Walker & Dunlop, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The company originates, sells, and services commercial real estate loans, primarily multifamily loans, through Fannie Mae, Freddie Mac, HUD/Ginnie Mae, and other institutional channels. Results include CWCapital only from August 31, 2012, following its acquisition.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $70.1 million | $33.4 million | $151.2 million | $104.8 million |
| Income from operations | $11.8 million | $9.7 million | $36.4 million | $38.7 million |
| Net income | $7.1 million | $6.1 million | $22.2 million | $23.8 million |
| Diluted EPS | $0.28 | $0.28 | $0.96 | $1.10 |
| Operating margin | 17% | 29% | 24% | 37% |
Q3 revenue rose 110%, mainly on higher loan originations and servicing fees; nine-month revenue rose 44%. Mortgage banking gains were $53.4 million in Q3 and $107.1 million year to date. Servicing fees increased 52% in Q3 and 33% year to date. Total expenses grew faster than revenue, up 146% in Q3 and 74% year to date, reflecting acquisition-related costs, expanded staffing and commissions, and acquired-intangible/MSR amortization.
Management’s non-GAAP adjusted figures exclude specified acquisition and integration costs and acquired-intangible amortization. Adjusted net income was $14.3 million for Q3 and $30.0 million for nine months; adjusted diluted EPS was $0.56 and $1.30, respectively. Adjusted operating margin was 34% in Q3 and 32% year to date. These are supplemental, non-GAAP measures and should be considered alongside GAAP results.
Cash flow, balance sheet, and debt
- At September 30, total assets were $1.879 billion, including $1.293 billion of loans held for sale, $82.6 million of cash, and $294.7 million of mortgage servicing rights. Total liabilities were $1.539 billion; stockholders’ equity was $339.8 million.
- Nine-month operating cash flow was negative $902.3 million, versus positive $213.6 million a year earlier. The company attributed the swing primarily to loan originations exceeding loan-sale proceeds by about $903 million. Excluding loan purchases and sales, operating cash flow was positive $0.7 million.
- Investing cash outflow was $229.1 million, mainly the approximately $208.1 million net cash outflow for the CWCapital acquisition. Financing cash inflow was $1.160 billion, principally from warehouse borrowings and equity issuance. Cash increased $28.8 million from year-end 2011.
- Warehouse notes payable were $1.280 billion and term notes payable were $83.0 million. The new $83 million secured term loan bears interest at one-month LIBOR plus 3.75%, amortizes quarterly, and matures August 31, 2017. Warehouse facilities generally bear LIBOR-based rates; outstanding warehouse debt is primarily matched to loans held for sale.
- Management reported $82.0 million of operational liquidity against a $15.1 million minimum requirement, and said the company was in compliance with warehouse and term-loan covenants at quarter-end. It stated that current cash flows should meet obligations for the next 12 months.
Material changes and acquisition
The September 4 acquisition of CWCapital was valued at approximately $231 million: $80 million cash and 11.65 million newly issued shares valued at approximately $151 million. The acquired business added $14.5 billion of servicing and contributed $27.0 million of revenue and $3.9 million of operating income from the acquisition date through quarter-end. The combined company serviced $33.9 billion at September 30, up from $15.9 billion a year earlier. The acquisition also added goodwill of $53.4 million and substantial acquired MSRs and intangible assets. Integration, acquisition financing, amortization, and share issuance materially affect period comparisons.
Origination volume was $2.18 billion in Q3 and $4.19 billion for nine months, compared with $0.91 billion and $2.72 billion in the respective 2011 periods. The nine-month GAAP profit decline, despite higher revenue, reflects substantially higher expenses and acquisition-related charges. Q3 GAAP net income increased, while diluted EPS was unchanged.
Outlook, risks, and contingencies
- Outlook: No specific earnings or revenue guidance is provided. Management described improving multifamily occupancy and rents, but noted that broader economic recovery remains slow. It expects continued uncertainty over GSE reform and regulation, while anticipating that GSEs and HUD will continue supplying significant multifamily-market capital in the near term.
- Funding and leverage: The business depends on maintaining warehouse funding. A $640 million temporary commitment increased one warehouse facility to $1.14 billion through December 6, 2012, subject to stated conditions; facility capacity and lender participation thereafter require monitoring. Debt agreements have covenants and cross-default provisions.
- Credit and guarantees: The DUS risk-sharing allowance was $16.8 million. The at-risk portfolio had $19.1 million of loans more than 60 days delinquent, or 0.15%, versus none a year earlier. The maximum quantifiable Fannie Mae guarantee exposure was $2.6 billion, which the filing emphasizes is not an estimate of expected loss. The company expected approximately $29.1 million of additional collateral requirements over time for its existing Fannie Mae portfolio.
- Valuation sensitivity: A 100-basis-point increase in the MSR discount rate would reduce MSR fair value by approximately $9.4 million. MSR values depend on estimates of prepayments, servicing costs, and other assumptions.
- Litigation: Capital Funding litigation remained pending while the parties pursued settlement. The company’s stated loss exposure is capped at $3.0 million under an indemnification arrangement, though it noted possible interim legal costs and uncertainty of outcome.
- Other: The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls. It does not anticipate paying dividends in the foreseeable future.
Important facts for investors to verify
- Whether CWCapital integration delivers expected scale and synergies, and how acquired amortization and integration costs affect ongoing GAAP earnings.
- Warehouse facility availability, post-temporary-increase capacity, refinancing/renewal terms, and compliance with debt covenants.
- Cash conversion and liquidity needs as loan originations expand, including collateral requirements and servicing advances.
- Trends in DUS delinquencies, risk-sharing allowances, and realized losses, distinguishing maximum contractual exposure from expected losses.
- MSR valuation assumptions and sensitivity, plus the durability of servicing values and fees on newly originated loans.