Walker & Dunlop, Inc. annual report, FY2021

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Walker & Dunlop, Inc. — 2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. Comparisons below are primarily with fiscal 2020.

Business context

Walker & Dunlop provides commercial real estate financing and services, with a primary focus on multifamily lending. Its activities include Agency lending and servicing, debt brokerage, interim lending, property sales, appraisal, research, investment banking, and affordable-housing investment management. The company depends significantly on Fannie Mae, Freddie Mac, HUD/Ginnie Mae, institutional investors, and short-term warehouse funding.

Financial and operating performance

  • Revenue: $1.259 billion, up 16% from $1.084 billion. Loan origination and debt brokerage fees rose 24% to $446.0 million; servicing fees rose 18% to $278.5 million; and property sales broker fees increased 215% to $120.0 million. Fair value of expected servicing cash flows declined 20% to $287.1 million.
  • Profitability: Operating income was $352.1 million, up 7%; Walker & Dunlop net income was $265.8 million, up 8%; diluted EPS was $8.15 versus $7.69. Reported operating margin was 28% versus 30%, and return on equity was 21% versus 23%.
  • Adjusted EBITDA: $309.3 million, up 43% from $215.8 million. This is a non-GAAP measure; the company cautions it is not a substitute for GAAP net income or free cash flow.
  • Transaction volume: Debt financing volume increased 40% to $48.9 billion, driven particularly by brokered lending, which rose to $29.7 billion from $11.0 billion. Property sales volume rose to $19.3 billion from $6.1 billion.
  • Servicing and managed portfolio: The servicing portfolio grew 8% to $115.7 billion. Total assets under management rose to $16.4 billion from $1.8 billion, principally because of the Alliant acquisition.
  • Cash flow: Cash provided by operating activities was $870.5 million, compared with cash used of $1.411 billion in 2020. The company says these totals are substantially affected by the timing of loan originations and sales; excluding loan-origination activity, operating cash flow was $249.7 million, up 25%. Investing activities used $377.6 million, including $420.6 million net cash paid for acquisitions; financing activities used $457.7 million. Year-end cash, cash equivalents, and restricted cash totaled $393.2 million.
  • Debt and funding: Year-end warehouse notes payable were $1.942 billion and notes payable were $740.2 million; scheduled total principal maturities across warehouse and other notes were $2.688 billion, much of it short-term warehouse funding tied to loans. The company entered a $600 million secured term loan maturing in 2028 and assumed Alliant debt. It reported $4.1 billion of bank warehouse capacity and a further $1.5 billion uncommitted Fannie Mae facility for Agency loans, plus separate interim and Alliant facilities.
  • Liquidity and capital: Operating liquidity of $251.7 million exceeded the stated $51.1 million minimum requirement, and operating-subsidiary net worth of $722.4 million exceeded the $258.2 million Fannie Mae requirement. The company was in compliance with its warehouse and term-loan covenants at year-end. Fannie Mae collateral rules are expected to require another $65.3 million of restricted liquidity over 48 months, assuming no portfolio paydowns, prepayments, or defaults.
  • Dividends and shares: The company paid $2.00 per share in dividends during 2021. In February 2022, the board declared a $0.60-per-share first-quarter dividend, 20% above the prior-quarter dividend. No shares were repurchased under the 2021 public repurchase program.

