Walker & Dunlop (WD) Q4 2022 Earnings Call Transcript

Walker & Dunlop (WD 1.77%)
Q4 2022 Earnings Call
Feb 21, 2023, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Kelsey Duffey

Good morning. I'm Kelsey Duffey, senior vice president of investor relations at Walker & Dunlop. And I would like to welcome you to Walker & Dunlop's fourth-quarter and full-year 2022 earnings conference call and webcast. Posting the call today is Willy Walker, Walker & Dunlop chairman and CEO, He is joined by Greg Florkowski, executive vice president and CFO.

Today's webcast is being recorded, and a replay will be available via webcast on the investor relations section of our website. This morning, we posted our earnings release and presentation to the investor relations section of our website www.walkerdunlop.com. These slides serve as a reference point for some of what Willy and Greg will touch on during the call. Please also note that we will reference the non-GAAP financial metrics, adjusted EBITDA, and adjusted core EPS during the course of this call.

Please refer to the appendix of the earnings presentation for a reconciliation of these non-GAAP financial metrics. Investors are urged to carefully read the forward-looking statements language in our earnings release. Statements made on this call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe our current expectations, and actual results may differ materially.

Walker & Dunlop is under no obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, 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.

Willy Walker -- Chairman and Chief Executive Officer

Thank you, Kelsey, and good morning, everyone. 2022 was a challenging year for the debt markets, commercial real estate industry, and Walker & Dunlop. Since going public in 2010, we have generated outstanding shareholder returns of over 800%. Yet in 2022, not only was our stock price down precipitously, but we did not achieve our annual financial targets.

While the Federal Reserve raising interest rates by 425 basis points is the direct reason for the commercial real estate financing and sales markets falling apart, we take full accountability for our 2022 performance. On this earnings call last year, we outlined significant growth for Walker & Dunlop, not knowing the extent of the dramatic -- of the Federal Reserve's tightening plan. And as the rate hikes got more consistent and significant, the commercial real estate transaction market slowed down dramatically. We closed $11.2 billion of total transaction volume in Q4, down 59% from Q4 of 2021, generating total revenues of $283 million, down 31% from Q4 of 2021.

Diluted earnings per share was $1.24, down 49% from the previous year, reflective of the dramatic deceleration in capital markets activity we saw in the back half of the year. Full-year debt financing and sales volume was $63 billion, down only 7% year over year, generating revenues of $1.3 billion, flat from 2021. Full-year diluted earnings per share was $6.36, down 22% from 2021, primarily due to significant declines in mortgage servicing rights from our Fannie Mae and HUD loan originations. The dramatic drop in MSR revenues was due to pricing with Fannie Mae and overall lending volumes with HUD.

The rising interest rate environment in Q3 and Q4 forced us to adjust pricing on our Fannie Mae loans to make deals work for our clients, which resulted in lower guarantee fees for Fannie Mae and lower servicing fees for Walker & Dunlop. To understand the magnitude of this fee compression, had our 2022 Fannie Mae loan originations been done with 2021 average servicing fees, it would have added over $2 of diluted earnings per share on the year, a 31% increase over our reported earnings per share. As the Fed slows the pace of tightening and rates stabilize, we expect servicing fees to revert to historic profitability levels. Our Q4 HUD volume of $187 million was well below budget.

And while we finished the year as the No. 2 HUD lender, $1.1 billion of loan originations was less than 50% of our annual budget expectation. HUD has plenty of capital, particularly for multifamily construction loans. But until HUD modifies their lending programs to be more market competitive, deploying their capital will continue to be challenging.

Even with the decreased profitability in Fannie and dramatically lower volumes with HUD, our scaled lending partnerships with Fannie Mae and Freddie Mac showed their value in the third and fourth quarters. Floating-rate loans were in high demand in Q4, an area of the market Freddie Mac dominates, and we closed $2.3 billion of Freddie loans, up 49% year over year. Our Freddie Mac originations totaled $6.3 billion for the year, making W&D the third-largest Freddie Mac Optigo Lender, up one position in the league tables. As I begin to talk about our Fannie Mae volumes, we're going to run a graphic produced by CoStar that shows Walker & Dunlop's incredible market share gains with Fannie Mae over the past five years.

Our Q4 volume with Fannie Mae was only $995 million due to Freddie Mac's competitiveness. Our full-year 2022 Fannie Mae volume of $10 billion brought us to 16.5% market share, an all-time high, and solidified our ranking as the No. 1 Fannie Mae DUS lender for the fourth consecutive year. Our Fannie Mae lending volumes have consistently grown, as this chart clearly demonstrates, and we have taken significant market share from the competition over the past five years.

We ended the year with combined GSE market share of 12.7%, making us the largest GSE lender in the country for 2022, something we have never done before. This scale with the two largest providers of capital to the multifamily industry will pay significant benefits to Walker & Dunlop and our clients in 2023 and beyond. As large banks, CMBS lenders, debt funds, and life insurance companies step back from the market in Q4, our capital markets team had a solid quarter, closing $4.4 billion in financing volume. While this volume was off 66% from Q4 of 2021, it was an accomplishment given overall market volatility and lack of liquidity.

