Q3 2023 Walker & Dunlop Inc Earnings Call
Participants
Gregory A. Florkowski; Executive VP & CFO; Walker & Dunlop, Inc.
Kelsey Duffey; SVP of IR; Walker & Dunlop, Inc.
William Mallory Walker; Chairman & CEO; Walker & Dunlop, Inc.
Jade Joseph Rahmani; MD; Keefe, Bruyette, & Woods, Inc., Research Division
Jay McCanless; SVP of Equity Research; Wedbush Securities Inc., Research Division
Kyle Joseph; Equity Analyst; Jefferies LLC, Research Division
Steven Cole Delaney; MD, Director of Mortgage & Real Estate Finance Research & Equity Research Analyst; JMP Securities LLC, Research Division
Presentation
Operator
Good day, and welcome to the Third Quarter 2023 Walker & Dunlop, Incorporated Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kelsey Duffey, Senior Vice President of Investor Relations. Please go ahead, ma'am.
Kelsey Duffey
Thank you, Melinda. Good morning, everyone. Thank you for joining Walker & Dunlop's Third Quarter 2023 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 note, during the call, that we will reference a non-GAAP financial metric, adjusted EBITDA and adjusted core EPS. 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 under no obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, and 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 Mallory Walker
Thank you, Kelsey, and good morning, everyone. I'd like to start this call, as I have several Walker webcasts, highlighting the trauma and concern that many of our Jewish colleagues and clients have experienced since the Hamas terrorist attacks on Israel. These are exceptionally challenging times, with great concern for the state of Israel, its people and the Palestinians caught in the war on Hamas. We continue to support our colleagues and clients in any in all ways we can. As well, there is no place in a free society for discrimination or antisemitic behavior, and we must be vigilant in stopping it out anywhere it arises.
When I joined Walker & Dunlop in 2003, I looked at the consistent revenues generated by the company's $4 billion loan servicing portfolio and said to myself, "More of that." And for the past 20 years, we have added $125 billion of servicing and $17 billion of assets under management to generate large sums of recurring revenue flow that allow us to continue investing in our people, brand and technology throughout cycles.
Part and parcel of building scaled servicing and asset management businesses was to ensure our credit risk in those portfolios was minimal due to the conservative underwriting and taking credit risk solely on multifamily properties. And that strategy has worked, resulting in negligible credit defaults, allowing us to fully benefit from our servicing and asset management cash flows. We do not control the macro environment that has increased rates dramatically and turn the commercial real estate market on its head. We do, however, control building a sustainable business for all cycles and managing through those cycles.
As investors in W&D now, we benchmark our growth and success against the bold, highly-ambitious 5-year strategic plans we develop and pursue. And while our financial performance over the past 2 years of the Drive to '25 has not met our own high expectations, we remain committed to that strategy.
If you benchmark our business model and financial performance against our peers, as Slide #3 shows, our revenues this quarter and year-to-date have fallen more significantly than our peers due to the relative scale of our capital markets businesses. As transaction volumes recover, so will W&D's revenues. But as you can also see on this slide, these 6 direct competitors have watched year-to-date adjusted earnings and adjusted EBITDA fall by an average of 53% and 49% respectively, while W&D's adjusted core earnings are up only 26% and EBITDA only 9%. This is super-important, for it underscores the strength and margin of our recurring revenue businesses and the cost-cutting measures we have implemented this year.
As this slide shows, W&D's revenues fell 15% in Q3. Our financing and sales pipelines were robust entering the quarter, and we were optimistic that transaction volumes were recovering off dramatically lower volumes in Q1 and Q2. Yet, as the 10-year treasury rose precipitously, our pipeline of acquisitions and refinancing deteriorated, bringing total transaction volumes down 49% from Q3 of 2022 to $8.6 billion, slightly higher than our Q2 volume, resulting in total revenues of $269 million.
Diluted earnings per share declined 54% to $0.64 per share, yet adjusted core EPS, which strips out noncash mortgage servicing rights, and adjusted EBITDA were down 21% and 1%, respectively. Notably, adjusted EBITDA has continued to grow throughout this year from $68 million in Q1 to $71 million in Q2 to $74 million in Q3. This is the company we built to provide us with durable recurring revenue streams with limited credit exposure to allow us to continue investing in our people, brand and technology throughout cycles.
The multifamily acquisitions market picked up slightly in the third quarter, and our team closed $2.5 billion of property sales, down 50% year-over-year but up 67% from the second quarter, significantly outperforming the overall U.S. multifamily property sales market, which grew only 7% quarter-over-quarter.
Fannie Mae and Freddie Mac have deployed only $74 billion, or 50%, of their $150 billion annual multifamily lending caps through 3 quarters of the year. They are well behind. But they aren't losing deal flow to other capital sources. There simply hasn't been demand for their capital in such a dislocated market. Regardless of the path of rates over the next 12 months, it is our expectation that the wait-and-see attitude of most owners in 2023 transitions into a I-must-move market in 2024, given the amount of dry powder that needs to be deployed and the volume of loans that will need to be refinanced or sold. Multifamily loan maturities, which totaled only $75 billion in 2023, increased 73% to $129 billion next year. Those loans must be refinanced or properties sold regardless of what happens to interest rates.
