Walker & Dunlop, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone Q4 filing; quarterly figures are included in the filing. The company provides commercial real estate finance and services, principally multifamily lending, loan servicing, debt brokerage, property sales, and investment management.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $817.2 million | $725.2 million | +13% |
| Income from operations | $230.4 million | $212.9 million | +8% |
| Walker & Dunlop net income | $173.4 million | $161.4 million | +7% |
| Diluted EPS | $5.45 | $4.96 | +10% |
| Operating margin | 28% | 29% | Down 1 percentage point |
| Adjusted EBITDA (non-GAAP) | $247.9 million | $220.1 million | +13% |
- Revenue growth reflected higher origination and brokerage fees, servicing fees, interim-loan interest income, escrow earnings, and property-sale commissions. Property-sales volume nearly doubled; debt-financing volume increased 5% to $26.6 billion.
- Expenses rose 15% to $586.9 million, including personnel expense up 16% to $346.2 million and provision for credit losses of $7.3 million versus $0.8 million. Higher staffing and commissions supported growth; three loans defaulted during 2019.
- Net cash provided by operating activities was $427.6 million versus $64.1 million. Excluding loan-origination activity, operating cash flow was substantially unchanged at $166.6 million versus $166.1 million; reported cash flows are affected by the timing of short-term loan funding and sales.
- At year-end, cash and cash equivalents were $120.7 million; total cash, including restricted cash, was $136.6 million. Total assets were $2.68 billion and equity was $1.04 billion.
- Warehouse notes payable were $906.1 million and term-loan carrying value was $294.0 million. The term loan has a $297.8 million principal balance, matures in 2025, and bears interest at 30-day LIBOR plus 200 basis points. The company reported compliance with debt covenants.
- Agency and bank warehouse facilities had aggregate capacity of $5.3 billion, including substantial uncommitted capacity; outstanding borrowings were $906.8 million before debt issuance costs. Many facilities are short-term and subject to renewal.
- The servicing portfolio grew 9% to $93.2 billion. Mortgage servicing rights (MSRs) had a $718.8 million net carrying value; their estimated fair value was $910.5 million.
Q4 and material changes
In Q4 2019, revenue was $217.2 million versus $214.9 million in Q4 2018. Walker & Dunlop net income was $42.9 million versus $45.8 million, and diluted EPS was $1.34 versus $1.41. Q4 2019 total transaction volume was $9.8 billion.
- Annual net income improved from 2018, but remained below 2017’s $211.1 million; the 2017 comparison included a $58.3 million tax benefit from federal tax-rate changes.
- Property-sales volume rose to $5.4 billion from $2.7 billion, and brokerage debt-financing volume increased to $10.4 billion from $8.4 billion. HUD originations fell 15%, partly due to a federal government shutdown that halted HUD loan commitments for about a month.
- Net warehouse interest income on loans held for sale declined to $1.9 million from $6.0 million, with the net spread contracting to 17 basis points from 46 basis points. Interest income on loans held for investment increased to $23.8 million from $8.0 million.
- Fannie Mae risk-sharing defaults increased: two at-risk loans with $48.5 million aggregate unpaid principal balance were in default at year-end, versus $11.1 million in 2018. The risk-sharing allowance rose to $11.5 million from $4.6 million.
Outlook, risks, and unusual items
- Management’s stated growth strategy targets at least $1 billion in annual revenue by the end of 2020, with milestones including $30–$35 billion of annual debt-financing volume, $8–$10 billion of property-sales volume, at least $100 billion in servicing, and $8–$10 billion of AUM. At year-end 2019, the respective reported figures were $26.6 billion, $5.4 billion, $93.2 billion, and $2.0 billion. These are strategic targets, not formal earnings guidance.
- Management described multifamily fundamentals as strong and expected financing demand to remain robust, while noting intense competition. The outlook depends on economic and real-estate conditions, interest rates, and continued Agency activity.
- Key risks include changes to Fannie Mae or Freddie Mac and their loan caps, loss of Agency approvals, property-market downturns, servicing disruptions, higher defaults and required advances, and dependence on short-term warehouse funding. Fannie Mae risk-sharing collateral requirements could also restrict available cash.
- The company held $546.6 million of interim loans for investment at year-end, its largest balance to date. One $14.7 million loan was in default; management was working to restructure it. Interim loans expose the company to greater direct credit and liquidity risk than loans sold to investors.
- The company expected adoption of the new credit-loss standard in 2020 to increase the risk-sharing allowance by $30–$35 million, with a $25–$30 million after-tax reduction to opening retained earnings; the expected loan-loss allowance adjustment was de minimis.
- MSR valuation is a significant estimate and was identified by the auditor as a critical audit matter. A 100-basis-point increase in the MSR discount rate would reduce estimated MSR fair value by approximately $28.5 million. The auditor issued unqualified opinions on the financial statements and internal control.
- The board declared a 2020 Q1 dividend of $0.36 per share, up 20% from Q4 2019, and authorized a new $50 million share-repurchase program. Dividends and repurchases remain subject to board decisions, debt restrictions, and regulatory capital and liquidity requirements.
Important facts for investors to verify
- Whether 2020 growth targets are achievable given 2019 shortfalls in debt volume, property sales, servicing balance, and AUM.
- The subsequent performance, collateral values, and reserve adequacy for the two defaulted Fannie Mae risk-sharing loans and the $14.7 million interim loan in default.
- Current status and renewal terms of warehouse facilities, particularly uncommitted funding and maturities; the filing states one Agency facility expired January 31, 2020.
- The actual opening adjustment and ongoing effects of the expected credit-loss accounting adoption, compared with the disclosed estimate.
- MSR assumptions and sensitivity, including discount rates, prepayments, escrow earnings, and servicing costs; also distinguish noncash MSR gains from recurring cash servicing revenue.
- Dividend and repurchase capacity after considering debt covenants, Agency requirements, and the additional $63.9 million of projected restricted liquidity funding over 48 months.