On the year, our debt brokerage volume totaled $25.9 billion, a decrease of 13% from 2021 when capital was free and debt funds were lending on any asset they could find. Q4 multifamily property sales volume of $3.3 billion was similarly down 64% year over year, but $3.3 billion was still healthy volume during the quarter. Our full-year 2022 sales volume was $19.7 billion, up 2% from 2021 in a market that was off 17%. As this slide shows, on institutional-size multifamily sales W&D grew market share from 7.8% in 2021 to 10.2% in 2022.

Look at the precipitous fall with some of our largest competitors on this slide. W&D, which only entered this market in 2015, is firmly in the mix to have the largest multifamily sales platform in the country. The Mortgage Bankers Association recently released their commercial real estate finance forecast, which, as you can see on this slide, projects the 2023 multifamily financing market to decline 16% to $384 billion, and the total commercial real estate finance market to be down 15% to 684 billion. Freddie Mac's 2023 multifamily market estimate is larger at $440 billion.

A market of this size, with the GSEs playing an outsized role, presents a huge opportunity for Walker & Dunlop to grow volumes and capture market share. And looking to 2024, the MBA estimates that multifamily origination volumes grow 26% to $486 billion and total CRE originations grow 32% to $906 billion. These estimates are compelling. And just as Walker & Dunlop outperformed during the great financial crisis and COVID pandemic, our team, brand, and technology should outperform once again.

Many of our competitor firms have announced layoffs. We assume that rates stabilize in 2023 and financing and sales activities increase in the back half of the year. So, we are holding on to our entire team for the following reasons. First, we're an extremely efficient company, As you can see on the left-hand side of this slide, our revenue per employee is dramatically higher than the competition at right around $1 million per employee.

As the middle graph shows, our efficiency ratio, defined as G&A expense as a percentage of total revenues, is dramatically better than the competition. Finally, as you can see on the right-hand graph, our adjusted EBITDA margin is at the high end of the peer set by a significant margin. Second, we have licenses to access countercyclical capital from Fannie Mae, Freddie Mac, and HUD and achieve record market share with the GSEs in 2022. Third, we are exceptional with credit and only take risk on multifamily properties.

We have seen no credit degradation in our at-risk loan servicing portfolio. And with an average debt service coverage ratio of over two times and no credit risk whatsoever on office buildings nor construction loans, we feel very good from a credit perspective. Fourth, we have durable, long-term revenue streams from our $123 billion servicing portfolio and $17 billion asset manager business. Q4 servicing revenues were $77 million and topped $300 million for all of 2022.

Added to that servicing revenue was escrow income of $53 million, which started the year at $2 million in Q1 and grew to $26 million by Q4. During the fourth quarter, cash revenues from mortgage originations, property sales, servicing and asset management, and escrows drove adjusted EBITDA to $93 million, bringing full-year EBITDA to $325 million, up 5% over the previous year. The strengthened EBITDA is reflective of the business model we have built and clearly differentiates W&D from some of our more transaction-focused competitors. Finally, we are a great place to work, a designation earned for eight of the last 11 years, and have a history of zigging when others zag.

We grew during the great financial crisis, and we're the first mortgage company to go public after the great financial crisis in December of 2010. And our financial performance during the pandemic wildly outperformed, allowing us to make three major acquisitions in 2021 and 2022 that are driving our future growth today. For these five reasons, we see great opportunity for growth over the coming years, yet current market conditions require action. And as Greg will outline in a moment, we have cut costs to improve profitability.

We cut expenses, eliminated significant discretionary spending, and are not backfilling positions. And because our 2022 performance fell shy of our annual budget, we did not fully fund our bonus pool. We funded the general employee bonus pool at the highest level possible, taking into account inflationary pressures in the tight labor markets and cut the senior executive bonus pool dramatically to accomplish this. The senior executive team was eligible for 50% bonuses due to meeting targets such as adjusted EBITDA.

It only received 25% bonuses to add funding to the general pool. As I said at the beginning, our 2022 performance was unacceptable, and the senior management team is responsible and accountable for it. While the capital markets continue to evolve daily with our team in place and expectations for a more stable market in the second half of 2023, we are confident we can meet our 2023 financial goals and return to the growth that W&D investors have come to expect from us. I will now turn the call over to Greg to discuss our Q4 and full-year financial performance, along with 2023 guidance.

And then, I'll come back with how we plan to execute in 2023 and beyond. Greg.

Greg Florkowski -- Executive Vice President, Chief Financial Officer

Thank you, Willy. And good morning, everyone. Our $11.2 billion of fourth-quarter transaction volume generated total revenues of $283 million, down 31% from the same quarter last year and diluted earnings per share of $1.24, down 49% compared to last year. As a result of the challenging fourth-quarter market dynamics Willy just described and the associated impacts on our dealer-level profitability, our operating margin and return on equity remain below our target ranges at 17% and 10%, respectively.