W&D is the largest GSE lender, third largest multifamily lender and sixth largest provider of capital in the commercial real estate industry in the United States. We are focused on and must capitalize on our brand and scale as financing and sales volumes return over the coming years.
Debt brokerage volume declined 52% year-over-year to $3.1 billion in Q3, in line with our Q2 volumes. The non-multifamily acquisitions and financing markets have been very challenged in 2023, yet our team is finding capital and solutions for our clients, reflected in 21%, or over $1 billion of our Q3 debt financing volume being on office, retail, hospitality and industrial assets. As a reminder, Walker & Dunlop takes no credit risk on any of our non-multifamily financing activity.
We continue to see market share growth in our technology-enabled businesses of small-balance lending and appraisals. Our market share with Fannie Mae in small-balance lending has grown from 7% last year to over 10% in 2023, and the same with Freddie Mac, up from 10% last year to 14% in 2023. And it's not just top line growth. We are delivering deals to Freddie Mac 12% more efficiently than the competition with 100% approval rate year-to-date. And we are seeing similar achievements in our appraisal business, generating appraisals more efficiently than the competition and growing market share from 6% in Q3 of 2022 to 11% in Q3 of 2023. It is our long-term strategy to take the technology investments in small-balance lending and appraisals and apply them to our scaled, large loan and property sales businesses.
Our asset management and servicing businesses add a tremendous amount of financial strength to our company. We are in the process of raising 2 new funds through Walker & Dunlop Investment Partners and have significant institutional commitments for 2 separate accounts, one focused on first trust lending and the other preferred equity. What we are seeing in this challenging fundraising environment is that investors value Walker & Dunlop's access to deal flow and banker-broker distribution network. As deals get harder and traditional sources of capital move in and out of the market, having capital Walker & Dunlop controls is becoming increasingly valuable and strategic. While these deals we are completing today are technically challenging, in many instances they are critical to our clients' success and deepen our long-term business partnerships.
I will now turn the call over to Greg to talk through our financials in more details. Greg?
Gregory A. Florkowski
Thank you, Willy, and good morning, everyone. As Willy just described, the stability and momentum of the capital markets this summer were quickly halted as the 10-year Treasury has rapidly increased, causing a continuation of the challenging and volatile market conditions that have persisted since the Fed began tightening monetary conditions last year. As a result, commercial real estate transaction activity remained at levels consistent with last quarter, and our Q3 '23 transaction volume was down 49% compared to the same quarter last year, but generally in line with the second quarter of 2023.
Diluted earnings per share, operating margin and return on equity continue to be negatively affected by the impacts of lower transaction volumes. However, our business continues to generate healthy cash flows due to the strength and scale of our servicing and asset management platform. As a result, adjusted core EPS, a metric we introduced this year to help investors better understand our core financial performance, held up well at $1.11 per share, down only 21% compared to the same quarter last year, while adjusted EBITDA was down only 1% to $74 million.
A look at our segment performance further illustrates the counterbalance of our business model, the Servicing and Asset Management segment, or SAM, includes our servicing activities and asset management businesses, both of which produced stable recurring revenues. As Willy just discussed, the SAM segment has grown significantly over the past several years. And as shown on Slide #7, segment revenues are up 15% over the same quarter last year to $148 million, while net income for the segment is up 47%.
Revenues for the SAM segment are tied to long-term servicing and asset management contracts that are not impacted by the capital markets instability. Importantly, segment revenues are primarily cash-driven and high-margin, given the scale of our platform. The operating margin for this segment was 41% this quarter, up from 31% in the year-ago quarter, and adjusted EBITDA for the segment grew 17% to $125 million.
Our capital markets segment continues to feel the impact of limited market-wide transaction activity. As a reminder, Q3 2022 was the final quarter of somewhat normal market activity before transaction volumes began a steady descent around Labor Day last year. As shown on Slide #8, Q3 2023 total transaction volume was down 49% year-over-year, but total revenues for the capital markets segment were down less, only 38% to $118 million.
During the quarter, we saw a slight improvement in our gain on sale margins. Servicing fees on new Fannie Mae loans remained below historical norms again this quarter, as they have since the tightening cycle began due to the loan pricing dynamics in a rapidly rising interest rate environment, and we are not expecting that to change any time soon. Q3 adjusted EBITDA for the capital markets segment was a loss of $16 million compared to positive $1.3 million in the third quarter of last year.
For the first 3 quarters of the year, transaction activity appears to have settled into an elongated bottom, and the financial results of this segment are under pressure due to the persistent negative conditions in the market. The durability of our cash flows, though, allows us to be on the offensive while the market cycles through this downturn. Over the last several months, we brought on sales talent in Southern California, New York and Atlanta to enhance our existing presence in those markets. We are proactively retaining our team and rethinking business processes to position ourselves to gain scale and market share when the cycle inevitably turns.
Given the current macroeconomic conditions, we're keeping a close eye on the credit quality within our at-risk servicing portfolio, and it remains terrific again this quarter. During the quarter, we settled a fully reserved loss on the last remaining defaulted loan in our portfolio, a default that occurred in 2019. That charge-off reduced adjusted EBITDA and adjusted core EPS by $2 million but had no impact on GAAP earnings this quarter because the default occurred 4 years ago. At September 30, there are 0 defaulted loans in the at-risk portfolio, which includes nearly 3,000 loans, exceptional performance at this point in the cycle and a further reflection of what Willy highlighted a moment ago about building our servicing and asset management portfolios on a foundation of responsible credit.
