Walker & Dunlop, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Dollar amounts are in U.S. dollars.
Business context
Walker & Dunlop provides commercial real estate finance and services, including Agency lending, debt brokerage, property sales, loan servicing, investment management and affordable-housing tax-credit syndication. Its results are sensitive to interest rates, financing availability and commercial real estate transaction activity.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $272.6 million | $340.8 million | $511.4 million | $660.3 million |
| Income from operations | $36.0 million | $73.6 million | $70.6 million | $163.6 million |
| Walker & Dunlop net income | $27.6 million | $54.3 million | $54.3 million | $125.5 million |
| Diluted EPS | $0.82 | $1.61 | $1.61 | $3.73 |
| Adjusted EBITDA (non-GAAP) | $70.5 million | $94.8 million | $138.5 million | $157.5 million |
| Operating margin | 13% | 22% | 14% | 25% |
Revenue declines reflected lower origination and debt brokerage fees, servicing-rights income and property sales fees. Q2 debt financing volume fell 52% and property sales volume fell 81% year over year. For the first half, total transaction volume declined 57%, including a 50% decline in debt financing and a 70% decline in property sales. Higher escrow earnings and servicing fees partly offset these pressures. The first-half 2022 comparison also included a one-time $39.6 million gain from revaluing a previously held equity-method investment.
Q2 personnel expense declined 21% year over year as commissions fell with transaction volumes; cost-reduction measures also lowered other operating expenses. Corporate debt interest expense rose 165% in Q2, reflecting higher rates and increased floating-rate borrowings. Net warehouse interest income turned negative, primarily because short-term funding rates exceeded long-term mortgage rates.
Cash flow, balance sheet and liquidity
- Operating cash flow: Cash used was $881.0 million in the first half, versus $853.9 million provided in the prior-year period. Management attributed the swing mainly to loan originations exceeding loan sales by $901.8 million at period end, largely due to delivery timing and a higher loans-held-for-sale balance. Cash flow from operations excluding loan origination activity was positive $20.7 million.
- Investing and financing: Investing activities provided $110.6 million; financing activities provided $796.0 million, including $902.1 million of net warehouse borrowings. Total cash, cash equivalents and restricted cash ended at $283.9 million.
- Debt: At June 30, warehouse notes payable were $1.342 billion and notes payable were $776.0 million. The company added a $200 million term loan in January, bearing interest at SOFR plus 300 basis points and maturing in December 2028. It reported compliance with debt covenants.
- Liquidity and capital: The operating subsidiary reported $205.4 million of operational liquidity against a $57.9 million requirement, and $1.0 billion of defined net worth against a $291.1 million requirement. The company expects to fund an additional $74.8 million of DUS restricted liquidity over 48 months, assuming no specified portfolio changes.
- Servicing and MSRs: The servicing portfolio was $126.6 billion, up 6% year over year; the total managed portfolio was $143.5 billion. MSRs had a net carrying value of $932.1 million. The filing also states a portfolio fair value of approximately $1.4 billion. A 100-basis-point increase in the MSR discount rate would reduce estimated fair value by $42.4 million.
Material changes, outlook and risks
- Management said elevated interest rates, market volatility and reduced bank and other capital availability were constraining commercial real estate financing and sales. It expects debt and property-sales activity to remain depressed in 2023 relative to 2022; the filing provides no quantitative earnings or revenue guidance.
- GSE lending activity increased 68% in Q2 compared with Q1 2023. Management expects the GSEs to remain a source of countercyclical multifamily capital, while new-loan servicing fees and profitability are expected to remain below long-term historical levels.
- Alliant syndicated $407.1 million of equity in the first half, which management said put it on pace for its strongest year of syndicated equity. Transitional lending is being approached cautiously; no Interim Program JV loans were originated in the first half.
- The company recorded a first-ever charge-off related to a loan that had defaulted in 2019; the loan was charged off after collateral was sold in Q2. The filing describes a $14.7 million delinquent loan principal balance and a $6.0 million net write-off after reserves.
- Fannie Mae risk-sharing exposure is a significant contingent risk: the maximum quantifiable exposure was $11.3 billion, which the company says is not representative of expected loss. The allowance for risk-sharing obligations was $32.4 million. Two loans had $3.5 million of collateral-based reserves at quarter end.
- Other risks include further interest-rate changes, MSR valuation and prepayment assumptions, reduced transaction volumes, warehouse funding availability, GSE program changes and potential increases in collateral requirements. Management reported no material change to previously disclosed risk factors and no material pending litigation.
- The board declared a Q3 dividend of $0.63 per share. The $75 million share-repurchase authorization remained unused at June 30, 2023.
Important facts for investors to verify
- Whether transaction activity and financing volumes recover, particularly in debt brokerage and property sales, and whether GSE lending offsets weakness elsewhere.
- How much of reported cash-flow volatility reflects loan-delivery timing and whether the elevated loans-held-for-sale balance converts to cash as expected.
- The sensitivity of MSR valuations and servicing revenue to discount rates, interest rates, prepayments and lower servicing fees on new originations.
- Debt costs, warehouse-facility availability and the timing of the additional $74.8 million DUS liquidity funding requirement.
- Credit performance of the Fannie Mae at-risk portfolio and any changes to reserves, collateral requirements or risk-sharing losses.
- The filing reports both a $932.1 million MSR carrying value and approximately $1.4 billion fair value; investors should confirm the applicable valuation basis and disclosures.