We continue to generate durable and growing cash revenues from our servicing and asset management businesses and benefit from the variable nature of our compensation structure when transaction volumes decline. As a result, adjusted EBITDA was $93 million, down only 16% from the same quarter last year despite a 59% year-over-year decline in total transaction volumes. Notably, recent acquisitions, Alliant and Zelman, contributed $42 million in revenues this quarter and over $130 million of primarily cash revenues this year, highlighting the stability of those two businesses and the value of those recent investments. We also continue to benefit from earnings on our escrow deposits, which are tied to short-term rates, and grew dramatically throughout the year, increasing to $26 million in Q4, up from just $2 million a year ago.

Entering 2022, we were confident that our investments in people, brand, and technology, along with a strong and loyal client base and a stable interest rate environment, would allow us to continue growing revenues, diluted EPS, and adjusted EBITDA by double digits and deliver a high 20% operating margin in high teens to low 20% return on equity. Our outperformance during the first half of the year supported that confidence, but the unprecedented movements in interest rates and associated impacts on liquidity supply to commercial real estate brought on a steep decline in transaction volumes and noncash MSR margins throughout the second half of the year, and we did not meet our targets. Top-line results remained healthy with total transaction volume of $63 billion down only 7%, and total revenues of $1.3 billion flat compared to 2021. And we generated $325 million in adjusted EBITDA, up 5% over the prior year.

However, diluted earnings per share ended the year at $6.36, down 22% compared to last year. And annual return on equity and operating margin were 13% and 21%, respectively, also below our targets. As commercial real estate transaction activity fell over the last several months, we evaluated our business needs and operating model and made adjustments. During the fourth quarter, we terminated the majority of our temporary employment contracts, stopped backfilling positions, and dramatically reduced growth-related hiring.

And as a result, our headcount has steadily declined since October. We also looked closely at discretionary spending and reduced travel and entertainment, terminated several third-party service contracts, and renegotiated a handful of leases across the country. We incurred minimal charges in the fourth quarter in connection with these decisions and, in total, reduced the run rate of personnel and controlled general administrative expenses by more than $15 million. Staying on expenses, I want to spend a few minutes on another adjustment made during the fourth quarter.

As a reminder, the acquisitions of GeoPhy and Alliant were structured with our announced [Inaudible] performance milestones. To date, Alliant has achieved $36 million of its $100 million earnout, ahead of our expectations, while GeoPhy has not yet achieved any of its $205 million earnout. We are required to revalue our net liabilities quarterly. And during the fourth quarter, we recognized a net reduction of $13 million to the other expenses line item associated with these revaluations.

The Alliant team continues to perform above our expectations and is well on track to achieving the full earnout. Affordable housing in this country is front and center, and we feel very good about that acquisition and the integration of Alliant in only our first year together, and we incurred an expense of $5 million associated with the revaluation of this earnout. With respect to GeoPhy, we align the earnout milestones with the growth of two emerging businesses: small balance lending and appraisals. While those businesses grew revenues in 2022, the growth was less than our expectations when we structured the earnout because we did not anticipate the economic disruption that began last summer.

Therefore, we reduced the carrying value of the GeoPhy earnout liability by $18 million. We see opportunity for growth in 2023 as we continue to capture market share in the small balance lending and appraisal sectors. We remain focused on scaling both businesses toward our Drive to '25 objectives, which could also enable GeoPhy to achieve the full value of the earnout. We will continue to revalue both earnouts periodically and expect to make further revaluation adjustments as we draw up actual performance to our estimates over the next several years.

In 2022, we introduced segment financial results to provide further insight and transparency into our operating structure and financial performance. As shown on Slide 11, our capital market segment, which includes our transaction-related businesses -- excuse me, includes our transaction-related businesses. Transaction volumes for 2023 were down 7% compared to last year, generating $709 million of revenues, down 20%. Revenues decline more steeply than transaction volumes due primarily to tighter servicing fees on new Fannie Mae loans, causing a 33% decline in noncash MSR revenues.

Servicing fee margins on new loans remain below historical levels to start 2023. And although multifamily lending demand remains strong, particularly with the GSEs, liquidity and transaction volume supporting other asset classes face headwinds in 2023, and we face challenging year-over-year comps for the next two quarters. That said, a little more than 60% of compensation costs for this segment are variable, mitigating expected declines in transaction-related revenues. Importantly, we have established a team with a track record of executing for our clients through difficult conditions, and we believe in the long-term outlook of the commercial real estate sector.

As Willy stated, this team has captured market share and delivered immense value to our clients through unprecedented volatility. We will continue making investments to keep this team intact and remain focused on achieving our long-term Drive to '25 objectives of $65 billion of debt financing volumes and $25 billion of property sales going. Our SAM segment includes the performance of our servicing activities and asset management businesses. Turning to Slide 11.

