Yahoo Finance

Gregory Florkowski

Thank you, Willy, and good morning, everyone. Despite significant volatility in the broader capital markets throughout the first quarter, W&D's transaction activity increased across most products, with the largest gains in our Fannie Mae and property sales executions, reflecting the strong fundamentals underlying the multifamily industry that Willy just described. As shown on Slide 10, growth in transaction activity drove revenue growth of 4% during the first quarter. However, due to specific increases in expenses and additions to our loan loss reserves, diluted earnings per share declined to $0.08. Adjusted EBITDA declined to $65 million and adjusted core earnings per share declined to $0.85.
During the first quarter, we incurred $10 million of expenses associated with 3 discrete decisions or events. First, we refinanced our corporate debt in March. In the process, we extinguished a portion of our outstanding term loan and wrote off a portion of the deferred issuance costs totaling $4 million. The advantages of recapitalizing our balance sheet at historically low spreads far outweighed the impact of the accelerated costs and sets us up with a balance sheet to continue investing in our business. Second, we recognized a provision for loan losses of $4 million this quarter compared to $500,000 a year ago.
The majority of that provision relates to a single loan. And while our loan portfolio continues to perform extremely well, defaults happen. Finally, we made the decision to separate several low-performing salespeople during the quarter that will cost us around $5 million during the first half of the year, with a little over $2 million expensed in the first quarter. The first quarter is typically our slowest of the year. And while the credit expense is clearly unwelcome, it is a part of our core business.
And the one-time charges for the debt offering and personnel separations are expenses we decided to take to make W&D better and stronger. With that backdrop in mind, let me now turn to segment results, starting with Capital Markets. Total revenues for the segment grew 25% to $103 million, driven by stronger revenues year-over-year across nearly every area of the segment. Of note, our research and investment banking business, Zelman, grew revenues 129% to $11 million as a result of closing several investment banking transactions during the quarter. A 10% increase in total transaction volume to $7 billion boosted origination fees, MSR income and property sales broker fees.
Fannie Mae lending volume was up significantly by 67% and total agency volumes were up 30% year-over-year, driving a $7 million or 33% year-over-year increase in non-cash MSR revenues. Capital Markets segment net income totaled $2 million, a $9 million improvement from Q1, '24 and adjusted EBITDA grew by $6 million or 31%. First quarter transaction activity showed solid growth, but not the acceleration we anticipated as deals scheduled to close late in Q1 ended up slipping into the second quarter as a result of the market volatility in the days leading up to Liberation Day. But as Willy just stated, our pipelines over the next 60 days put our capital markets team on track for a very strong second quarter. While we do not yet have clarity around tariffs or near-term monetary policy, the strength of multifamily fundamentals, the stabilization of long-term rates since Liberation Day and the competitiveness of agency capital have enabled our clients to transact.
We will react to changes that result from tariffs and resulting monetary policy, but it's clear that the investments we made over the past 2 years to add to our capital markets platform should allow us to capitalize on any market improvements this year. Our Servicing and Asset Management, or SAM segment, continues to generate strong cash revenues from our growing servicing portfolio and assets under management. Despite a 3% year-over-year increase in servicing fees off our $136 billion portfolio, total segment revenues declined 7% from Q1, '24 for a few reasons that are not unexpected. First, our investment management fees declined by $4 million or 28% due to lower capital raising and lower realizations. But this is a timing issue as both our investment management businesses were in the market in Q1 raising money, and we feel very good about revenues moving forward.
Second, placement fees and other interest income decreased by $6 million or 17% year-over-year due to the impact of a 100-basis point decline in the Fed funds rate. Our placement fees are tied directly to Fed funds, so depending on the movement in Fed funds rates, the revenues for this segment will increase or decrease depending on Federal Reserve action. As a reminder, our corporate debt expense also moves with short-term interest rates, acting as a natural hedge against lower placement fees. As well, we would expect that any reduction in the Fed funds rate would increase transaction activity as Walker & Dunlop clients decide to refinance and purchase properties. Turning to credit and our $64 billion at-risk loan portfolio.