We only take risk on multifamily loans. That's not to say there are not issues in the market today, as uncapped floating rate loans or forced (ph) maturities in a rising rate environment are causing weakness and pushing some loans to default in the multifamily sector, but those issues are not as concerning for us today. Only 9% of our at-risk portfolio is floating rate debt, and every loan must maintain an interest rate cap.
As for forced maturities in a rising rate environment, only $3.2 billion of our at-risk portfolio matures over the next 24 months, and the median year of origination for those loans was 2015. That's only 5.5% of our at-risk portfolio maturing during the next 2 years. And with the median year of origination in 2015, there has been plenty of NOI growth to support refinancing the vast majority of those loans. Finally, the weighted average debt-to-service coverage ratio of our portfolio remains over 2x, consistent with the end of last year.
In short, the credit fundamentals of our at-risk multifamily portfolio continued to hold up exceptionally well, and we feel very comfortable that our current loss reserves will cover challenges that may arise within the portfolio.
Turning back to our consolidated results on a year-to-date basis. As shown on Slide #11, our total transaction volume is down 55%, while total revenues are down only 20% due to the stability of servicing and asset management revenues. Diluted earnings per share for the first 3 quarters of the year is down 56% to $2.25 per share, while operating margin is 13% and return on equity is 6%. Adjusted core EPS reduces the volatility of our GAAP earnings by eliminating the large swings that can occur from noncash revenues and expenses. And year-to-date, adjusted core EPS is down only 26% to $3.25 per share. Finally, adjusted EBITDA has held up extremely well in 2023, down just 9% year-over-year, demonstrating the stability of our business model from recurring revenues.
Our financial results reflect the commercial real estate market that has struggled to digest rapid tightening of monetary policy and liquidity and the associated impacts on the cost of capital and asset values. Throughout the year, we have seen glimpses of stabilization only to be faced with a new piece of news that leads to renewed volatility and pressure on transaction activity.
The transactions market is cycling. And while we are looking for opportunities within that cycle, as Willy will touch on in a moment, we are also positioning our balance sheet and operations to withstand an elongated cycle. At the start of the year, we raised about $80 million through an incremental term loan, and our term loan is priced attractively at a blended cost of 250 basis points over SOFR and does not mature for another 5 years. We also laid out a plan at the start of the year to reduce our controllable costs by at least $15 million. And year-to-date, we have exceeded our goal and saved almost $16 million and now expect to realize $20 million of savings year-on-year.
We also reduced our headcount in April, creating annualized personnel-related savings of $25 million, and the third quarter is the first to reflect the full benefit of that action. Those steps, along with the recurring cash flows from our servicing and asset management businesses, have not only stabilized our financial results in this challenging market but enabled us to increase our cash position to $236 million at the end of the quarter. We remain focused on building our liquidity. But given the strength of our cash flow and our capital position, our Board of Directors approved a quarterly dividend of $0.63 per share yesterday, payable to shareholders of record as of November 24, 2023.
On our last call, we were optimistic about the market and our pipeline as the cost of capital and asset values were stabilizing entering the second half of the year. We anticipated those stable conditions would support further improvement in transaction activity and, in turn, our ability to deliver financial results at the low end of our guidance range for 2023. However, by mid-August, conditions quickly changed, and the 10-year Treasury increased to its highest point in 16 years. Although rates improved last week, we do not expect rates or transaction activity to stabilize again before the end of the year and do not anticipate a meaningful increase in transaction activity in the fourth quarter. Consequently, our full-year financial results will fall below the low end of our guidance range as our fourth quarter financial metrics are likely to fall within a range consistent with the first 3 quarters.
Our performance this year has given me even more confidence in the investments we made to build this business since going public and the durability of our business model and associated cash flows. Walker and Dunlop's focus on multifamily, one of the best performing commercial real estate asset classes, our size and ability to move quickly to take advantage of market opportunities or make difficult cost-cutting decisions like we did earlier this year, and the strong cash flow that our business will continue to generate regardless of the level of transaction activity, all make Walker & Dunlop a great company to invest in today but, more importantly, a great company to invest in for the long-term. When the market recovers, we are positioned to grow quickly and dramatically, as has been our track record since going public.
Thank you for your time this morning. I will now turn the call back over to Willy.
William Mallory Walker
Thank you, Greg. We are at the end of an exceedingly challenging year for our industry; yet, as I mentioned at the top of the call, W&Ds financial performance versus the competition is strong.
So what do we see, going forward, and how do we take advantage of our market position, exceptional team, brand and technology investments? With multifamily maturity volumes increasing 73% from 2023 to 2024, there is a large refinancing market to address in the coming year. There is also another $202 billion of non-multifamily commercial loans maturing next year. And as banks continue to increase provisions for potential loan losses, it is our continued assumption that the bank pullback will increase the need for debt brokerage services to other sources of capital.
