Walker & Dunlop, Inc. — Q3 2022 Form 10-Q
Business context and period. Walker & Dunlop provides commercial real estate finance and services, with a focus on multifamily lending, brokerage, servicing, property sales, and affordable-housing investment management. This unaudited report covers the quarter and nine months ended September 30, 2022, compared with the same 2021 periods.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $315.6 million | $346.3 million | $975.9 million | $852.0 million |
| Income from operations | $54.2 million | $94.7 million | $217.8 million | $242.2 million |
| Walker & Dunlop net income | $46.8 million | $71.7 million | $172.3 million | $185.8 million |
| Diluted EPS | $1.40 | $2.21 | $5.13 | $5.73 |
| Adjusted EBITDA (non-GAAP) | $75.0 million | $72.4 million | $232.5 million | $199.6 million |
| Operating margin | 17% | 27% | 22% | 28% |
| Total transaction volume | $16.9 billion | $18.5 billion | $52.1 billion | $41.1 billion |
- Q3 revenue fell 9% and net income fell 35% year over year, as lower origination and servicing-rights recognition revenue outweighed growth in servicing, investment-management, and escrow-related revenue.
- Nine-month revenue rose 15%, while net income declined 7%. Revenue growth included a $39.6 million noncash gain from revaluing the previously held Apprise investment; higher expenses, including personnel, amortization, and corporate-debt interest, pressured earnings.
- Q3 loan origination and debt brokerage fees declined 26%; fair value of expected servicing cash flows declined 38%. Servicing fees rose 8%. For the first nine months, property sales fees increased 54% and investment-management fees increased substantially, partly reflecting the Alliant acquisition.
- Adjusted EBITDA increased 4% in Q3 and 16% year to date. It is a non-GAAP measure; the company excludes, among other items, the fair value of servicing cash flows, so it should not be viewed as a substitute for GAAP earnings or cash flow.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $152.2 million, restricted cash was $40.2 million, and pledged securities were $151.4 million. Total cash, cash equivalents, and restricted cash reported in the cash-flow reconciliation, including pledged cash, was $205.1 million, down from $393.2 million at year-end 2021.
- Cash used in operating activities was $466.8 million for the nine months, versus $197.0 million used in 2021. Management attributed the change primarily to loan originations exceeding loan-sale proceeds by $594.5 million, compared with $301.9 million in the prior-year period; these loan balances generally turn over within 60 days.
- Warehouse notes payable were $2.545 billion and other notes payable were $711.1 million at quarter-end. Warehouse borrowings support loans and other operating activity; the $600 million term loan had $595.5 million principal outstanding, and the Alliant note had $120.2 million outstanding. The company reported compliance with applicable warehouse and credit-agreement covenants.
- Warehouse facilities totaled approximately $5.85 billion of capacity, with $2.55 billion outstanding. The company says its facilities are adequate for current origination needs, but its ability to originate depends on maintaining financing arrangements on acceptable terms.
- For Agency requirements, Walker & Dunlop, LLC reported $131.9 million of operational liquidity against a $54.7 million minimum, and defined net worth of $646.0 million against a $275.0 million requirement. It expects to fund an additional $71.8 million of restricted liquidity over 48 months, assuming no portfolio paydowns, prepayments, or defaults.
- The servicing portfolio was $120.8 billion; mortgage servicing rights had a $967.8 million net carrying value. The company estimated that a 100-basis-point increase in the MSR discount rate would reduce portfolio fair value by $40.6 million.
Material changes and notable items
- The company acquired GeoPhy in February 2022, obtaining full ownership of Apprise. Acquisition consideration included $82.1 million cash and $117.0 million fair-value contingent consideration; the maximum GeoPhy earnout is $205.0 million. Goodwill increased to $948.2 million from $698.6 million at year-end 2021, principally reflecting acquisitions and purchase-accounting adjustments.
- Q3 included a $10.2 million one-time tax benefit from dissolving the Apprise joint venture, partly offset by a $3.9 million one-time international property transfer tax related to GeoPhy intellectual property. The Apprise revaluation gain was recorded earlier in 2022, not in Q3.
- Contingent consideration liabilities were $221.0 million at September 30, up from $125.8 million at year-end 2021. These estimates use management forecasts and other significant unobservable inputs; maximum remaining undiscounted earnouts were $325.0 million.
- The board authorized a $75.0 million share-repurchase program in February 2022. The company repurchased 109,000 shares under the program during Q2, with $63.9 million of capacity remaining at September 30. It paid $0.60 per share in each of the first three quarters and declared another $0.60 dividend payable in December 2022.
Outlook, risks, and contingencies
- Management reported that multifamily fundamentals remained healthy, while higher inflation and rapidly rising interest rates had disrupted parts of commercial real estate finance. It expected transaction activity to slow from earlier-year peaks, with non-multifamily debt brokerage particularly exposed; it anticipated Agency lending to remain steady in Q4 and new-loan servicing fees and profitability to remain around Q3 levels. The filing provides no full-year earnings or revenue guidance.
- Management cited a 27% increase in total transaction volume for the first nine months, including growth in property sales, brokerage, and Fannie Mae volume; HUD volume fell 49%. Interim Program JV originations fell to $86.3 million from $665.9 million in the comparable period, amid competition and higher rates.
- Interest-rate and market risks include lower origination margins and MSR values, higher warehouse and corporate borrowing costs, and potential pressure on property sales and transaction activity. A 100-basis-point increase in SOFR was estimated to reduce annual net warehouse interest income by $23.6 million and annual operating income by $6.0 million, based on period-end balances.
- The company’s Fannie Mae risk-sharing portfolio carries contingent credit exposure. Three at-risk loans with $78.2 million aggregate unpaid principal balance were in default; collateral-based reserves were $10.8 million. The stated $10.8 billion maximum quantifiable contingent liability assumes all covered loans default and collateral has no value and is not an estimate of expected loss.
- Ordinary-course litigation was described as not material; management did not expect pending matters to have a material adverse effect. The filing reported no material changes to the risk factors in the 2021 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher rates and reduced spreads further weaken loan origination economics, MSR income, property sales, and transaction volumes.
- How much of reported revenue and earnings growth depends on acquired businesses, noncash servicing-rights valuation, the Apprise revaluation gain, and other nonrecurring items.
- Warehouse-facility availability, maturities, borrowing costs, covenant compliance, and the cash impact of the required $71.8 million additional restricted liquidity.
- Performance of the Fannie Mae risk-sharing portfolio, defaulted loans, reserves, and any changes to Fannie Mae collateral or capital requirements.
- Achievement and eventual cash cost of acquisition earnouts, particularly GeoPhy and Alliant, and the assumptions underlying the $221.0 million contingent-consideration valuation.
- Whether dividends and repurchases remain supportable given operating cash use, acquisition commitments, debt service, and liquidity requirements.