Walker & Dunlop, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Walker & Dunlop provides commercial real estate financing and services, including Agency lending, loan servicing, brokerage, property sales, and affordable-housing investment management. Unless stated otherwise, dollar figures below are in millions.
Financial results and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $268.7 | $315.6 | $780.1 | $975.9 |
| Income from operations | $28.2 | $54.2 | $98.8 | $217.8 |
| Walker & Dunlop net income | $21.5 | $46.8 | $75.8 | $172.3 |
| Diluted EPS | $0.64 | $1.40 | $2.25 | $5.13 |
| Adjusted EBITDA (non-GAAP) | $74.1 | $75.0 | $212.5 | $232.5 |
| Reported operating margin | 10% | 17% | 13% | 22% |
| Total transaction volume | $8,555 | $16,919 | $23,688 | $52,129 |
- Revenue mix and movements: Q3 origination and debt-brokerage fees were $56.1 (down 38%); servicing fair-value income was $35.4 (down 36%); servicing fees were $79.2 (up 4%); and property-sale fees were $16.9 (down 44%). Placement fees and other interest income rose to $43.0 from $18.1, primarily due to higher rates earned on escrow balances.
- Cash flow: Nine-month operating cash flow was negative $332.4, compared with negative $466.8 in 2022; investing cash flow was positive $146.6, versus negative $171.0; and financing cash flow was positive $228.2, versus positive $449.6. The operating cash outflow primarily reflects loan originations exceeding loan-sale proceeds and timing of loans held for sale. Cash, cash equivalents, restricted cash, and pledged cash totaled $300.6 at period-end, including $236.3 of cash and cash equivalents.
- Debt and liquidity: At September 30, warehouse notes payable were $790.7 and notes payable were $774.7. The stated principal balance of corporate term debt was $788.5. Agency warehouse facility capacity was $5.4 billion, with $765.6 outstanding; interim warehouse capacity was $454.8 million, with $25.6 outstanding. Walker & Dunlop reported $186.4 of operational liquidity at its operating subsidiary against a $60.0 minimum requirement, and net worth of $1.0 billion against a $301.6 requirement. It reported compliance with debt covenants.
- Portfolio: The servicing portfolio was $129.0 billion, up 7% year over year; total managed portfolio was $146.3 billion, up 6%. Assets under management were $17.3 billion.
Material changes versus prior comparable periods
- Nine-month revenue fell 20%, net income fell 56%, and diluted EPS declined from $5.13 to $2.25. Q3 revenue declined 15% and net income declined 54% year over year.
- Nine-month debt-financing volume fell 50% and property-sales volume fell 64%; total transaction volume declined 54%. Lower transaction activity reduced origination, servicing fair-value, and property-sales revenue. Higher expenses for floating-rate corporate debt also pressured earnings: nine-month corporate-debt interest expense rose to $49.9 from $22.1.
- Capital Markets was the principal area of weakness: nine-month segment net income was $23.7 versus $129.8, while Servicing & Asset Management net income increased to $132.2 from $92.4. SAM benefited from a larger servicing portfolio and higher escrow placement fees.
- Reported results also reflect comparison effects: 2022 included a $39.6 million gain from revaluation of a previously held Apprise investment and a $6.3 million one-time tax benefit in Q3. No comparable items occurred in 2023.
Outlook, management commentary, risks, and unusual items
- Management attributed subdued commercial real estate activity to higher, volatile interest rates, tighter capital availability, and uncertainty among owners and developers. It expected debt-financing and property-sales activity to remain depressed in 2023 relative to 2022, and transitional-asset lending to stay low until conditions normalize. The filing provides no specific earnings or revenue guidance.
- Management said GSE lending activity increased in Q2 and Q3 from Q1 and expected the GSEs to continue providing competitive, countercyclical multifamily capital. It also pointed to healthy multifamily fundamentals and reported $461.2 million of affordable-housing equity syndicated in the first nine months.
- In January 2023, the company borrowed an additional $200 million under its term-loan agreement, bearing interest at SOFR plus 300 basis points and maturing in December 2028; proceeds partly repaid a subsidiary note. Most debt and legacy GSE LIBOR-based loans transitioned to SOFR during 2023.
- GeoPhy-related contingent consideration was remeasured downward by $14.0 million, with a corresponding $14.0 million goodwill impairment. The company said the matched adjustments had no net impact on GAAP net income. Remaining contingent consideration liabilities were $161.2 million; maximum remaining undiscounted earnouts were $292.9 million.
- Mortgage servicing rights had a $921.7 million balance-sheet carrying value. A hypothetical 100-basis-point increase in the discount rate would reduce their estimated fair value by $43.2 million; the filing cautions that this sensitivity does not capture interactions among assumptions.
- Fannie Mae risk-sharing allowance was $31.0 million. The disclosed maximum quantifiable exposure on at-risk loans was $11.8 billion, which the company states is not representative of expected loss. No at-risk loans were in default at September 30, 2023.
- In October 2023, the company received Freddie Mac and Fannie Mae repurchase requests relating to loans with a combined $24.8 million outstanding principal. It appealed the Freddie Mac request and expected the Fannie Mae repurchase in Q1 2024; management did not expect a material loss based on collateral values.
- Fannie Mae collateral requirements are expected to require $79.6 million of additional restricted liquidity over the next 48 months, assuming no portfolio paydowns, prepayments, or defaults. Management said future increases in collateral requirements could reduce available cash.
- The company had a $75 million share-repurchase authorization but had made no purchases under that program through September 30. It paid a $0.63-per-share quarterly dividend and declared the same amount for Q4 2023.
- Management described ordinary-course litigation as not material and said it had accrued its best estimate of probable impacts. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether transaction volumes and Capital Markets profitability stabilize as interest rates, lender capital availability, and GSE activity evolve.
- How much of earnings and cash generation depends on noncash servicing-rights valuations and rate-sensitive escrow placement fees.
- Changes in SOFR borrowing costs, corporate debt balances, warehouse availability, and required restricted liquidity.
- Actual credit losses and collateral outcomes under Fannie Mae risk-sharing, including the repurchase requests and the $79.6 million future liquidity requirement.
- Performance of GeoPhy earnouts, remaining contingent consideration, and goodwill valuation assumptions.
- Whether dividends and any future share repurchases remain supportable under debt and Agency capital requirements.