We ended the quarter -- Slide 12. We ended the quarter with a $123 billion servicing portfolio, $17 billion of assets under management, and $2.7 billion of escrow balances, generating full-year revenues of $507 million, up 34%. With short-term rates expected to remain high, we will continue to see increases in our escrow and other interest income, which grew from $8 million in 2021 to $51 million in 2022. Given the current rate outlook, we expect to generate between $120 million and $130 million of escrow and other interest income in 2023, more than double our interest earnings in 2022.

Also included in our SAM segment is the impact of forecasted losses on our at-risk portfolio, which was a net benefit of $14 million in 2022 as we updated our loss forecasts and unwound the remaining pandemic-related reserves. Our at-risk portfolio remains incredibly healthy. We averaged less than one basis point of losses over the last three years. The average debt service coverage ratio in our portfolio is over two times, and we held only seven basis points of delinquent loans in our portfolio on December 31st.

We hold credit exposure exclusively on multifamily loans, and the asset class continues to perform exceptionally well. We will update the historical loss rate used in our loss forecast again in Q1 2023, just as we did in Q1 last year. Our loss forecast will contemplate the economic headwinds we face, but we are also updating the historical loss rate with another year of near-zero loan losses and anticipate recognizing the benefit, just as we did a year ago when we updated our loss forecast. Our corporate segment represents the corporate G&A of our business, which includes the majority of our fixed overhead expenses and our corporate debt expense.

In 2022, the corporate segment included a one-time gain recognized in the first quarter of $40 million, resulting from the GeoPhy acquisition and the tax benefit of $6 million recognized in the third quarter when we restructured our corporate organization chart and repatriated certain assets acquired from GeoPhy. These two items generated over $1 of diluted EPS and will not be repeated in 2023. One of the primary drivers of expenses within the corporate segment is interest expense on our corporate debt. And this quarter, we updated our segment reporting to allocate corporate debt expense to provide a better reflection of the performance of each segment.

This year, interest expense totaled $34 million, up $8 million in 2021 -- up from $8 million in 2021 due to an increase in debt to support acquisition of Alliant and the dramatic increases in short-term rates over the last year. In January, we increased the size of our term loan by $200 million to $795 million and used $116 million of the proceeds to pay down debt assumed in the Alliant acquisition. A slightly higher debt balance and a full year of higher short-term rates will result in continued growth in interest expense in 2023. However, we raised roughly $80 million of strategic capital from the debt upsize and eliminated roughly $25 million in mandatory annual principal paydowns by paying off the Alliant debt, creating greater capital flexibility.

Importantly, as shown on Slide 13, our debt-to-adjusted-EBITDA ratio at December 31st was 2.2 times, and the $120 million $130 million of escrow and other interest income expected from our escrow balances in 2023 more than offset the increased cost of borrowing. As we look ahead to 2023, we don't have a crystal ball, but we are planning for short-term rates to remain at or above current levels all year. Consequently, we are managing our business with the expectation that transaction activity in the first half of this year will be slower than the same period last year but return to growth in the second half of the year. We are planning for servicing fees on new Fannie Mae lending to remain below historical levels until late in 2023.

Under this scenario, we expect diluted EPS to be flat in 2023 as the onetime acquisition-related revenues I mentioned earlier are replaced with higher cash-driven servicing and escrow revenues. That, in turn, will drive our ability to deliver double-digit growth in adjusted EBITDA this year. We also expect operating margins to remain in the low 20% range and ROE to remain in the low teens until transaction activity and servicing fees on new loans normalize. As we integrated recent acquisitions this year and dealt with the impacts of an unprecedented, evolving macroeconomic environment, we felt that the core performance of Walker & Dunlop's business model was being overshadowed.

Therefore, we are introducing a new metric called adjusted core EPS, which better reflects the operating performance of our business by eliminating large swings that can occur from noncash MSR revenues and expenses and one-time acquisition-related revenues and earnout revaluation adjustments. As shown on Slide 15, adjusted core EPS eliminates differences between actual and estimated credit losses, removes the impacts of both amortization and depreciation in non-cash MSR revenues, and removes the impact of earnout and other acquisition-related revenues and expenses. Also included on the slide is a look back at the trend on the adjusted core EPS over the last three years. Although adjusted core EPS fell just over 10% in 2022, that decline was largely driven by the overall decline in transaction volumes and related revenues.

For 2023, we expect to grow adjusted core EPS by double digits, largely on the continued growth in servicing and asset management, and escrow-related revenues. We will continue to share updates and guidance on this metric in the coming quarters and years as we think it provides investors with a transparent view into the overall health of our business. Turning briefly to capital allocation. In 2023, we ended the year with $226 million of cash before closing our debt refinance in January.

Our cash always decreased seasonally in the first quarter as we pay annual subjective and performance-related bonuses and settle our annual tax liabilities. Our business will continue to generate strong cash flow in 2023, and we have the financial flexibility to prioritize investing capital back into the business closely with returning capital to shareholders. Yesterday, our board of directors approved a quarterly dividend of $0.63 per share, a 5% increase, and authorized a $75 million share repurchase program. This is our fifth annual dividend increase since we initiated the dividend in February 2018 at $0.25 per share and represents a cumulative increase of 152% over the last five years.