The loan maturities numbers I just mentioned are what is known. Those loans must be refinanced in 2024 regardless of interest rates. What is unknown is what happens to the rest of the market depending on short- and long-term rate movements. But here are some of our thoughts. If rates increase another 100 to 150 basis points, the distress that has emerged in the market during 2023 will increase, potentially dramatically. This scenario would lead to an increase in nonperforming loans, distress sales and expensive forced refinancings. In this scenario, we would expect GSE and HUD Capital to dominate the multifamily financing market, investment sales to be predominantly on distressed properties, and our fund business to provide significant rescue and opportunistic capital to the market.
If rates remain at their current levels, it is our expectation that the wait-and-see market of 2023 turns into the I've-got-to-move market of 2024. We'd expect cap rates to adjust closer to the cost of financing. And with rate stability, we would expect financing and sales volumes to increase from 2023. Finally, if rates drop, we'd expect a significant uptick in annual financing and sales volumes.
We obviously have no idea which rate scenario will play out in '24, but we have the team and services to help our clients under any scenario. Over the next 2 years, maturities in our own risk portfolio comprise just 1% of the total multifamily loans maturing, so our team is focused on winning every piece of business we can from the competition. During the third quarter, 74% of our refinancing activity was on new loans to Walker & Dunlop's servicing portfolio, reflecting the people, brand and technology that differentiate our platform.
In our last earnings call, I ran through the Drive to '25 and how we could achieve our goals in today's market environment. And while the macro environment has not improved since that call, we remain focused on achieving the Drive to '25 and executing on the underlying strategy.
As Greg mentioned, we continue to invest in our banking and brokerage teams and are adding talent when and where possible to achieve our goal of $65 billion of debt financing and $25 billion of property sales volume by 2025. The expansion of our affordable housing capabilities with the acquisition of tax credit syndicator Alliant Capital in 2021 is an enormous addressable market with fantastic growth drivers that will fuel additional growth in our core debt and sales businesses.
Our asset management business, which I mentioned is generating over $110 million of annual revenues only 5 years after we entered it, presents great growth opportunities in distressed and stable markets. And our technology investments in GeoPhy and Enodo, are transforming our small-balance lending and appraisal businesses and showing great promise for growth in those 2 business lines as well as the opportunity to accelerate growth and reduce costs in our scaled, large loan and property sales businesses. And the underlying goal of the Drive to '25 is $2 billion in revenues and $13 per share of earnings. While those numbers feel far off, given our current financial performance, we know we have the team and services to achieve them, and we will continue pursuing the Drive to '25 until we do.
The Walker Webcast, which just celebrated its 10 millionth view on YouTube, has grown and extended the Walker & Dunlop brand in ways we never imagined. Along with 10 million views on YouTube, the webcast is ranked in the top 1.5% of global business podcasts, meaning that we are in the ears and minds of our clients on a consistent basis.
I want to end by saying these are challenging times for many of our industry and for some of our clients. It is our responsibility to provide our clients with the very best counsel, capital and execution capabilities possible, and we have built this company to do just that.
As the financial metrics I showed at the top of the call demonstrate, our management team built a business and has managed through these challenging markets as well or better than any competitor firm. That takes discipline, that takes focus, and that takes execution each and every day. I want to thank our team for all they do. I also want to thank our investors for their continued confidence in Walker & Dunlop. And I want to thank all of you for joining us on this call today and for your continued interest in our company.
With that, I'd like to ask the operator to open the call for any questions.
Question and Answer Session
Operator
(Operator Instructions) And we take our first question from Jade Rahmani with KBW.
Jade Joseph Rahmani
Thank you very much. I want to start off with a question around the industry and some news this week. It was reported that a multifamily broker had some issues with loan documentation and other things, specifically with Freddie Mac. In addition, there is some chatter that, as a result, the GSEs are cracking down on deals involving this (ph) broker. Can you please comment on how, if at all, this impacts W&D if you (inaudible) outside third-party brokers and overall how you see this issue?
William Mallory Walker
So first of all, I have only read what you have read. So there have been articles about Freddie Mac stopping accepting loans from a brokerage firm, which sends loans through a number of Optigo lenders into Freddie Mac, and that they can no longer submit loans. The aftermath of that, so I don't know anything further about the investigation and what has come out as it relates to that brokerage firm. It's very clear, though, that both Fannie Mae and Freddie Mac sent out notes this week, putting, if you will, new restrictions or oversight on any loan that has been brokered into either a Fannie Mae DUS lender or a Freddie Mac Optigo lender.
The implications to W&D are minimal. We take less than 10% of our deal flow through brokers. We used to be all broker-based and, over the last 15 years or so, have built out our direct sales force. And so over 90% of our loans are originated by bankers and brokers at Walker & Dunlop and will not be subject to that additional scrutiny or oversight by Fannie and Freddie.
Some of our competitor firms, as you know, Jade, receive a very large volume of their deal flow through both broker networks and, in some instances, through JV partners who do not have agency licenses. And so I would imagine that that change in the pre-review on the Fannie Mae side, particularly all brokered loans will go through, will slow down deal flow and make it a little bit more challenging for brokered loans to get underwritten and closed.
Jade Joseph Rahmani
So although it's early to say, might this be an opportunity for W&D to gain market share and further secure its standing with the GSEs, particularly perhaps with Freddie Mac?