I previously highlighted the $4 million loss reserve, which primarily related to 1 large loan default in our portfolio. Out of the nearly 3,200 loans in our at-risk portfolio, only 8 are in default as of the end of the first quarter, totaling 17 basis points of the at-risk portfolio compared to 6 loans at the end of the fourth quarter. Higher interest rates and oversupply in some markets is impacting a small number of properties, which is natural to see at this point in the cycle. Our current at-risk portfolio was underwritten to an average 61% loan-to-value at origination and a minimum debt service coverage ratio of 1.25x, reflecting the discipline in our underwriting. Turning to capital, I mentioned the debt refinancing we closed in March.
When we launched that offering, credit spreads were near historic lows, allowing us to reduce our weighted average cost of capital immediately, while simultaneously negotiating a further 25 basis point reduction in the cost of our senior secured term loan should our debt-to-EBITDA decrease below 2:1. It is currently at 2.7x. Importantly, we launched the debut bond in this unsecured market that was significantly oversubscribed. That debut bond provides us the access to a new investor base, giving us financing alternatives to support our long-term growth. One final benefit of the transaction was adding over $50 million of liquidity to the balance sheet and securing a $50 million working capital line, giving us balance sheet flexibility to support our growth objectives.
Given the strength of our balance sheet, yesterday, our Board of Directors approved a quarterly dividend of $0.67 per share, consistent with last quarter's dividend and payable to shareholders of record as of May 15. Despite lower-than-expected Q1 earnings, our goals for the year have not changed. We established annual guidance at the beginning of February, shown on Slide 14, that expected a significant increase in financing and sales activity throughout the year. And while market volatility has clearly been challenging to manage for our clients and W&D, what we are seeing from our pipelines and business makes us comfortable reiterating our annual guidance. This quarter, we are outlining goals across our business lines, so investors can benchmark our progress and clearly understand the expectations for our business lines.
As you can see on Slide 15, we have 226 bankers and brokers on our platform and our goal is for each banker and broker to originate an average of at least $200 million of transaction volume this year. Through all the volatility over the last year, we continue to invest in our platform, adding 20 salespeople across business lines, and in the process, establishing new products and entering new geographies. We expect significant contributions over the coming months and quarters from our new salespeople to help us meet our goal of increasing market share across our service and product offerings. Our valuation and Zelman teams are also expecting to grow with the goal of generating $40 million to $50 million of revenue this year, significant growth off last year when the M&A and valuation markets slowed considerably. Over the last year, we added to our core residential housing investment banking capabilities by adding advisory talent in the affordable and data and infrastructure sectors, and those teams should help contribute to growth in 2025.
Within our investment management business, we are also expecting growth. Last year, we made a leadership change in our affordable investment management business, WDAE, and our team is expected to return to raising at least $600 million of tax credit equity this year, up from $400 million in 2024. WDIP, our real estate investment management platform, is also expected to increase its capital deployment in 2025 to over $1 billion, a level we have not yet achieved since we've been in the business, but that is supported by follow-on investments in our flagship debt fund that had its first close in Q4 of last year. Finally, we are launching WD Suite next week, a web-based software that we expect will engage and attract private clients that will ultimately transact through our service lines. We expect to prove this concept in 2025 as this will be a pillar of our long-term growth goals for the private client business.
As we think about our long-term goals for private client lending, we must also expand our product offering beyond Fannie and Freddie to meet that demand, and investors should expect us to add new sources of capital to our product offering in this business. I'm excited about the goals we have to grow our business in the coming quarters and get back on offense. Willy will touch on where we are with respect to each of our goals through the first quarter and the momentum we are seeing across markets as we enter the second quarter. With a strong April behind us, I'm eager to see what our team is capable of delivering as market conditions hopefully settle down and we get back to meeting the market's need for capital and investment properties. Thank you for your time this morning.
I will now turn the call back over to Willy.

