Walker & Dunlop, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise indicated. Walker & Dunlop provides commercial real estate lending, brokerage, servicing, property sales, appraisal, and affordable-housing investment services.
Financial performance
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $319.4 million | $224.3 million; up 42% |
| Operating income | $90.0 million | $73.2 million; up 23% |
| Walker & Dunlop net income | $71.2 million | $58.1 million; up 23% |
| Diluted EPS | $2.12 | $1.79 |
| Operating margin | 28% | 33% |
| Adjusted EBITDA (non-GAAP) | $62.6 million | $60.7 million; up 3% |
| Operating cash flow | $971.9 million | $1,315.7 million |
| Total cash, including restricted cash | $224.0 million at March 31 | $393.2 million at December 31, 2021 |
Revenue growth reflected higher origination and servicing fees, property sales, and other revenue. Other revenue included a one-time $39.6 million gain from revaluing Walker & Dunlop’s prior investment in Apprise upon acquiring the remaining interest. Costs grew faster than revenue: personnel expense increased 50% and total expenses increased 52%, contributing to the lower operating margin. Adjusted EBITDA excludes, among other items, MSR fair-value revenue and the Apprise revaluation gain; it is not a GAAP measure or free cash flow.
Balance sheet, debt, and liquidity
- Total assets were $4.34 billion and total equity was $1.64 billion at March 31, 2022. Loans held for sale declined to $703.6 million from $1.81 billion at year-end, alongside lower warehouse borrowings.
- Warehouse notes payable were $924.3 million, down from $1.94 billion at December 31, 2021. Notes payable were $726.6 million, including a $598.5 million term loan and $132.9 million Alliant note. The term loan matures in 2028 and bears interest at Adjusted Term SOFR plus 225 basis points, subject to a 50-basis-point floor.
- Warehouse facilities had aggregate capacity of approximately $5.82 billion, including agency and interim facilities. The company reported compliance with warehouse and corporate debt covenants.
- At its operating subsidiary, the company reported $98.6 million in operational liquidity against a $51.8 million requirement, and net worth of $704.8 million against a $261.2 million requirement. It expects to fund an additional $68.2 million of DUS restricted liquidity over 48 months, assuming no portfolio paydowns, prepayments, or defaults.
- Operating cash flow is substantially affected by short-term loan originations and sales: the filing reports $3.19 billion of originations and $4.20 billion of loan-sale transfers in the quarter. It should not be read as cash earnings or free cash flow.
Material changes and business developments
- Total debt financing volume increased 17% to $9.14 billion; property sales volume increased to $3.53 billion from $1.40 billion. Total transaction volume rose to $12.67 billion from $9.22 billion.
- Origination and debt brokerage fees rose 8% to $82.3 million; servicing fees rose 10% to $72.7 million. Property sales broker fees increased 159% to $23.4 million. MSR fair-value revenue declined 9% to $52.7 million.
- The servicing portfolio reached $116.3 billion, up from $109.9 billion a year earlier. Assets under management were $16.7 billion versus $1.8 billion, largely reflecting the Alliant acquisition; the company cautions that the comparison is affected by acquisitions.
- On February 28, 2022, the company acquired GeoPhy for consideration valued at $212.0 million, including $119.0 million of contingent consideration. The acquisition brought its ownership of Apprise to 100%. Purchase accounting remained provisional at quarter-end; GeoPhy’s post-acquisition results were immaterial.
- Goodwill increased to $908.7 million from $698.6 million at year-end, primarily due to acquisitions. Contingent consideration liabilities were $218.7 million, with maximum remaining undiscounted earnout payments of $323.8 million.
- The company began reporting three segments: Capital Markets, Servicing & Asset Management, and Corporate. Capital Markets’ operating income fell 16% to $59.4 million, while Servicing & Asset Management’s rose 18% to $40.9 million.
Outlook, commentary, and risks
- Management described multifamily fundamentals as strong, citing 97.6% occupancy and 15.2% year-over-year rent growth as of March 2022. It expected continued strength in Agency lending and property sales, while noting rising mortgage rates and the return of competing capital sources.
- The filing gives an estimated effective tax rate of approximately 26.5%–27.5% for the remainder of 2022. It does not provide consolidated revenue, earnings, or EPS guidance.
- Management said GeoPhy supports strategic goals of $5 billion in annual small-balance lending volume and $75 million in appraisal revenue by 2025. These are goals, not guaranteed results.
- Interest-rate increases may affect funding costs, loan demand, and MSR values. A 100-basis-point increase in the MSR discount rate would reduce estimated MSR fair value by $39.1 million; the filing describes this sensitivity as hypothetical.
- Fannie Mae DUS risk-sharing remains a material contingent exposure: the maximum quantifiable exposure was $10.2 billion, not an estimate of expected loss. The CECL allowance for the at-risk Fannie Mae servicing portfolio was $42.5 million. Three at-risk loans totaling $78.7 million were in default; the company reported no history of required loan repurchases.
- Other disclosed risks include dependence on warehouse funding and Agency programs, possible changes to DUS collateral requirements, acquisition integration and earnout uncertainty, market and economic volatility, and LIBOR transition. The company reported no material change in risk factors from its 2021 Form 10-K and no material litigation.
Important facts for investors to verify
- How much of reported revenue and earnings growth is recurring, given the $39.6 million Apprise revaluation gain and acquisition-related contributions?
- Whether transaction volumes, margins, and staffing costs remain sustainable as interest rates and financing markets change.
- The assumptions and final purchase accounting for GeoPhy and Alliant, including contingent earnout estimates and potential cash payments.
- Liquidity and funding capacity after dividends, acquisition obligations, and the planned $68.2 million of additional DUS restricted liquidity.
- Credit performance of the at-risk servicing portfolio, defaults, allowance assumptions, and potential changes to Fannie Mae’s risk-sharing or collateral requirements.