Walker & Dunlop, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are to Q1 2019 unless otherwise stated. Walker & Dunlop provides commercial real estate finance and services, with a primary focus on multifamily lending, brokerage, servicing, and property sales. Amounts below are in millions unless noted.
Financial results and condition
| Metric | Q1 2020 | Q1 2019 / prior period | Change |
|---|---|---|---|
| Total revenue | $234.2 | $187.4 | +25% |
| Income from operations | $60.3 | $56.1 | +7% |
| Walker & Dunlop net income | $47.8 | $44.2 | +8% |
| Diluted EPS | $1.49 | $1.39 | +7% |
| Adjusted EBITDA (non-GAAP) | $64.1 | $66.7 | -4% |
| Operating margin (company-reported) | 26% | 30% | -4 percentage points |
| Net cash used in operating activities | $(292.6) | $(135.4) | Greater use of cash |
- Revenue gains reflected higher loan origination and brokerage fees ($76.4, +32%), servicing-related fair-value revenue ($68.0, +66%), and property sales broker fees ($9.6, +112%). Mortgage banking volume rose 84%; total transaction volume was $11.4 billion versus $5.9 billion.
- Expenses increased 32% to $173.9, including personnel expense of $89.5 (+25%) and provision for credit losses of $23.6 versus $2.7. The higher credit provision principally reflected revised COVID-19-related loss expectations.
- Cash and cash equivalents were $205.3 at quarter-end, with restricted cash of $30.7. Cash, cash equivalents, restricted cash, and restricted cash equivalents totaled $244.6. Operating cash use primarily reflected the timing and volume of loan originations and sales; excluding that activity, operating cash provided was $28.9.
- Warehouse notes payable were $1.306 billion and the term note payable was $293.4. Warehouse borrowings largely fund loans held for sale or investment. Total equity was $1.043 billion; total assets were $3.312 billion.
- Available warehouse facilities totaled $4.714 billion, of which $1.306 billion was outstanding at March 31. The company reported compliance with warehouse and term-loan covenants. Operational liquidity, as defined for agency and lender requirements, was $291.9, against a stated minimum requirement of $39.7.
Material changes and notable items
- CECL adoption on January 1, 2020 increased the risk-sharing allowance by $31.6 and reduced opening retained earnings, net of tax, by $23.7. The allowance for risk-sharing obligations stood at $64.1 at March 31; the separate calculated CECL reserve for the at-risk Fannie Mae portfolio was $57.2, up from $34.7 at adoption.
- Q1 provision for credit losses was $23.6, including $22.5 for risk-sharing obligations and $1.1 for loan losses. The at-risk Fannie Mae servicing portfolio was $37.2 billion. Loans in default totaled $48.5, or 0.13% of the at-risk portfolio.
- The company acquired two debt brokerage businesses for aggregate consideration of $64.9, including $43.8 cash, $5.0 in stock, and $16.1 of contingent consideration. Goodwill increased by $64.5 from acquisitions.
- Mortgage servicing rights had a $722.5 carrying value at quarter-end. Management disclosed that a 100-basis-point increase in the discount rate would reduce estimated MSR fair value by $25.8.
Outlook, risks, and contingencies
- Management said COVID-19 had not materially affected Q1 operations, cash flows, or liquidity, but emphasized that the crisis and its duration made future effects uncertain. No formal numerical earnings guidance was provided.
- Management expected Agency multifamily lending to remain active, supported by Fannie Mae, Freddie Mac, and HUD, while anticipating significant near-term declines in property sales and non-multifamily brokerage activity. It temporarily ceased new balance-sheet interim-loan originations pending greater clarity on the crisis.
- Servicing advances may rise if borrowers cannot pay. In April, the company advanced $0.8 for Fannie Mae loans and $4.5 for HUD loans. A proposed $100 million warehouse sublimit for Fannie Mae advances was subject to final documentation, lender consent, and Fannie Mae approval.
- Fannie Mae DUS risk-sharing has a maximum quantifiable contingent exposure of $7.7 billion; the filing cautions this is not representative of expected losses. The company estimated $68.5 million of additional pledged securities would be required over 48 months, assuming no portfolio runoff or defaults.
- Management expected an effective tax rate of 26%–27% for the remainder of 2020. The board declared a $0.36-per-share Q2 dividend. Further share repurchases were described as unlikely until the crisis’s effects on the economy and company liquidity were better understood.
- Other risks include changes in multifamily rent collections, occupancy, property values, interest rates, agency programs, warehouse funding availability, and borrower defaults. The company reported no material pending litigation and no material subsequent events requiring recognition.
Important facts for investors to verify
- Whether loan originations, property sales, and transaction cancellations changed materially after quarter-end, particularly given the $2.1 billion loan portfolio locked in Q1.
- Actual borrower delinquencies, forbearance requests, servicing advances, and subsequent updates to the $57.2 million CECL reserve and $64.1 million risk-sharing allowance.
- Completion and availability of the proposed $100 million advance-funding sublimit, and renewal or amendment of warehouse facilities.
- Cash conversion and funding needs as loans held for sale grow, alongside remaining capital, liquidity, and pledged-collateral requirements.
- Whether the announced dividend remains sustainable and whether share repurchases resume; the filing reports no specific full-year earnings guidance.