William Mallory Walker
I would say, look, we're always focused on that, Jade. I would say in the New York area, where the subject firm is based, presents a very significant opportunity because they have sent significant deal flow through competitor firms of Walker & Dunlop. And so our team in New York should have an opportunity to increase volumes.
And then the only other thing I would say on that is that, as you well know, the New York market has been a market that the agencies haven't done that much lending in. But if you think about Signature Bank no longer being there, New York Community Bank having gotten a lot of brokered loans from the subject firm, you would think that there will be a pullback from bank capital. And if the agencies can get their arms around the underwriting characteristics of New York, there'd be the opportunity increase volumes.
Jade Joseph Rahmani
Turning to multifamily more broadly, just trying to parse your remarks. I guess 2 related questions. First would be on interest rate outlook. Considering the magnitude of debt issuance that the federal government has to undertake to finance itself as well as replace maturities, let's say the outlook for the 10-year is to remain here and maybe up to 5.5%. However, if the Fed is done, there could be less volatility in fixed income and, therefore, the spread being applied to commercial real estate loans might have an opportunity to narrow. Do you think that alone would be enough to spur an increase in transaction volumes? That would be number one.
And number two would just be, with respect to multifamily credit performance, clearly, W&D's credit performance is pristine. But with respect to your comments about if this lasts longer than expected, do you anticipate any distress to emerge in multifamily?
William Mallory Walker
So Jade, clearly, as it relates to rates, no clue. We shall see how that plays out. I will, just as an anecdote, say that we had a Board and senior executive off-site 2 days ago, and I went through the various scenarios and asked for a show of hands. No hand went up when we said rates go up. A lot of hands, almost everyone's hand went up when we said rates stay relatively the same in a band of sort of 4.15 to 5, and 2 hands went up when we said the rates would be cut.
So I think that that's one little poll of our senior executive team and Board. Take from that whatever you want to play into it. But obviously, nobody in that room has any real insight.
The other thing that I would say to that is it's not so much the spread on the cost of financing. As you know, spreads on agency paper have been very tight throughout 2023. That just says that investors like the relative spread you can get from buying agency paper over just buying a 10-year bond or a 2-year bond.
The real spread that is going to drive market activity is the spread between cap rates and interest rates. And as we saw in September and October, the spread between cap rates and interest rates blew out as rates rose. So it's very clear that commercial real estate is driven by the 10-year Treasury, not by the Fed funds rate. 2/3 of commercial real estate debt is fixed rate debt. Therefore, it's going off of a Treasury. It's not going off of SOFR.
So as the 10-year moved and blew out, that spread between multifamily cap rates and the cost of financing got to a spread that was too wide for any buyer to say, I'll go buy that asset, put negative leverage on it at 100 to 150 basis points and, due to rent growth and potential cap rate compression over my hold period, I'm going to get a good return on that buy. And so that's what froze (ph) the market, that movement in the 10-year and cap rates being in the high 4s, low 5s.
So until that spread between the cost of financing and cap rates closes and so then the question would be rates come down, you can get deal volume coming back. Cap rates move up, you're getting significant value destruction in the market. But once you get that leveling, if you will, you can get transaction volumes coming back. That calculation, if you will, that recalibration of cap rates to interest rates has historically taken about a quarter. So what you need to have happen, which we have not happened in any quarter through 2023, is rates destabilize and cap rates to then move according to where rates are.
And so if you play that out for 2024, if you were to get rates stabilizing somewhere between a 4.15% and a 5% 10-year Treasury, you could then get cap rate movement to make it so that the acquisitions market is pricing assets at either slight negative leverage or potentially positive leverage depending on how far cap rates move, and that's when you're going to get transaction volumes on the sales side coming back and, clearly, the commensurate refinancing volumes that would come from an acquisitions market.
Operator
(Operator Instructions) we go to the line of Kyle Joseph with Jefferies.
Kyle Joseph
Just wanted to go back to the agencies. Obviously, they've been utilizing less than their cap. That sounds like that's a lack of demand, not a lack of desire to put capital to work there. I think, based on my math, they've been easing roughly 2/3 of their cap year-to-date. How does that compare to historical levels? And given the kind of outlook for refi activity to improve into '24, would you anticipate the GSEs moving back towards their cap rates?
William Mallory Walker
So Kyle, how it compares to previous times -- unfortunately, I'm old enough to remember all this stuff specifically -- if you think about the Great Financial Crisis when all other capital providers moved out of the market, Fannie and Freddie and HUD stepped into the market, and their volumes and percentage market share went up significantly. But we were in a decreasing rate environment, which meant that everybody who had a property that they wanted to either refinance or go buy, and there wasn't a lot of acquisition activity during the GFC, particularly 2008, 2009, they had capital and Fannie and Freddie particularly were able to deploy. They didn't have caps back then, but they deployed significant volumes of capital.
Fast-forward to the pandemic. The exact same thing happened. Pandemic, other capital sources moved out of the market, Fannie and Freddie moved into the market and volumes went up. You may recall that Walker & Dunlop was the largest multifamily lender in the United States in 2020. That was due to J. P. Morgan and Wells Fargo, the 2 ahead of us in the lead tables, stepping out of the market, and Walker & Dunlop stepped in with Agency capital.
