Walker & Dunlop, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 1, 2019. Walker & Dunlop provides commercial real estate financing, loan servicing, property sales brokerage, and investment management, with a substantial focus on multifamily housing.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $187.4 million | $147.5 million | +27% |
| Income from operations | $56.1 million | $43.9 million | +28% |
| Walker & Dunlop net income | $44.2 million | $36.9 million | +20% |
| Diluted EPS | $1.39 | $1.14 | +22% |
| Adjusted EBITDA (non-GAAP) | $66.7 million | $52.1 million | +28% |
| Operating margin | 30% | 30% | Flat |
Mortgage banking gains rose 21% to $98.7 million, supported by higher volume and a greater share of Agency lending. Total mortgage banking volume increased 16% to $5.24 billion; total transaction volume increased 23% to $5.94 billion. Servicing fees rose 9% to $52.2 million. Property sales volume more than doubled to $696.6 million, and property sales broker fees rose 113% to $4.5 million.
Expenses increased 27% to $131.4 million. Personnel expense rose 30%, reflecting higher headcount, compensation, and commissions. Credit-loss provision was $2.7 million, versus a $0.5 million benefit in Q1 2018, following defaults in a risk-sharing loan and a loan held for investment.
Cash flow, balance sheet, debt, and liquidity
- Operating cash flow was negative $135.4 million, compared with positive $177.0 million in Q1 2018. The company attributed the swing mainly to timing and use of cash for loan originations relative to loan sales; excluding loan origination activity, operating cash flow was positive $15.7 million.
- Investing cash flow was positive $12.4 million; financing cash flow was positive $136.5 million, including $151.8 million in net warehouse borrowings.
- Cash, cash equivalents, and restricted cash totaled $133.8 million at quarter-end. Cash and cash equivalents alone were $109.9 million.
- Total assets were $2.97 billion and total equity was $928.1 million. Loans held for sale were $1.23 billion; mortgage servicing rights had a $677.9 million carrying value and $867.8 million estimated fair value.
- Warehouse notes payable were $1.34 billion, up from $1.16 billion at December 31, 2018. Corporate note payable was $295.4 million; its stated maturity is November 2025. Warehouse and corporate debt are primarily LIBOR-based.
- Warehouse facilities totaled $4.57 billion in capacity, including committed and uncommitted lines; $1.34 billion was outstanding. The company reported compliance with debt covenants and Agency liquidity and net-worth requirements.
- Agency requirements included $35.4 million of minimum operational liquidity; the company reported $144.6 million. It expects to fund an additional $63.4 million of pledged liquidity over 48 months, assuming no portfolio paydowns, prepayments, or defaults.
Comparative changes and management commentary
- Agency mortgage banking volume increased, particularly at Fannie Mae and Freddie Mac; HUD volume declined 49%, with management citing a roughly month-long federal government shutdown that halted HUD commitment processing.
- Brokered mortgage banking volume declined 9% year over year, while interim loan originations increased to $48.6 million from $24.7 million. Servicing portfolio unpaid principal balance rose to $87.7 billion from $75.8 billion a year earlier.
- Management described multifamily fundamentals as strong, citing rental demand, low vacancies, and rent growth. It expected continued market strength, while noting competition for loan originations and pressure on Fannie Mae servicing fees.
- The FHFA set 2019 market-rate multifamily origination caps of $35 billion each for Fannie Mae and Freddie Mac. Management noted that revised criteria for qualifying “green” loans could reduce exclusions from those caps; the impact of future FHFA policy was uncertain.
- Management expects its effective tax rate for the remainder of 2019 to be approximately 26%–27%; it did not provide full-year revenue or earnings guidance.
- The company paid a $0.30-per-share quarterly dividend and declared another $0.30 dividend for Q2 2019. A new $50 million repurchase authorization was approved, with the full authorization still available at March 31.
Risks, contingencies, and unusual items
- Fannie Mae DUS risk-sharing creates contingent credit exposure. The filing reports a maximum quantifiable guarantee liability of $7.0 billion, which management cautions is not representative of expected loss. The allowance for risk-sharing obligations was $6.7 million.
- A large loan in the at-risk servicing portfolio defaulted, prompting a $2.4 million provision for risk-sharing obligations. One $14.7 million loan held for investment was delinquent, impaired, and on non-accrual at quarter-end; its allowance included a specific reserve.
- Interest-rate and yield-curve movements affect warehouse spreads, corporate debt costs, escrow earnings, and MSR valuation. Management reported that a 100-basis-point increase in the MSR discount rate would reduce estimated MSR fair value by $27.2 million.
- Competition reduced the weighted-average servicing fee rate on new Fannie Mae originations by 28% year over year. The company also cited potential risks from future GSE policy changes, warehouse funding availability, and multifamily market conditions.
- Adoption of lease accounting reduced opening retained earnings by $1.0 million. The company early-adopted cloud-computing implementation-cost guidance and capitalized $1.9 million of costs in the quarter.
- Management reported no material change in risk factors from its 2018 Form 10-K and no litigation it believed material. It stated that disclosure controls were effective and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash flow normalizes as loan originations and loan sales settle, and how warehouse borrowing needs evolve.
- Credit performance of the defaulted risk-sharing loan and delinquent loan held for investment, including future provisions and realized losses.
- Fannie Mae and Freddie Mac origination caps, green-loan eligibility rules, and the effect of competition on servicing fees and gain-on-sale margins.
- MSR valuation assumptions and sensitivity to discount rates, prepayments, and servicing portfolio changes.
- Availability, renewal terms, and covenant compliance of warehouse facilities, together with the planned build-up of pledged liquidity.
- Actual 2019 results and tax rate relative to management’s commentary; the filing provides no full-year earnings or revenue guidance.