Walker & Dunlop, Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Unless noted otherwise, financial figures below are in U.S. dollars.
Business context
Walker & Dunlop is a commercial real estate finance and services company focused primarily on multifamily lending. It originates, sells and services loans through Fannie Mae, Freddie Mac and HUD/Ginnie Mae programs; brokers loans for institutional lenders; makes interim loans that it holds on its balance sheet; and provides multifamily investment sales brokerage. It retains servicing rights on nearly all Agency loans it originates. The company ranked as the second-largest Fannie Mae DUS lender and third-largest Freddie Mac seller/servicer in 2016.
Financial performance and key metrics
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $575.3 million | $468.2 million | +23% |
| Income from operations | $185.8 million | $135.4 million | +37% |
| Walker & Dunlop net income | $113.9 million | $82.1 million | +39% |
| Diluted EPS | $3.65 | $2.65 | +38% |
| Operating margin | 32% | 29% | +3 percentage points |
| Return on equity | 21% | 19% | +2 percentage points |
| Adjusted EBITDA, non-GAAP | $129.9 million | $124.3 million | +5% |
Revenue growth was led by gains from mortgage banking activities, up 26% to $367.2 million, and servicing fees, up 23% to $140.9 million. Higher personnel expense and amortization and depreciation partly offset that growth. The credit-loss provision was a $0.6 million benefit in 2016, compared with a $1.6 million expense in 2015. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, gains attributable to mortgage servicing rights; the company cautions that it is not free cash flow.
Fourth quarter: Revenue was $178.4 million versus $121.4 million in Q4 2015; operating income was $61.2 million versus $33.9 million; net income was $36.8 million versus $20.4 million; and diluted EPS was $1.16 versus $0.67. Q4 2016 transaction volume was $6.26 billion.
Volumes and servicing: Loan originations totaled $16.72 billion, up 3% from 2015; total transaction volume, including investment sales, was $19.30 billion. Agency mix shifted toward Fannie Mae and HUD, the company’s higher-margin executions. The servicing portfolio grew 26% to $63.1 billion, including a $3.6 billion HUD portfolio acquired during 2016 for $43.1 million. Investment sales transactions totaled $2.57 billion, up from $1.52 billion for the eight months the business operated in 2015.
Cash flow and balance sheet: Operating cash flow was $759.4 million, versus cash used of $1.34 billion in 2015; these reported totals are heavily affected by the timing of loan originations and sales. Excluding loan-origination activity, operating cash flow was $102.7 million versus $84.5 million. Investing cash use was $66.8 million, including the servicing-rights purchase and $24.8 million funded for preferred equity. Financing cash use was $693.6 million, primarily reflecting net warehouse-debt repayments. Cash, restricted cash and pledged securities totaled $213.5 million at year-end, including $118.8 million of unrestricted cash and cash equivalents.
Total assets were $3.05 billion and total equity was $615.1 million at December 31, 2016. Warehouse notes payable were $1.99 billion and the term note’s carrying amount was $164.2 million. Warehouse balances primarily fund loans awaiting sale or loans held for investment and should be considered in that context. The company reported $2.1 billion of committed Agency warehouse capacity and a $1.5 billion uncommitted Fannie Mae facility, and said it was in compliance with debt covenants. Operational liquidity was $115.8 million, against a stated minimum requirement of $25.1 million.
Changes, outlook, risks and unusual items
- Mortgage banking gains increased with higher Fannie Mae originations and a larger share of Fannie Mae and HUD loans. The servicing portfolio’s growth also lifted servicing fees.
- Interim loan originations increased to $419.6 million from $185.1 million. The company held 12 interim loans with $222.3 million unpaid principal at year-end and bears the full credit risk on these loans.
- The company ended its proprietary CMBS program in Q4 2016 amid market volatility, wider credit spreads and higher borrowing costs. It recorded $2.0 million of severance and other termination costs.
- Management described multifamily fundamentals as strong and its near-term capital-markets and investment-sales outlook as positive, citing expected loan maturities. It did not provide specific financial guidance. It noted uncertainty around interest-rate increases, GSE policy and future origination caps; 2017 Fannie Mae and Freddie Mac market-rate multifamily purchase caps were each set at $36.5 billion, subject to specified exclusions and possible adjustment.
- Key risks include dependence on Agency relationships and the future of Fannie Mae and Freddie Mac; Fannie Mae risk-sharing exposure; reliance on short-term warehouse funding, including facilities requiring renewal; changes in interest rates, loan demand and property conditions; competition; servicing and loan-repurchase obligations; and credit risk in interim loans and preferred equity. The company had $42.8 million of preferred-equity commitments, of which $24.8 million was funded, and expected to fund the balance over the following 12 months.
- At year-end, no loans in the at-risk servicing portfolio were 60 or more days delinquent. The allowance for risk-sharing obligations was $3.6 million; the company’s maximum quantifiable contingent exposure was $4.9 billion, which it says is not representative of expected loss. It reported no history of loan repurchases.
- After year-end, the company acquired Deerwood Real Estate Capital assets for $15.0 million cash and approved a new $75.0 million share repurchase program. The company paid no common dividends and said it retained earnings to fund growth.
Important facts for investors to verify
- Whether Agency origination volumes, purchase caps and the company’s approvals remain supportive of revenue and servicing growth.
- Warehouse-line renewals, committed versus uncommitted availability, covenants and liquidity needs, including the planned $54.0 million of additional Fannie Mae restricted liquidity over 48 months.
- Credit performance and reserve adequacy for the $24.1 billion at-risk portfolio, interim loans and preferred-equity investments; review the distinction between maximum exposure and expected losses.
- How much reported earnings growth reflects recurring cash-generating activities versus noncash MSR gains, and how MSR valuation assumptions respond to rates and prepayments.
- Progress and economics of the HUD servicing acquisition, post-year-end Deerwood acquisition and authorized share repurchases.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2016. Management also concluded that disclosure controls and internal control over financial reporting were effective.