Walker & Dunlop, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report; the supplied filing text does not provide a standalone Q4 financial results table. Walker & Dunlop provides commercial real estate finance and services, principally multifamily lending, loan servicing, debt brokerage, property sales, and investment management.
Financial performance and position
| Metric | FY 2020 / Dec. 31, 2020 | Prior comparable period |
|---|---|---|
| Total revenue | $1,083.7 million | $817.2 million; up 33% |
| Income from operations | $330.3 million | $230.4 million; up 43% |
| Walker & Dunlop net income | $246.2 million | $173.4 million; up 42% |
| Diluted EPS | $7.69 | $5.45 |
| Operating margin (company-reported metric) | 30% | 28% |
| Adjusted EBITDA (non-GAAP) | $215.8 million | $247.9 million; down 13% |
| Total debt | $2.8 billion principal balance | Primarily warehouse borrowings supporting loan originations, plus term debt |
| Cash and cash equivalents | $321.1 million; $358.0 million including restricted cash | $120.7 million; $136.6 million including restricted cash |
| Operating cash flow | $(1,411.4) million | $427.6 million |
- Debt financing volume rose 32% to $35.0 billion; the servicing portfolio increased 15% to $107.2 billion. Property sales volume reached a record $6.1 billion, up 14%.
- Revenue growth reflected higher loan volume and mortgage servicing rights (MSR) gains. Fair value of expected servicing cash flows contributed $358.0 million of revenue, nearly doubling year over year; this is substantially non-cash at initial recognition. Servicing fees rose 10% to $235.8 million.
- Personnel expense increased 35% to $468.8 million, while provision for credit losses increased to $37.5 million from $7.3 million. Lower short-term rates reduced escrow earnings and other interest income 68% to $18.3 million. These factors, including the non-cash MSR revenue adjustment in the company’s EBITDA reconciliation, contributed to lower adjusted EBITDA despite higher GAAP net income.
- Operating cash flow was negative primarily because of the timing and scale of loans originated and sold: the company reported a $1.6 billion net cash use for loan-origination activity. Excluding that activity, operating cash flow was $200.3 million, versus $166.6 million in 2019.
- At year-end, total assets were $4.65 billion and stockholders’ equity was $1.20 billion. Warehouse notes payable were $2.52 billion; the term-loan carrying balance was $291.6 million. The term loan matures in 2025 and bears interest at 30-day LIBOR plus 200 basis points.
- Warehouse facilities had $5.54 billion of aggregate capacity, of which $2.52 billion was outstanding. Much of the capacity is uncommitted or subject to annual renewal. The company reported compliance with its warehouse and term-loan covenants.
- Reported operational liquidity at the operating subsidiary was $370.0 million against $45.2 million of applicable minimum requirements; subsidiary net worth was $991.1 million against a $228.0 million Fannie Mae requirement.
Material changes and unusual items
- Fannie Mae, Freddie Mac, and HUD lending volumes increased, with Agency loans representing 68% of total mortgage banking volume versus 57% in 2019. The company cited higher origination and MSR rates and growth in the Fannie Mae servicing portfolio.
- The company adopted CECL on January 1, 2020, recording a $31.6 million increase in the risk-sharing allowance and a $23.7 million after-tax reduction to opening retained earnings. The year-end risk-sharing allowance was $75.3 million, including a $67.0 million CECL reserve, compared with $11.5 million at year-end 2019.
- Two Fannie Mae loans totaling $48.5 million remained in default and awaiting disposition; specific reserves were $8.3 million. One company-held interim loan of $14.7 million was also in default. The filing says most other interim loans were performing as agreed.
- The company acquired assets and assumed certain liabilities of three debt brokerage businesses for aggregate consideration of $69.4 million, including cash, stock, and contingent consideration. It also purchased the remaining noncontrolling interests in its property-sales subsidiary.
- 2020 dividends totaled $1.44 per share. In February 2021, the board declared a $0.50-per-share first-quarter dividend, up 39% from the fourth-quarter 2020 rate, and authorized a new $75 million repurchase program.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting. KPMG identified initial MSR valuation and the forecast-period loss factor for risk-sharing reserves as critical audit matters.
Outlook, management commentary, and risks
- Management said Agency multifamily lending remained active through the pandemic and expected lending opportunities to continue in the near term. It noted recovery in property sales and commercial debt brokerage during the second half of 2020, while retaining a cautious approach to interim lending.
- New long-term goals for 2025 include $65 billion in annual debt financing volume, a $160 billion servicing portfolio, $25 billion in annual property sales volume, and $10 billion in assets under management, alongside investment-banking capability development and ESG objectives. These are targets, not financial guidance for 2021.
- Management achieved its prior $1 billion annual revenue goal in 2020, but property sales volume of $6.1 billion fell short of the prior $8 billion target, and assets under management of $1.8 billion were below the prior $8 billion goal. Debt financing volume and servicing portfolio targets were achieved.
- COVID-19 risks include weaker borrower cash flows, future delinquencies and credit losses, and servicing advances. Advances outstanding under Fannie Mae and HUD arrangements were immaterial at year-end; Fannie Mae and HUD obligations differ from Freddie Mac and life-insurance servicing, where the company reported no comparable advance obligation.
- Major exposures include dependence on Agency approvals and the continued role of Fannie Mae and Freddie Mac; risk-sharing on Fannie Mae loans; short-term warehouse funding and renewals; potential repurchase or indemnification claims; interim-loan credit and liquidity risk; and interest-rate effects on escrow income, borrowing costs, and MSR valuations.
- The company is exposed to LIBOR transition risk across loans, debt, escrow earnings, and serviced loans, and was preparing for transition to alternative reference rates. No material pending litigation was identified; management said ordinary-course claims were not expected to materially affect the company.
Most important facts for investors to verify
- How much FY 2020 revenue and earnings growth came from recurring servicing and fees versus fair-value MSR gains, and how sensitive MSR values are to assumptions.
- Whether negative reported operating cash flow is primarily temporary loan-origination timing and how cash conversion develops as loans are sold and warehouse balances turn over.
- Whether CECL reserves and the $8.3 million specific reserves adequately reflect COVID-related credit risk, including the two defaulted Agency loans and the defaulted interim loan.
- Availability, renewal terms, covenants, and concentration of warehouse funding, particularly the large uncommitted capacity and near-term facility maturities.
- Progress toward the 2025 volume, servicing, property-sales, and AUM targets, and the effect of Agency lending limits or housing-finance reform.
- Whether dividends and repurchases remain supportable while meeting lender, Agency, liquidity, and capital requirements.