Our outlook for 2023 and expected double-digit growth in adjusted EBITDA gives us confidence to increase the dividend yet again while still retaining capital to support the business. We enter 2023 with conviction that we have the right team in place and a brand that continues to gain market share. We are focused on leveraging technology to create operating efficiencies and scale emerging businesses for the long term. We also have an experienced management team that has dealt with market disruptions and recessions and not only prevailed but grown.

Our business model is diversified due to the strategic investments we made over the past few years and durable due to our servicing portfolio that has steadily grown over time. [Inaudible] cost management, combined with our steady cash flow generation, will allow us to weather the current storm and emerge poised for growth. Most importantly, we remain focused on investing in our business to achieve our long-term Drive to '25 objectives and delivering returns for our shareholders. Thank you for joining us this morning and for your continued confidence in Walker & Dunlop.

I'll now turn the call back over to Willy.

Willy Walker -- Chairman and Chief Executive Officer

Thank you, Greg. Rarely, if ever, has forecasting for our business in the broader economy been more challenging. On one hand, multifamily fundamentals are extremely strong. The public multifamily REITs, who have already reported, showed solid growth in rents and compressing cap rates to start the year.

With over 80% of Walker & Dunlop revenues coming from the multifamily industry and 100% of our credit risk being on multifamily properties, we feel great about our market positioning. And is the largest GSE lender in the country, we feel extremely good about our access to capital to meet our clients' borrowing needs. And yet, after watching the Federal Reserve's successive 75-basis-point rate hikes in the back half of 2022 literally cease the financing and sales markets, it's exceedingly difficult to predict when transaction volumes will return to a normalized pace. There are plenty of data points that give us optimism.

At the National Multifamily Housing Council's annual conference in Las Vegas three weeks ago, the topic of discussion was when interest rates and cap rates stabilize to allow investors to transact again and not distress. One of Walker & Dunlop's largest warehouse lenders, a SIFI bank, that halted all CRE lending in the back half of 2022 just offered to expand the size of our warehouse line and asked us to take down our unused capacity. And most of the lenders at the Mortgage Bankers Association annual conference last week were looking to lend more on commercial real estate in 2023 than they did in 2022. And finally, the Federal Reserve's 25-basis-point rate hike earlier this month was well received by the market and prompted an uptick in transaction volumes.

Yet clarity on whether the Fed raises two or three more times and by how much is keeping plenty of investors on the sidelines until they know the cap rate they are buying or financing they are using is properly priced. So, we keep focusing at Walker & Dunlop on the things we control, meeting our clients' needs, investing in new businesses and technology, minding our expenses, and maintaining an extraordinary team of professionals. And due to the strength of our business model and recurring revenues, we can afford to do this to further extend our competitive advantage in the marketplace. We are still confident in achieving our five-year strategic plan called the Drive to '25, Hitting the $65 billion debt financing goal will be challenging.

We will either need to significantly outperform the market with the team we have in place today, as we have a track record of doing, or add to our team through acquisitions, as we also have a track record of doing. To put numbers to this, to achieve our $65 billion target, we will need to grow originations at a 14% compound annual growth rate over the next three years, which is significantly lower than our 10-year compound annual growth rate of 20%. Our property sales volume target is $25 billion. And having just sold under $20 billion last year, we are very confident in achieving this target.

Our investment sales team expanded volumes by 2% in a market that contracted by 17% last year. And this exceptional team has the opportunity to not only exceed our 2025 goal, but expand into other asset classes such as industrial, retail, office, and hospitality sales. And all of this growth, whether in multifamily or new asset classes, will drive incremental debt and equity financing to Walker & Dunlop. Our servicing portfolio will grow to over $160 billion if we achieve our debt financing goals.

And our asset management business already exceeds its Drive to '25 goal of $10 billion. Revisiting the SAM segment slide Greg just walked through, both servicing and asset management showed tremendous value in 2022 and will continue to do so going forward. It is thanks to W&D's business model and the growth of our servicing and asset manager businesses that we had annual transaction volumes fall 7% and yet held revenues flat and saw a 5% growth in EBITDA. Beyond our scaled financing, property sales, servicing and asset management businesses, we continue to invest in our emerging businesses and technology.

Our proprietary loan database, Galaxy, is uncovering data-driven financing and sales opportunities that our competition isn't finding. And our technology-enabled small balance lending and appraisal businesses continue to gain market share and will begin contributing meaningful revenues at higher margins over the next three years. Exactly as we did with our debt and property brokerage businesses, we will scale small balance lending and appraisals to over $100 million in annual revenues, with both being primarily powered by technology. Finally, our investments in Zelman, Alliant, and GeoPhy are driving growth in new areas.

