Image source: The Motley Fool.
Walker & Dunlop(NYSE: WD)
Q2 2024 Earnings Call
Aug 08, 2024, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Q2 2024 Walker & Dunlop, Inc. earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kelsey Duffey.
Please go ahead, ma'am.
Kelsey Duffey -- Senior Vice President, Investor Relations
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.
Should you invest $1,000 in Walker & Dunlop right now?
Before you buy stock in Walker & Dunlop, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Walker & Dunlop wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $606,079!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 6, 2024
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 non-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.
William M. Walker -- Chairman and Chief Executive Officer
Thank you, Kelsey, and good morning, everyone. We held Walker & Dunlop's annual summer conference in Sun Valley, Idaho two weeks ago with some of the largest and most active investors in commercial real estate. The sentiment at the conference was that after two years of rising interest rates and limited investment activity, it is time to get active again. Q2 2024 was the first quarter in almost two 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 for 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 valuation business, saw volumes grow 26% year over year as property sales returned 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 their rent restriction period.
W&D Affordable Equity has not sold many assets over the past two years, but as the market heals, we will see a pickup in sales and realize 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 a 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 noncash mortgage servicing rights. Adjusted core EPS, however, which strips out noncash 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 two 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 people live, work, shop, and play but also 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 Vice President, Chief Financial Officer
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 of 10% and 5%, respectively.
The last two years of The Great 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've 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 brokered 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 noncash 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 of 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 and 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 the $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 the 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 three loans totaling $62 million, where we either indemnified or repurchased the loan from the GSEs.
During the quarter, we foreclosed on two 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 three loans to $5 million. Importantly, we have not received any additional repurchase notifications beyond these three 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 two times 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 the $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 five of those loans are defaulted at the end of the quarter, a decrease from six 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 risk 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. Two 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 Great 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 two years of restricted interest rates.
Thank you for your time this morning. I'll now turn the call back over to Willy.
William M. Walker -- Chairman and Chief Executive Officer
Thank you, Greg. As Greg just underscored, 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's 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 two 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 three 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 five 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 five-year loans. In the first six months of 2024, the percentage of 10-year loans at Fannie Mae dropped to 26%, while the volume of five-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 seven- 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 brought 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. They recently signed 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, we're 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 two 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 at 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 two 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. Now that we sit at the doorstep 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.
Questions & Answers:
Operator
Thank you, Mr. Walker. [Operator instructions] Our first question comes from Jade Rahmani with KBW. Please go ahead.
Jade Rahmani -- Analyst
Thank you very much. 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, I just want to get some color as to your thoughts and insights into this phenomenon that's going on.
William M. Walker -- Chairman and Chief Executive Officer
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 GSEs' sort of shift in 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 had 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.
Jade Rahmani -- Analyst
Thanks very much.
Operator
And we'll move to our next question from Steve Delaney with Citizens JMP. Please go ahead.
Steve DeLaney -- Analyst
Good morning, everyone. 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. So, thanks, Jade. Thank you for your reply, Willy.
I want to talk just about the earnings statement if I might. Your frontline numbers are GAAP, and I think most of the analysts were 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, etc.
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. Thanks.
William M. Walker -- Chairman and Chief Executive Officer
Steve, it's a heck of a good question because I will tell you that, while the growth in adjusted core as well as in 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 two 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 two years. But we also realize that [Inaudible] cycle will be, whether it's five years from now, seven 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 three, five, seven 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 still 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 noncash earnings and noncash revenues as we book them, which will then pay huge dividends three, five, seven 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.
Steve DeLaney -- Analyst
Got it. So, what you're saying in it, when you think about WD 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, 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 you can't -- 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.
William M. Walker -- Chairman and Chief Executive Officer
Yeah. 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, OK? 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 on to 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 five, seven, 10 years from now, when we have another downturn in transaction volumes. That's the model, and we'll stick to it.
Steve DeLaney -- Analyst
That's very helpful, Willy. I appreciate that clarity. Thanks so much.
Operator
And we'll move to our next question from Derek Sommers with Jefferies. Please go ahead.
Derek Sommers -- Analyst
Hey, good morning, everyone. I was wondering -- I think in the prior quarter, you 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 of that deal flow pulling through.
