Walker & Dunlop, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods unless noted. Walker & Dunlop provides commercial real estate financing and services, with a primary focus on multifamily lending, loan servicing, debt brokerage, property sales, and investment management. Dollar amounts below are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $281.4 (+11%) | $252.8 | $505.7 (+4%) | $487.0 |
| Operating income | $74.3 (-11%) | $83.5 | $147.5 (+3%) | $143.8 |
| Walker & Dunlop net income | $56.1 (-10%) | $62.1 | $114.1 (+4%) | $109.9 |
| Diluted EPS | $1.73 | $1.95 | $3.52 | $3.44 |
| Operating margin | 26% | 33% | 29% | 30% |
| Adjusted EBITDA, non-GAAP | $66.5 (+37%) | $48.4 | $127.2 (+13%) | $112.5 |
- Q2 total transaction volume rose 90% to $13.5 billion; debt financing volume increased 52% to $10.2 billion. Brokered volume reached $6.3 billion, versus $1.5 billion, and property sales volume was $3.3 billion, versus $446.7 million.
- Q2 loan origination and debt brokerage fees increased 38% to $107.5 million; servicing fees rose 21% to $69.1 million; property sales broker fees rose to $22.5 million from $3.6 million. Fair value of expected servicing cash flows fell 32% to $61.8 million, chiefly reflecting lower Agency lending volume. Net warehouse interest income declined 51% to $4.6 million.
- Personnel expense increased 32% to $141.4 million, reflecting higher commissions, compensation, and headcount. Total expenses grew 22% to $207.1 million, outpacing revenue growth and contributing to the lower quarterly operating margin and net income.
- Six-month cash from operating activities was $759.3 million, compared with cash used of $822.6 million in 2020. Management attributed the swing primarily to loan-sale proceeds exceeding originations in 2021, whereas originations exceeded sales in 2020; cash flow is therefore materially affected by loan timing and inventory movements. Investing cash flow was $75.4 million; financing cash used was $803.0 million.
Financial position, debt, and liquidity
- At June 30, 2021, total assets were $3.94 billion, total liabilities $2.65 billion, and stockholders’ equity $1.29 billion. Cash and cash equivalents were $326.5 million; restricted cash was $15.8 million. Cash, cash equivalents, restricted cash, and pledged cash equivalents totaled $389.8 million, versus $358.0 million at year-end 2020.
- Loans held for sale were $1.72 billion, down from $2.45 billion at year-end; warehouse notes payable were $1.82 billion, down from $2.52 billion. The company also had a term loan with $293.3 million principal outstanding (balance-sheet carrying amount $290.5 million), maturing in 2025. Warehouse borrowing principally funds loans awaiting sale or held for investment.
- Warehouse facilities had aggregate capacity of approximately $5.79 billion and outstanding borrowings of approximately $1.82 billion. The company reported compliance with applicable warehouse and term-loan covenants. It reported $359.3 million of operational liquidity at its operating subsidiary against a $48.7 million minimum requirement.
- Mortgage servicing rights had a $915.5 million net carrying value; disclosed fair value was approximately $1.2 billion. A 100-basis-point increase in the MSR discount rate would reduce fair value by an estimated $36.9 million, a sensitivity rather than a forecast.
- The servicing portfolio totaled $112.3 billion, up from $107.2 billion at December 31, 2020. The Fannie Mae at-risk servicing portfolio was $45.9 billion; its CECL allowance was $52.8 million, compared with $67.0 million at year-end.
Changes, outlook, and material risks
- Performance reflected a marked recovery in brokered lending and property sales compared with pandemic-affected Q2 2020. Conversely, Q2 Fannie Mae and Freddie Mac financing volumes were lower year over year, and lower Agency volume reduced MSR income. Servicing revenue benefited from growth in the servicing portfolio.
- Improved unemployment forecasts and multifamily operating conditions led to a $4.3 million Q2 credit-loss benefit and a $15.0 million benefit for the first half, mainly from lower estimated Fannie Mae risk-sharing reserves. Management said it had seen minimal delinquencies and no defaults in the at-risk portfolio since the pandemic began; two loans totaling $48.5 million remained in default, including loans previously defaulted in 2019.
- Management expected Agency lending to accelerate in the second half, citing $80.5 billion of combined Fannie Mae and Freddie Mac lending capacity remaining. It also described multifamily fundamentals as resilient, while noting competition and the return of other capital sources. These are management expectations, not formal revenue or earnings guidance. The company estimated an effective tax rate of approximately 25.5%–26.5% for the remainder of 2021.
- COVID-19 recovery remained uncertain; rising cases from new variants, rent collection weakness, post-forbearance payment difficulties, and loan advances could increase delinquencies, losses, or liquidity needs. Management reported that borrower forbearance requests and advances were immaterial at June 30, 2021.
- The company’s Fannie Mae DUS guarantees create credit and collateral obligations. The stated $9.5 billion maximum quantifiable contingent exposure assumes all covered loans default and all collateral has no value; the filing cautions this is not representative of expected loss. It expected to fund an additional $66.9 million of restricted liquidity over 48 months, assuming no portfolio changes.
- Other risks include dependence on short-term warehouse financing, interest-rate and LIBOR-transition exposure, and MSR valuation sensitivity. The company also disclosed cybersecurity threats, including incidents involving unauthorized access that had not caused material financial impact, and new regulatory, compliance, and litigation risks from its post-quarter Zelman acquisition.
- After quarter-end, the company acquired a 75% interest in WDIB, formed to acquire Zelman assets and liabilities, for $53.6 million cash and $5.3 million in company stock, subject to working-capital adjustments. Purchase accounting was incomplete when the filing was issued. The acquisition expands housing research and real estate investment-banking activities and brings broker-dealer regulatory exposure.
- The board declared a $0.50-per-share Q3 dividend after paying $0.50 per share in each of Q1 and Q2. A $75 million share-repurchase authorization remained unused at quarter-end; shares purchased during Q2 were for employee tax withholding, not under the public repurchase program.
- Ordinary-course litigation was described as immaterial; management did not expect pending matters to materially affect the company. No material changes to other risk factors were reported beyond those described, including cybersecurity and Zelman-related regulatory risks.
Key facts for investors to verify
- Whether the substantial growth in brokered financing and property sales volumes is sustainable, and how the shift in transaction mix affects fee rates and margins.
- Agency lending volumes and MSR additions, amortization, prepayments, and valuation assumptions; distinguish noncash MSR-related revenue from recurring servicing-fee cash revenue.
- Credit performance of the at-risk portfolio, the assumptions behind CECL reserves, actual guarantee losses, and future DUS collateral requirements.
- Warehouse facility renewal and funding availability, liquidity after restricted-cash requirements, term-loan covenants, and the effect of the LIBOR transition.
- Zelman acquisition integration, purchase accounting, results contribution, and associated SEC, FINRA, and other broker-dealer compliance obligations.