Zelman's research is extremely sticky and exceeded its annual budget in 2022. Alliant also exceeded its annual budget, drove significant growth in Walker & Dunlop's affordable lending business, and helped us recruit an exceptional, affordable sales team. And while the GeoPhy earnout is focused on the growth and profitability of our small balance lending and appraisal businesses, having the technological capabilities of GeoPhy inside W&D is transforming technology across the company. 2022 was a challenging year, and I'm extremely proud of the customer service, execution, and teamwork at W&D.

And yet, even in the context of the Fed raising rates by 425 basis points and the markets easing, W&D held revenues flat, grew adjusted EBITDA by 5%, and gained significant market share in both financing and sales. These are huge accomplishments, thanks to our team and business model. 2023 will certainly have its share of challenges, but W&D does well when things get hard. Our culture shines.

Our business model shows its strength. Our access to countercyclical capital becomes a bigger competitive advantage. And our ability to invest in our people, brand, and technology drives us forward while the competition steps back. Money has value once again.

And as the markets adjust to the new cost of capital and asset values, Walker & Dunlop will be there to help our clients and continue growing. Many thanks to everyone for your time this morning. I will now turn the call over to Kelsey to open the line for any questions.

Kelsey Duffey

The line is now open for questions. [Operator instructions] Our first question is coming from Jade Rahmani of KBW. Jade.

Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst

Hi. Can you hear me?

Willy Walker -- Chairman and Chief Executive Officer

We can, Jade.

Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst

Hey. How's it going?

Willy Walker -- Chairman and Chief Executive Officer

Great.

Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst

Thanks so much for your comments. Just on the Fannie Mae side, that was one of the main variances to the downside versus our estimate. Can you comment on the outlook for that business line in particular? Historically, W&D had extremely strong market share with Fannie Mae, a very high-quality track record with the company. And I know that in my conversations with the industry, the GSEs are very focused on mission-driven housing -- affordable housing.

So, where does W&D business model fit within that? And are you confident that Fannie Mae originations, in particular, will pick up as we move later in the year? Thank you.

Willy Walker -- Chairman and Chief Executive Officer

Sure, Jade. Well, as I hope that slide that we put up there that CoStar produced, it's a pretty dramatic slide as it relates to the growth in W&D's volumes with Fannie Mae over the last five years, as not only we moved into the No. 1 position, but then we moved further to the right and gained a lot of volume while a lot of our competitor firms moved to the left and, in some instances, fell off the chart. The agencies are there to provide liquidity when the market dislocates, which is where we are today.

And they are doing that. And so, from an overall volume standpoint, I don't think we have any doubt that we will continue to be at the very top of the league tables and continue to do a tremendous amount of volume with Fannie Mae. As Greg and I both underscored, servicing fees have been under pressure due to pricing in the market. It is our very strong conviction that when rates stabilize and cap rates stabilize, we can get back to historic pricing on servicing fees.

But until we get back to that moment, every deal in a rising rate environment is going to be under pressure from a pricing standpoint. And therefore, we are going to be under pressure to reducing those fees just as Fannie is reducing their g-fee to be able to win business. The final piece is the focus on affordability and mission. If you look in the Fannie Mae press release that announced that Walker & Dunlop was the largest DUS lender in 2022, it also breaks out in that press release the various, if you will, subgroups of affordable housing, manufactured housing, seniors housing, LIHTC housing, etc., etc.

And as you look at those league tables, you can see very clearly, Jade, that Walker & Dunlop is right there as it relates to the specialty products and being high in the league tables of Fannie Mae on those areas of the business that are mission-driven and are very important to them hitting their scorecard. And the final piece I'd say is we've only had Alliant inside of Walker & Dunlop for a year. Alliant had an exceptional year in 2022, and Greg underscored their financial performance in his comments. Our continued growth in the affordable housing space as a tax credit syndicator, as a lender of debt, as an equity raiser, and then deployer is super, super helpful to us growing and having, if you will, the synergies between our core existing business pre-Alliant acquisition to where we are today post-Alliant acquisition and integration.

Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst

Great. So, just to confirm, it sounds like you don't have any concerns in terms of a shift going on at Fannie Mae with respect to their focus on affordable that is -- that has a negative impact on W&D.

Willy Walker -- Chairman and Chief Executive Officer

No.

Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst

Great. Second question would be the credit performance. I mean, it's astonishing to me how good the performance is. You noted average debt service coverage ratio and the risk sharing both at over two times, I think that, even defaulted loans, which are very, very minimal, decreased.

So, what are you seeing on the credit side? And specifically, as multifamily loans come up for repayment, especially floating-rate loans, what do you expect to happen? And could this even be an opportunity to extend servicing on those loans as they come up for maturity?

Willy Walker -- Chairman and Chief Executive Officer

So, Jade, as I've heard you ask in a couple other investor -- excuse me, a couple other earnings calls so far this cycle, there is very clearly an issue with floating-rate financing and, in particular, people who need to fund escrow accounts for new caps that need to go in place on those floating-rate loans. There are a couple of things to keep in mind as it relates specifically to Walker & Dunlop. The first thing is that we do not carry any risk on CLOs, period, end of statement. We have no risk on CLOs.