The difference this time is that we are in a raising rate environment. Therefore, all of those refinancings that happened in 2020 when rates went down and happened in 2009 when rates went down are not coming for refinancing in this market. And then you have, as I just described to Jade, a drying up of acquisition activity based on that gap between the cost of financing and where cap rates are on a lagging basis. So what you have set up is the agencies should be the dominant source of capital in the market today; except in a raising rate environment, there just isn't that much demand for their capital.
So now go to 2024. First of all, we are talking extensively, we and the industry, with the regulator to keep Fannie and Freddie's caps at their current $75 billion level for each one of them, or $150 billion combined, thinking that volumes will go up in '24 as we get hopefully rate stabilization. That's point one. We don't know what the regulator will do, but it's our hope that the regulator says, look, '24 will be a higher volume year than '23. Let's leave them with the capacity that they had this year, even though they won't use all of it.
The second thing is that refinancing number that I put forth to you, only $75 billion of multifamily loans matured in '23. That number steps up precipitously in '24. Those deals must get done. So the agencies are positioned well to do those loans. And the issue there is how much of them are refinanced and how many of them hit the wall, which then requires potentially either a foreclosure on the loan, a sale of the property, or some other type of structured deal rather than just a straight-out first trust refinancing.
And then the final thing is, if you get any kind of stability where cap rates move, as I said in my comments, there's a lot of dry powder sitting on the sidelines waiting to get into this market. The issue with it is a lot of that capital is waiting for distress, and the distress just hasn't shown up in '23. So if distress starts to come in '24 and there is the opportunity for people to start deploying that capital, you would be able to put on new loans at lower bases in the properties when people move in to try and take advantage of a distressed market, should it arrive.
Final thing I would say that Greg underscored is just that we have a very, very low volume of loans maturing in 2024 as well as in 2025. So what that means for us is it's great from a credit standpoint at Walker & Dunlop. We don't have a lot of opportunities, if you will, for loans to hit the wall because of poor performance and because of high refi volumes. The challenge, as I underscored in my comments, is to go out and find those loans. And in Q3, 74% of the refinancings that we did at Walker & Dunlop were loans that we got from competitor firms and finance for Walker & Dillon. That's the opportunity for us into '24 and '25.
Kyle Joseph
And then just one quick follow-up. I mean, obviously, you guys have done a phenomenal job growing your servicing portfolio. But given we're, call it, 7 months out from Silly Valley and more rumblings of bank capital requirements on MSRs, is that a bigger opportunity in your mind now, or potentially do you accelerate growth there? Particularly we've been hearing a lot on banks stepping away from the resi MSR side of things, but just wanted to get your perspective more on the commercial side.
William Mallory Walker
So the growth of the servicing portfolio is all related to the growth in origination volumes. If you look at what we're originating as it relates to quarterly origination volumes at these lower levels, which Greg just walked through, if we're in a band of doing $8 billion to $10 billion of total transaction volume on a quarterly basis, Greg's number was we've only got $3.8 billion in our at-risk portfolio rolling off in the next 2 years. So you will continue to add loans and MSRs to the servicing portfolio. But significant growth in the servicing portfolio was going to come when those quarterly volumes move from 8% to 10%, to 10% to 12%, from 12% to 16%, and from 16% to 20%.
And the exciting part for us is we know that's going to happen. The question is when. I think one of the things that as CEO of this great firm I have a lot of confidence in is we don't have to be in the lab trying to figure out how to design the iPhone 16 to get people to go buy the next generation of technology. We don't have that problem. We know that we have the bankers and brokers, brand and services at Walker & Dunlop that, when demand comes back into the market, we will be able to meet that demand. We have the people. We have the services. And so, really, it's a matter of keeping the team focused, doing every piece of business we can now. But we know, as we saw in 2010 and '11 and '12 after the GFC, when the market heals and those cap rates and interest rates come together to a point where the market starts to transact, we are going to be positioned exceptionally well.
Operator
Our next question comes from the line of Steve Delaney with JMP Securities.
Steven Cole Delaney
Willy, thanks for your clear and candid comments this morning, I think appropriate for the market we're in.
The thing that was most interesting to me was the kind of creative idea that you're thinking about 2 new funds that you would raise, and I assume with partners, asset management partners, you mentioned pref and debt. Could you just comment about those maybe a little more? I'm not sure you're at the point right now you can mention who your partners might be, but anything you could add on that? And then I have one follow-up related to that.
William Mallory Walker
Yes, Steve. As I think you can appreciate, because we are in the fundraising mode, I have to be very careful as it relates to, quote-unquote, "promoting those funds." And so I can't really go much deeper into exactly what part of the market they're focused on. The outline I put into our script was, as you can imagine, heavily scrutinized by our lawyers to make sure that I was in no way promoting the funds.
But what I would underscore is this, not speaking specifically to the funds. As I said, what we have seen is that our access to deal flow through our banker-broker relationships with the market is very attractive from an investor's perspective. And unlike some of our competitor firms who have incredible brands and the ability to raise volumes much higher than Walker & Dunlop would ever contemplate on the asset management side, all of that deal flow is being brokered into them, and they are being bid off against other investors, other people with capital. The fact that we have access to the clients makes it so that we can find the deals quicker and in many instances are not being, if you will, bid off against other capital sources because we're coming in with what you would deem sort of rescue capital. And so that's an important piece to the value proposition at Walker & Dunlop.
