of new lending that would -- help to having more of those IRR loans going forward. So the name of the game right now, Jade is increased D4 as well as 223F, which is just their standard refinancing product. And our team knows that that those are the 2 products that we're out selling and that we need to get ourselves -- the aggregate volume is important, but lead tables are extremely important to us. And continuing to be at the very, very top of the lead tables versus the competition is super important. And our whole team is focused on doing just that.

[Operator]

And ladies and gentlemen, that concludes the Q&A portion of today's call. I'd like to turn the conference back to Mr. Willy Walker for additional or closing remarks.

[Willy Walker, executive]

Great. Thank you, everyone, for joining us today. And thank you to the W&D team for all they did to produce a very solid Q2, 2024. And we look forward to talking to you all at the end of Q3 and well beginning of Q4 for Q3. Thanks, everyone. Have a nice day.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.