The second thing is that our Freddie Mac business and our Freddie Mac servicing book carries no risk to Walker & Dunlop. And so, while Freddie Mac has been the predominant floating rate lender in the multifamily space, as I underscored, given our Q4 volume with Freddie Mac and our lower volume with Fannie Mae, we don't take risk on those Freddie Mac loans. The [Inaudible] buyers on those loans are the ones who carry the risk on those floating-rate loans. Does it provide an opportunity for Walker & Dunlop to step in and help our clients in refinancing those deals, trying to potentially negotiate with the master servicers some type of relief from a cap cost expense standpoint? Very much so.

And as you can imagine, we're doing that daily. But as it relates to credit risk to Walker & Dunlop, we don't carry credit risk on those floating-rate Freddie Mac loans. And then, I'd say the final thing is, as a company that emerged from being a small, privately held, family owned company to the company we are today, credit has always been at the center of everything we do at Walker & Dunlop. When I joined Walker & Dunlop, if we had one loan go bad, it could have bankrupted the company.

As a result of that, that very deep focus on credit has paid incredible dividends as we've scaled this business to be much, much bigger to the point where, quite honestly, we can "afford" to take more losses, but we don't because of that credit underwriting discipline. And David Levy, who's our chief credit officer, I've got incredible confidence in David and his entire underwriting team. And so, we feel extremely good right now from a credit perspective, particularly, Jade, given the underlying fundamentals of multifamily. While the transaction volume has fallen off precipitously, given where rates have gone and waiting for adjustment to cap rates for people to allow to reenter the market, as I said in the beginning of my comments, all the publicly traded multifamily REITs who've reported so far are showing fantastic rent growth and compressing cap rates starting 2023.

And so, the fundamentals of multifamily are holding up very well, and that plays into the strength of our fixed-rate Fannie Mae loan servicing portfolio.

Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst

Thank you very. Much.

Willy Walker -- Chairman and Chief Executive Officer

Yep.

Kelsey Duffey

Thank you, Jade. Our next question comes from Jay McCanless at Wedbush Securities. Jay.

Jay McCanless -- Wedbush Securities -- Analyst

Hey, good morning, everyone. Thank you for taking my questions. If we could start with the adjusted earnings calculation. And, Greg, please correct me where I'm wrong on this, but it looks like the change from the way you were expressing it in the third quarter of '22 to now, looks like you just took stock comp out of it and made a change to the tax adjustment.

Am I reading that correctly?

Greg Florkowski -- Executive Vice President, Chief Financial Officer

For the most part. And we're also fully including all of the revaluation adjustments as well, Jay, which we haven't included in the past, particularly the fourth-quarter adjustment to the earnouts. So, there's a slight change from that.

Jay McCanless -- Wedbush Securities -- Analyst

But I mean, high level, why exclude the stock comp? I would think that's something that since it's a non-cash expense, typically, something you want to take out to show true operating earnings.

Greg Florkowski -- Executive Vice President, Chief Financial Officer

Yeah, I think we're not necessarily trying to make it a cash metric, Jay, but something that just gives you a better sense of sort of the core performance of the platform, and the stock comp is a part -- a meaningful part of our compensation plan for most of our key executives and senior management. And we feel like it's an important expense to include because it is what retains people. So, we don't want to -- we think that's an important adjustment for EBITDA but not necessarily for the new core adjusted EPS metric.

Jay McCanless -- Wedbush Securities -- Analyst

OK. Got you. And then, I guess the second question on GeoPhy. Is it more a competitive issue with everyone trying to do more small balance lending right now, Willy? Or was it really a demand issue from the potential borrowers?

Willy Walker -- Chairman and Chief Executive Officer

So, Jay, I'd say there are a couple of things there. First of all, we have been somewhat capital constrained in the box that the agencies have been willing to lend on because there are some requirements in the SBL space as it relates to the number of properties owned that make it so that lending to a new borrower in the SBL space has been somewhat challenging with the agencies. We raised outside capital to be able to meet that need and then had our capital partner in that joint venture basically said that they didn't want to do lending in the back half of the year. And so, that sort of took that source of capital off to the side.

They have now come back and said that they're ready to go and rolling up their sleeves and saying, let's put money to work. And we also have, if you will, increased momentum with the agencies in our SBL space. I have to tell you there are very few pieces to our business that I have as much excitement and confidence around as our SBL lending space. And the reason for that, to be kind of direct and blunt, in all of our businesses, it's a very, very competitive landscape.

But this SBL space is dominated by the big money center banks. And as I've said to our team multiple times, if we can't beat the big money center banks from a focused client service and execution standpoint -- I mean, that's what Walker & Dunlop has built itself on. You look at the league table that we showed there as it relates to our Fannie Mae volumes and how we've just moved up and moved up. Those are some pretty big brands that we jumped over.