Steven Cole Delaney
Interesting. And Jade and I and others cover a group of 25 commercial mortgage REITs, if you can believe it's that many. And obviously, while they're not multifamily-focused, they probably should have been more. But I think the same characteristics apply everywhere. What we are seeing is kind of a loan-to-own strategy or a need for these companies, on their 5 ratings, risk ratings, a lot of 5s, right? And they've already put in big reserves.
To me, there seems to be this amazing opportunity to step in and actually buy loans with sort of a loan-to-own strategy. And we're seeing that play out, but I don't sense that it's really institutionalized yet, but there's an awful lot of public data in their decks. They've just been reporting in the last few days. So it just strikes me that there's this tremendous opportunity for opportunistic external capital to come into those situations. And heck, if we're seeing what we're seeing just in 25 little commercial mortgage REITs, the opportunity within the commercial banks has to be multiples of that.
So I applaud what you're doing. The market needs what you and your partners are focused on. I can assure you that.
William Mallory Walker
The one thing that I would say on that, Steve, so that you and Jade and others on this call know our thinking about it, we see the exact opportunity that you're talking about. The one thing that I would put forth is that the reason we sit so well today is because we haven't been the type of investor to say let's either use our own balance sheet or our own capital to go take 100% of the risk on making that bet on that deal, that asset, that opportunity. And so what investors should expect at Walker & Dunlop is to raise funds with other people's capital, do co-investments to then meet our clients' needs, and that will drive increased deal flow at Walker & Dunlop and will create additional asset management fees.
But we are not the ones to look at 2024 and say massive opportunity, go all-in and take the commensurate risk with that. It's not the way we built the company, and we're not going to go off of that more conservative risk strategy even though we see exactly the same opportunities you just identified. Totally understood. You're going to use OPM and earn your fees and be paid for your expertise.
Operator
(Operator Instructions) We'll go next to Jay McCanless with Wedbush.
Jay McCanless
So my first question is if in that rate environment range that you talked about, Willy, if rates are stable, does that potentially help HUD origination volume going into next year make up for some of the loss business you guys haven't been able to get this year?
William Mallory Walker
I would hope so, Jay. Let me dive into that question a little bit deeper. Our HUD origination volumes, which have come down quite significantly over the past 2 years, are due to 2 significant factors. And I want to underscore, we know we are not holding up in that space, and we need to. Our team knows it. We know it. We have lost market share in the HUD space, and we need to gain that market share back.
The reason we have lost market share, the first is the reason for a very strong 2021 HUD print was that we were doing a lot of interest rate reduction loans. So as we were in that low rate environment, we were going back to our historic borrowers and redoing those loans with lower interest rates, and that drove a lot of volume for our 2021 HUD originations.
In both '21 and '22, the other large component of our HUD volume was construction loans. We are the largest HUD D4 construction lender in the country. We have the very best HUD D4 construction team in the country, and that was a big component to our HUD volumes in '21 and '22. I don't need to tell you that construction lending has gone through the floor in 2023 due to costs, due to rates, and due to a sense of oversupply in many of the high-growth markets. So what we have is a market in '23 that dislocated on our 2 biggest products, IRRs and D4s.
So we have an exceptional team. What we need to focus on is more of the standard refinancing market, which is called 223(f). We need to get volume out of 223(f) refinancings in HUD. We will see that construction pipeline continue to both hold in place and grow. There are a lot of investors today, Jay, that are looking at the market and saying, multifamily starts in 2022 were around 550,000. Multifamily starts in 2023, I have heard people talking about dropping down to 450,000 given the backlog and the starts that went into the ground this year. I've also heard people bring that number down lower than that to a 350,000 number. But what is projected for 2024 is only 250,000 units.
That lack of supply that is starting in '23 and '24 will present a fantastic new delivery market for '25 and '26. So what you should see is those developers who have the capability and have a good piece of property in an underserved market to put shovels into the ground in '24 and '25 and deliver into great markets in '25 and '26. So I would expect us to see HUD D4 volumes increase in 2024. But that's the reason we fell down in the lead tables in '23, and we and our team are extremely focused on getting those numbers up in '24.
Jay McCanless
You're not the only management team we've heard talking about looking past what happens in '24, maybe '25, for a better market in '25 and '26. Is that part of the reason that you think there is going to be kind of a reset in '24 as people start to evaluate, look at those new opportunities? Because it sounds like you have, and the management team has a pretty high degree of optimism in terms of volumes getting better in '24. And I guess is that just a function of what you know is coming from a refinance standpoint? Or do you believe you're going to be able to take market share in certain areas to grow those volumes?
William Mallory Walker
I want to be really clear. We started '23 with optimism that rates would stabilize and volumes would come back, and neither thing has happened. So I do not want to be misinterpreted as saying that we think that volumes are going up in 2024. We are right now planning for a redo of '23 in '24. We go above that, fantastic. We're very focused on it, and that refi number I put out there should drive an increase in volumes in '24. But we've got a war in Europe. We've got a war in Israel. We've got a threatening China and Taiwan. We've got a presidential election, and we've got a fiscal problem in Washington of printing more Treasuries than the market can absorb that all could have significant factors on the 2024 market.
