Walker & Dunlop, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. Walker & Dunlop provides commercial real estate financing and services, primarily for multifamily properties. It originates, sells and services loans through Fannie Mae, Freddie Mac and HUD programs; also brokers loans and offers interim lending and investment sales brokerage. This filing reports the three months ended March 31, 2017, compared with Q1 2016, and balance-sheet amounts at March 31, 2017, compared with December 31, 2016. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total revenue | $158.5 | $94.2; up 68% |
| Operating income | $56.1 | $24.2; up 132% |
| Operating margin | 35% | 26% |
| Walker & Dunlop net income | $43.2 | $15.5; up 180% |
| Diluted EPS | $1.35 | $0.50 |
| Adjusted EBITDA (non-GAAP) | $50.3 | $32.4; up 55% |
| Operating cash flow | $644.1 | $1,965.3 |
| Cash, restricted cash and pledged securities | $147.0 | $213.5 at Dec. 31, 2016 |
| Total assets / total equity | $2,481.5 / $648.2 | $3,052.4 / $615.1 at Dec. 31, 2016 |
| Warehouse notes payable | $1,406.5 | $1,990.2 at Dec. 31, 2016 |
| Corporate note payable | $164.1 | $164.2 at Dec. 31, 2016 |
Loan origination volume rose 92% to $4.73 billion; investment sales volume increased to $286.7 million from $157.0 million. Gains from mortgage banking activities grew 108% to $96.4 million, while servicing fees rose 31% to $41.5 million. The servicing portfolio reached $64.4 billion, up from $63.1 billion at year-end.
Cash flow from operations was strongly affected by the timing and volume of loan originations and sales. The company reported $653.7 million of net cash receipts from loan origination activity in Q1 2017, versus $2.0 billion in Q1 2016. Investing cash flow was negative $110.9 million, including $91.0 million of net investment in loans held for investment and $15.0 million paid for acquisitions. Financing cash flow was negative $599.7 million, principally reflecting net warehouse debt repayments and $17.5 million of share repurchases and withholding-related share purchases.
Material changes and significant items
- Revenue and earnings growth reflected higher origination volume, a more favorable product mix, and a larger servicing portfolio. Fannie Mae and HUD loans, described as higher-margin products, represented 44% of originations versus 36% a year earlier.
- Expenses increased 46% to $102.4 million. Personnel expense rose 64% to $56.2 million, reflecting commissions, higher headcount, bonuses and performance-based stock compensation. Amortization and depreciation increased 29% to $32.3 million, largely with MSR growth.
- Mortgage servicing rights (MSRs) were carried at $562.5 million; estimated fair value was $698.2 million. A 100-basis-point increase in the discount rate would reduce estimated MSR fair value by about $22.2 million, a sensitivity rather than a forecast.
- In January, the company acquired Deerwood Real Estate Capital assets and assumed certain liabilities for $28.2 million of total consideration, including contingent consideration; the acquisition added $27.3 million of goodwill. The filing reports $15.0 million of cash paid for acquisitions during the quarter.
- In Q2 2017, after the reporting date, the company formed a joint venture in which it owns 15%. The venture is expected to originate substantially all loans meeting the Interim Program criteria going forward; the company expects equity-method accounting.
Outlook, risks and contingencies
Management described multifamily market fundamentals as strong and cited high occupancy and rents, low delinquencies, elevated loan maturities and continued borrower demand. It reported no formal earnings guidance. Management expected the GSEs to retain a significant market role, but noted uncertainty around future FHFA production limits and the effect of further interest-rate increases. The filing notes that short-term rates rose faster than longer-term rates, compressing the net spread on loans held for sale; management expected pressure to continue if the yield curve flattened further.
- Warehouse facilities totaled $3.595 billion in stated capacity, with approximately $1.408 billion outstanding. The company said it was in compliance with debt covenants. One Agency facility had a June 2017 maturity; subsequent Q2 extensions and expected amendments are described in the filing.
- Fannie Mae DUS risk-sharing had a stated maximum quantifiable contingent exposure of $5.2 billion; the filing emphasizes this is a severe hypothetical, not expected loss. The risk-sharing allowance was $3.5 million, and no at-risk loans were 60+ days delinquent at quarter-end.
- The company expected to fund $61.0 million of additional DUS restricted liquidity over 48 months, assuming no further portfolio paydowns, prepayments or defaults. It also had $13.9 million of preferred-equity commitments not yet funded, expected by year-end 2017.
- The company reported $65.0 million of operational liquidity at its operating subsidiary against a $26.8 million requirement, and net worth of $513.8 million against a $137.1 million minimum.
- Rate sensitivity includes an estimated $13.8 million annual earnings increase from a 100-basis-point LIBOR rise on escrow balances, partly offset by an estimated $2.6 million annual reduction in net warehouse interest income and $1.6 million reduction from corporate debt costs.
- Management reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls. Results may fluctuate with origination volumes, interest rates, regulations, competition and market conditions.
Important facts for investors to verify
- Whether elevated loan origination volumes and the unusually strong quarterly earnings are sustainable, including the contribution of non-cash MSR gains and stock-based tax benefits.
- MSR valuation assumptions, prepayment behavior and the sensitivity of earnings and equity to discount-rate changes.
- Renewal and extension of warehouse facilities, available borrowing capacity, and liquidity needs as loan volumes and DUS collateral requirements evolve.
- Actual credit performance and loss exposure in the DUS risk-sharing portfolio and interim loans, alongside the distinction between stated maximum exposure and expected losses.
- The economics, funding and origination transition associated with the new Interim Program joint venture, and the performance and contingent payments related to the Deerwood acquisition.