Those are some pretty big brands that we've continued to outperform against. And so, SBL just gives us another, if you will, bite at the apple to go after some of these large behemoth firms that really aren't focused in this space and start to take share. And then, the final thing, I'd say there were a couple upstart companies in that space, one of which was sold to a regional bank, so, I kind of discount them as being a competitive force anymore. And then, there are only a few other entrepreneurial companies and that we have to really compete with to win market share.

And we feel very good about that sort of head-to-head battle.

Jay McCanless -- Wedbush Securities -- Analyst

Great. Thank you. And then, I guess my next question. I know you talked about it in the prepared remarks that your confidence around adjusted EBITDA gives you the confidence to raise the dividend.

But being, I don't know, skeptical, I would say, of what rates are going to do this year, it just seems like maybe seems premature to raise the dividend at this point. Maybe you can talk about that and kind of the bull-bear around making that decision.

Willy Walker -- Chairman and Chief Executive Officer

I don't -- let's just put it this way. We had a very good discussion at our board meeting, but given our overall financial performance, the natural hedge that we have from our escrows against increasing interest expense and the cash that the servicing portfolio, as well as the asset management portfolio, kick off, we feel extremely good as it relates to our cash-generating capabilities. And as a result of that, rather than raising the dividend 10%, as we've done quite consistently, the board decided to go with a 5% dividend increase but felt very good and very confident in doing that.

Jay McCanless -- Wedbush Securities -- Analyst

Great. Thank you. And then, my last question. You know, we've seen a lot of rate volatility between January '23 and February '23.

I guess, could you talk a little bit about what volumes look like in January directionally, and then, what you've seen so far in February? And have you seen some people getting more hesitant, clients getting more hesitant about entering transactions just given some of the volatility we've already had this year?

Willy Walker -- Chairman and Chief Executive Officer

It's actually the opposite. If you look at -- I mean, we were at NMHC and I was meeting with one of the agencies, and I said, you know, "How you feeling about hitting your cap this year?" And they're like, "Well, you know, for the first and second week of the year, our inflows were nothing." So, if they continue at that level, you know, they were $700 million a week for the first two weeks of the year, we won't hit our cap. But we had 4.3 billion of inflows last week. And so, if they continue at that rate, boy, we will have to manage to our cap.

The year started off slow, as it typically does. But also, coming off of six months of very limited transaction volume, as our numbers in the overall market volumes would tell you, the market has started to gain momentum. But as Greg and I both underscore and as you can imagine, we were editing our comments up until yesterday afternoon to try and give investors as insightful a view on the market as we possibly can. Just over the last week, we've added a lot to our pipeline.

But, you know, you add to the pipeline today and it's a March or April deal. And so, what we're seeing is the market build. We just had a client call us up and say they want to go do a new facility with us because they want to have dry powder, they see the market coming back. We love getting phone calls like that, but you're not going to base a quarter on one facility that you're doing for a fantastic historic client.

So, I would only say that we -- as I said in my prepared remarks, Jay, we're seeing plenty of signs for optimism. And at the same time, we're going from a market that basically shut down to a market that is gaining its legs. And as you accurately say, with the Fed doing the 25-basis-point raise, we said, hey, maybe they do one more and things stabilize, and off we go. And then, Jerome Powell, as he has done consistently, said, don't get too excited that I'm out of this market, I'm going to keep raising.

And so, it's that kind of push-pull that is making it so that, first of all, we have to be very, very, if you will, conservative in our estimates about what we potentially can do. And then, the second thing is that there are clients who are transacting. And I think one of the biggest issues here that I continue to kind of scratch my head on is, in 2022, in the first half of the year, there wasn't a single borrower or investor who Walker & Dunlop worked with who is concerned about either buying an asset at the tightest cap rate they'd ever bought at or financing at an interest rate that was the lowest interest rate they've ever borrowed at. And then, all of a sudden, now, everyone is waiting to not look like a fool.

Everyone's sitting there, going, no, I got to make sure that I don't buy at a cap rate that isn't perfectly priced. And I got to make sure my financing cost isn't too high because I think that rates are going to rally again. It's very interesting the psychology of the market right now that everyone's waiting sort of for somebody else to step in and do something in a major way to then dive in. But that was the theme at NMHC.

The theme at NMHC was the moment the dam breaks and somebody goes and makes a major stake saying they think the market is turned, the floodgates will open and the capital will come back.

Jay McCanless -- Wedbush Securities -- Analyst

Great, great detail. Thank you, Willy. Appreciate it.

Willy Walker -- Chairman and Chief Executive Officer

Sure.

Kelsey Duffey

We have no further questions at this time. So, I will now turn the call back to Willy for closing remarks.

Willy Walker -- Chairman and Chief Executive Officer

Thank you, everyone, for joining us this morning. And thank you to the W&D team, and, as well, thanks to the earnings team for pulling all this together as effectively and professionally as you always do. I hope everyone has a great day and I appreciate you all joining us this morning. Thanks.

Duration: 0 minutes

Call participants:

Kelsey Duffey

Willy Walker -- Chairman and Chief Executive Officer

Greg Florkowski -- Executive Vice President, Chief Financial Officer

Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

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