I'd love to see all of those things go away. And I'd also love to see us have some type of leadership in Washington that said that we're not going to be having Janet Yellen issue $1 trillion of debt every quarter.
The nice part of that is that there is actual focus on that now. The nice part of that is that whomever becomes President in the United States in November of next year is going to know that the fiscal outlook for the United States government must change. But, unfortunately, we have 2 people right now as the 2 candidates that look like they're going to be the nominees of the Republican and Democratic parties, that neither one of them have shown any interest at any time in focusing on that issue.
So what I want to be really clear is the dynamics of the commercial real estate industry would tell you that you should, in a stable rate environment, have volumes go up in '24, but you're also talking to a company and to a management team that has gone through a '23 where, every time we thought we were going to get stability, stability did not appear.
The final thing to it is commercial real estate is a slow rolling industry. Greg talked in his comments about us resolving a loan that defaulted in 2019 in 2023. So I think one of the other things is you watch CNBC in the morning and everyone's talking about office (ph) or this and that; and back in May and July, everyone sitting there saying this is going to come crashing down on bank balance sheets. This is going to be a massive, massive issue.
This is a slow rolling problem. Banks have plenty of capital to deal with this, as I have said for a very long period of time. This is an earnings issue for banks. It's not a capital issue for banks.
The same thing is going to happen in commercial real estate, where '23 has been a wait-and-see market. It is our expectation that '24 is I've-got-to-go market. People start to move. But there are a lot of factors that will play into whether '24 becomes I've-got-to-go market from a wait-and-see market.
Jay McCanless
Maybe turning to Alliant for a minute, continue to see good numbers there. I guess maybe what's your thinking about for that part of the business for '24? Is there anything positive or negatively we need to be thinking about as we model ahead?
William Mallory Walker
I mean, first of all, the Alliant acquisition has been a home run of an acquisition, couldn't be happier with the company, couldn't be happier with the management team, and couldn't be happier to what it's done to Walker & Dunlop strategically in the affordable housing space.
The second thing is that the tax credit syndication market, the amount of tax credits being allocated in the federal budget, there are many, many, many governors, senators from across the country who the #1 issue on their minds is affordable housing and housing affordability. And so figuring out how LIHTC, Low-Income Housing Tax Credits and HAP contracts that come out of HUD all play into the affordable housing equation, and the ability to supply more affordable housing is a very, very important issue for '24 '25, '26. We are extremely well-positioned there.
And I think that, given the breadth of the Walker & Dunlop platform, our ability to increasingly grow the size of our funds that we are raising around our tax credit business is very present.
And the second thing is the dynamics of that market have very strong growth drivers over the next several years because, if you look at where supply has come into the multifamily market, it is coming at the high end, not at the bottom end or in the middle of the market. And so there is still dramatic growth drivers in the affordable housing space, and we feel extremely well-positioned with Alliant to take advantage of that.
Operator
We'll return to the line of Jade Rahmani with KBW.
Jade Joseph Rahmani
I wanted to ask about the W&D platform and its relative size. Where do you see the greatest growth opportunities? Would it be in small balance and affordable housing? Do you see CPACE as a meaningful opportunity? Or is it on the asset management side, raising those funds, perhaps pursuing M&A there?
William Mallory Walker
So Jade, it's a very appropriate question. We just ran through exactly that with our Board and management team at our annual strategic offsite. The tangible addressable market in multifamily is enormous. And even though Walker & Dunlop is the largest agency lender in the country, the third largest multifamily lender in the country, and the sixth largest provider of capital in the commercial real estate industry; which all, if you think about who we compete with in those markets and us having those rankings, is pretty great. Of the total multifamily revenues on an annual basis, I think the number that came out of the strategic offsite was less than 2% of total revenues out of the tangible addressable market in multifamily. The largest area that we play in today as it relates to annual revenue opportunity is in the asset management space. And as you know, relative to other asset managers in multifamily, we are tiny.
So we clearly see great growth drivers in the asset management business. But the other piece to it is, if you think about the team that we have in place and our rankings, when transaction volumes come back, we're like a bow and arrow that is loaded, ready to explode in the sense that we have the team, we have the brand, we have the client relationships.
And so one of the great things as it relates to overall growth for us is, I mean, you think about our investment sales team. We have added to our investment sales team since they did $20 billion of investment sales in 2022. So that team that we have on the field can easily expand from $20 billion to $25 billion to $30 billion when and if the market comes back.
So I feel extremely good as it relates to overall growth drivers of the existing businesses we're in, but then we have the opportunity to scale in some areas of the market that have extremely large tangible addressable markets where we, today, are very small, like small-balance lending, like asset management, like appraisals.
Operator
And that was our final question for today. I'll turn the floor back over to Willy Walker for any additional or closing remarks.
William Mallory Walker
I want to thank all of the analysts on the call today for their questions and coverage of W&D. Thanks again to our team for all you do every single day. And thanks to everyone who listened in on the call today. Appreciate your interest in Walker & Dunlop, and I wish everyone a fantastic day. Thank you.
Operator
Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.