William Walker

Thank you, Greg. At the beginning of the year, we spoke about the tremendous amount of commercial real estate debt that needs to be refinanced and capital that needs to be deployed this year, and those underlying fundamentals remain intact. As Greg just outlined, our team is focused on specific business goals across the platform that will allow us to continue meeting our clients' expanding needs and deliver strong financial results in 2025 and beyond. We intend to grow market share with our largest lending partners, Fannie Mae, Freddie Mac and HUD in 2025, and we began the year by holding market share with the GSEs on a combined basis, after a strong quarter with Fannie and an okay quarter with Freddie. FHFA Director, Bill Pulte, appears to be focused on growing the GSEs and aggregating capital for a potential privatization.
While it is too soon to tell how or if the GSEs get spun out of conservatorship, what is clear today is that the teams at Fannie and Freddie are reenergized and focused on hitting their $146 billion multifamily caps in 2025. Similarly, the new HUD Secretary, Scott Turner, has already made positive changes at HUD to streamline the origination process and refocus HUD on providing additional, much-needed affordable housing in the United States. As the second largest HUD multifamily lender in the country with a scaled affordable housing platform, we are extremely well positioned to benefit from any changes to the HUD product that make it more efficient and competitive. As the housing market continues to heal and transaction volumes grow, our loan originations and properties sold per banker broker will also expand. As you can see on this slide, we ended 2024 with an average production per banker broker of $172 million, up by $35 million from 2023.
Our team has a 2025 goal of generating an average of $200 million in transaction volume per banker broker, and we have made significant investments in and cuts to our capital markets team to make sure we achieve this 2025 goal. And while the macro market clearly impacts our industry and company, we sell into a large enough market to get to these numbers. Our investment management businesses, Walker & Dunlop Affordable Equity and Walker & Dunlop Investment Partners must grow faster. WDAE had a slow start to the year due to leadership changes we implemented last year, but we just closed the largest multi-investor fund we have ever closed at $240 million at the beginning of April. We have a goal to raise $600 million in tax credit syndications in 2025, which would be 50% growth over 2024.
We are confident we have the team and addressable market to meet that goal. WDIP's newest debt fund deployed $174 million in Q1. And as transaction activity picks up throughout the year, we expect to hit our full year goal of $1 billion in capital deployment. This is a similarly large step-up in volume from 2024 of 36%. Our appraisal business, Apprise, grew appraisal revenues 50% in Q1 over last year.
We are using Apprise to turn around valuations quicker and more accurately on our own multifamily debt financing transactions and expect our valuation revenues to grow and drive positive earnings by the end of 2025. Similarly, our small balance lending team grew volumes by 28% in Q1 with 58% revenue growth. As Greg mentioned, that team is launching WD Suite next week that will drive lead generation to give us touch points with new private clients and source deal flow across this fragmented market. We've been very successful building this business and moving up in the league tables with Fannie Mae and Freddie Mac. And as we continue to scale, we need to partner with another capital provider beyond the GSEs.
This is a fundamental goal that we have set for 2025 that should allow us to expand our small balance lending volumes dramatically over the next several years. Our application of technology to both our appraisal and small balance lending businesses to make them more efficient, user-friendly and transparent will benefit both our top and bottom lines over the coming years as we apply these technological innovations across all our businesses. Our research and investment banking business, Zelman, had a great Q1 with revenues up 129%, primarily due to investment banking fees, putting the business on track to achieve its full year revenue target. As real estate transactions and investment banking activities pick up, we should see upside to revenues and margin at Zelman. As I showed at the top of the call, the macro backdrop for commercial real estate, and more specifically multifamily, are strong.
As Greg said, we have confidence in achieving our original 2025 guidance due to what we are seeing in the market today and our expectation that capital deployment and refinancing activity continues forward. The deregulatory changes at our 3 largest capital partners should benefit our ability to deploy capital, particularly given our scale with Fannie, Freddie and HUD. The Trump administration is very focused on housing. And from HUD Secretary Turner to FHFA Director Pulte, there is a keen focus on cost cutting, efficiency and deploying more capital to bring the cost of rental and single-family housing down. That is the first time I've ever written or said something like that about the federal government and their role in the housing finance industry.
Another first, as far back as I can remember, is a Treasury Secretary who is focused on treasury rates to refinance trillions of dollars of U.S. debt and also bring down the cost of borrowing to U.S. consumers. We have strong momentum across our business. And while the macro markets continue to gyrate, our Q2 pipeline is holding together nicely.
We will continue to focus on completing the Drive to '25, knowing that we have made the investments in the businesses and human capital to achieve its goals. Thank you for your time this morning. I will now turn the call over to the operator to take any questions.

Question and Answer Session

Operator

(Operator Instructions) Jade Rahmani, KBW.

Jade Rahmani

In today's current market, I know you gave an intra-quarter update as to the pipeline and volumes. But could you give any further insight in terms of what you're seeing from investors? Are they underwriting more conservative assumptions due to the macro-outlook? Are they eager to do deals to lock in rates that have started to move lower? And also, behaviorally, what are you seeing from Fannie Mae and Freddie Mac?