William M. Walker -- Chairman and Chief Executive Officer
Yeah, Derek. Pipeline is developing very nicely and sits -- we haven't disclosed the actual number, but it's great. And as I tried to give color, one of the -- our success in investment 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 five multifamily investment sales platform. Pipeline is very strong. And as I said in our comments, our team is doing everything right, 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 two things during this next cycle should benefit one another tremendously.
Derek Sommers -- Analyst
Got it. Very helpful color. Thank you. 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?
William M. Walker -- Chairman and Chief Executive Officer
Cool. I'll skip on the second one. On the first one, FHFA 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 of 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 toward 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 a 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 a 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.
Derek Sommers -- Analyst
Got it. Thank you. That's all for me.
Operator
We're moving to our next question from Brian Violino with Wedbush Securities. Please go ahead.
Brian Violino -- Wedbush Securities -- Analyst
Great. Thanks. Good morning. Just on escrow income, obviously, that's been a benefit over the last few years with higher short-term rates.
But just curious if you 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 will be offset by better transaction revenues, but just curious what the offset could be there and maybe the timing between the two.
Greg Florkowski -- Executive Vice President, Chief Financial Officer
Yeah, absolutely. So, simply, we have about -- depending on the time of the year, we have between $2.2 billion $2.5 billion of escrow reserves that we hold. So, a quarter point is going to be multiplied by that balance, and then you're going to just take that. Whenever 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 an annualized basis from that point forward.
Brian Violino -- Wedbush Securities -- Analyst
OK. Thanks. 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 expense base is pretty set for where you see volumes at least going in the very near term?
Greg Florkowski -- Executive Vice President, Chief Financial Officer
Absolutely. We've made sure to maintain capacity. We've got, as Willy said on his remarks, plenty of capacity with respect to our team. He gave some stats on where our investment sales team was toward 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 will be somewhat -- I don't think there will be a massive spike. So, I think we'll be able to grow into the market pretty easily from here without a lot of change there.
William M. Walker -- Chairman and Chief Executive Officer
The 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 step-down 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 and Greg talked about that as it relates to how you also have -- as escrow comes down, so does our borrowing cost and our debt.
So, those two act as a hedge against one another. And then if you're in a lower-rate environment, 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 in the escrows were basically in tandem as the hedge, and then what you pick up is increased transaction volumes.
Brian Violino -- Wedbush Securities -- Analyst
Makes sense. Thanks a lot.
Operator
And our next question is from Jade Rahmani with KBW. Please go ahead.
Jade Rahmani -- Analyst
Thank you. Just wanted to ask about the Affordable Equity business, the business that used to be known as Alliant. Just on the LIHTC outlook, what are you seeing there? And I think you alluded to the lower rate environment outlook potentially benefiting that business.
William M. Walker -- Chairman and Chief Executive Officer
A couple of things there, Jade. First of all, [Inaudible] just did not pass the bill that it 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 two 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 two years.
Jade Rahmani -- Analyst
Thank you. And then on the HUD business, that picked up meaningfully, and I know it's a high-margin business, although dollar volume is not that big. But what are your thoughts on the outlook there?
William M. Walker -- Chairman and Chief Executive Officer
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've 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 [Inaudible] to having more of those IRR loans going forward.
So, the name of the game right now, Jade, is increased D4 as well as 223(f), which is just their standard refinancing product. And our team knows that those are the two 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.
Jade Rahmani -- Analyst
Thank you.
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.
William M. Walker -- Chairman and Chief Executive Officer
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
[Operator signoff]
Duration: 0 minutes
Call participants:
Kelsey Duffey -- Senior Vice President, Investor Relations
William M. Walker -- Chairman and Chief Executive Officer
Greg Florkowski -- Executive Vice President, Chief Financial Officer
Willy Walker -- Chairman and Chief Executive Officer
Jade Rahmani -- Analyst
Steve DeLaney -- Analyst
Steve Delaney -- Analyst
Derek Sommers -- Analyst
Brian Violino -- Wedbush Securities -- Analyst
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
The Motley Fool has positions in and recommends Walker & Dunlop. The Motley Fool has a disclosure policy.