Material changes versus 2020

  • Revenue and net income increased, but operating margin and return on equity declined. Personnel costs rose 29% and total expenses rose 20%, reflecting higher commissions, headcount, amortization, and acquisition-related costs.
  • Revenue mix shifted toward brokerage and property sales. Agency debt financing volume fell, contributing to lower servicing-rights fair-value revenue, while the strong brokerage and property-sales activity lifted fee revenue.
  • The credit-loss line changed from a $37.5 million provision in 2020 to a $13.3 million benefit in 2021, mainly reflecting a lower forecast loss rate as economic and multifamily conditions improved.
  • The company acquired Alliant in December for total consideration of approximately $580.8 million, including cash, stock, and contingent consideration. Alliant added $14.3 billion of affordable-housing AUM and contributed $20 million of revenue after acquisition; its results were included only from the acquisition date.
  • Other 2021 acquisitions included Zelman, a housing research and investment-banking business, and a small-balance lending technology platform. In February 2022, the company agreed to acquire GeoPhy for $85 million in cash plus a contingent earn-out of up to $205 million; closing was expected in the first quarter of 2022.
  • Year-end total equity increased to $1.578 billion from $1.196 billion, including acquisition-related stock issuance and noncontrolling interests. Goodwill increased to $698.6 million from $249.0 million.

Outlook, commentary, risks, and unusual items

  • Strategic goals: Management’s stated ambition is to reach up to $2 billion of annual revenue by 2025. Goals include annual debt financing volume of at least $60 billion in the milestone description and $65 billion in the detailed strategy, $5 billion of annual small-balance lending, $25 billion of property sales volume, a $160 billion servicing portfolio, and at least $10 billion of AUM. The AUM goal was exceeded following Alliant; 2021 debt financing volume was $48.9 billion and servicing was $115.7 billion. These are strategic targets, not formal near-term earnings guidance.
  • Management’s market view: The filing describes improved economic conditions and strong multifamily occupancy, leasing demand, and rent growth in 2021. Management expected ongoing opportunity in Agency lending, property sales, affordable housing, and technology-enabled services, while noting competition and changing capital-market conditions.
  • Key exposures: Material risks include changes to the GSEs or their programs, dependence on Agency approvals and servicing relationships, multifamily-market weakness, defaults and Fannie Mae risk-sharing losses, servicing advances, warehouse-line renewals and uncommitted funding, interest-rate and MSR valuation sensitivity, and regulatory requirements. The company reported three defaulted Fannie Mae risk-sharing loans totaling $78.7 million and one defaulted interim loan of $14.7 million.
  • Acquisition and operating risks: Alliant integration, acquired-business performance, contingent earn-outs, goodwill and intangible-asset valuation, and the planned GeoPhy acquisition could affect results. The company’s internal-control assessment excluded Alliant, which represented $255 million of assets and $20 million of 2021 revenue; integration of Alliant’s controls was ongoing.
  • Other risks and contingencies: The filing discusses cybersecurity and privacy risks, LIHTC program and compliance risks, broker-dealer regulation following Zelman, and LIBOR transition. Ordinary-course litigation was not considered material by management. No loan repurchases had been required historically.
  • Unusual/non-GAAP items: 2021 included a $2.7 million write-off of prior term-loan issuance costs and a $6.9 million accelerated earn-out accrual. KPMG issued unqualified opinions on the financial statements and internal control, while identifying initial mortgage-servicing-rights valuation as a critical audit matter because of significant assumptions and limited observable market data.

Important facts for investors to verify

  • Whether growth in brokerage, property sales, and Alliant investment-management revenue is sustainable, and how much earnings depend on Agency-originated servicing-rights gains.
  • The renewal, availability, and covenant terms of warehouse facilities, especially uncommitted capacity and facilities with near-term maturities; also monitor restricted-collateral needs.
  • Performance and loss exposure in the Fannie Mae risk-sharing portfolio and interim loans, including the status of disclosed defaults and adequacy of reserves.
  • Alliant integration, realized synergies, contingent consideration, and the final purchase-price allocation; assess GeoPhy’s closing, consideration, and integration separately.
  • Progress toward 2025 strategic goals, while reconciling the filing’s $60 billion and $65 billion debt-volume targets and distinguishing targets from formal financial guidance.
  • MSR valuation assumptions and sensitivity, interest-rate exposure, dividend capacity under debt and Agency restrictions, and the company’s transition from LIBOR to SOFR.