William Walker

Jade, nice to have you on. I would say the following. As I just mentioned, having closed 60% of our Q1 volume in the first month of Q2, we have not seen deal flow fall out due to market volatility, which, quite honestly, is a surprising statement to make, given the massive gyrations in the 10-year treasury, particularly at the beginning of April. Where we are seeing questions right now is on larger transactions, Jade, where if someone is looking at taking out a larger portfolio, the question is, do we want to launch it now or do we want to wait? And I would say I was in 2 large investment sales pitches last week, and my comment to the owners of the assets was, "Well, unless you plan on waiting 4 years to do something with these assets, you might as well go into the market today because the volatility that we have seen in the first 100 days of the Trump administration is unlikely to subside."
There are some people who think that the 90-day pause on tariffs, that once we're beyond that window, the market settle down and there will be sort of clarity in the markets.
I'm not so sure on that statement. And as a result of it, unless someone is sitting there saying, I'm just going to take a pause for the next 4 years, they're likely considering going into the market. The one other thing I would say to that degree is, as I mentioned, the 10-year moving from 4.80% at the beginning of January down to 4.17% yesterday is obviously extremely important to the commercial real estate industry. And so while tariffs clearly present a macro backdrop that is challenging for business more -- on a macro or more global view as it relates to commercial real estate, what happens to the 10-year treasury is far more determinative as it relates to volumes.

Jade Rahmani

In terms of the GSEs, do you expect them to hit their caps this year? It sounded like, in your comments, you thought that was at least a possibility. And would you care to say anything about what you think the odds are that they hit their caps?

Gregory Florkowski

I don't think I'll give you odds on that, Jade, but I will give you this. We have not seen Fannie and Freddie competing in the market like they have been for the last 2 months in 3 years. So as I -- as you saw in Q1, our Fannie volumes were up significantly, but I did point out that was off an exceedingly slow low volume in Q1 of 2024. But what we are seeing right now is that both Fannie and Freddie are very engaged in the market. Both of them are working to win deals.
And for the beginning of the year, that is a very welcome sign.

Operator

(Operator Instructions) Steve DeLaney, Citizens JMP Securities.

Steve DeLaney

Talk about non-interest expenses, and you mentioned specifically severance. It sounded like that was just a production, pruning the low performers. You did -- I didn't hear you mention that you exited any business lines, is that correct?

William Walker

We did not exit any business lines, and you're exactly right that it was the write-off of some signing bonuses and compensation expense to, if you will, get rid of underperformers.

Steve DeLaney

Understood. The last 2 years, when we look at total operating expenses, obviously, you're building a complex, fully integrated business. So we get that. You don't come in every day with the goal to have the lowest cost of operations, you come in to have the best bottom line, including growth for your shareholders. But the last 2 years, operating expenses, non-interest expenses have averaged right at 60% of total revenues.
Can you give us a sense for 2025, if we were to -- is this year going to be more expensive on that ratio of 60% or -- and at what point do you see any potential for that 60% to drop to a lower figure with a 5 handle?

William Walker

So, it should be down in -- as you know, from having covered us for as long as you have, we have always focused on having that down in the sort of 48% to 50% personnel cost as a percentage of revenues. And the fact that it is up at 60% is directly related to volumes. And so, we are very focused, as I mentioned and Greg mentioned in our call, on driving producer -- on average producer production from $170 million to $200 million per producer in 2025. You get to that, Steve, and you're going to see that number drop to that ratio. And so it really is a -- it's a production, it's a volume-focused metric, if you will.
And we have every confidence that the reason we've reiterated our guidance is because we see the volumes in 2025. We clearly did not expect the first 100 days of the Trump administration to present the challenges in the market volatility that we have seen. But the underlying theme is this, commercial real estate owner operators have run out of time on delaying refinancings, delaying the return of capital and delaying the deployment of new capital. And as a result of that, because that clock is ticking, they are now saying, "Look, I may or may not love a 4.17% 10-year, but I need to go and sell that asset to return capital, I need to buy that asset to deploy capital or I need to refinance that asset because I've gotten 2, 1-year extensions, and it's now time to just go get permanent financing put on the asset. And we are very clearly seeing that drive volumes.

Operator

(Operator Instructions) It does appear there are no further questions at this time. I will turn the conference back over to Mr. Walker for any additional or closing remarks.

William Walker

Appreciate everyone joining us this morning, appreciate all the hard work by the W&D team in Q1. I hope everyone has a great day, and thanks again.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.