Walker & Dunlop, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016; comparisons are with the quarter and nine months ended September 30, 2015, except balance-sheet comparisons, which are with December 31, 2015. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Business context and reporting period
Walker & Dunlop originates, sells, and services multifamily and other commercial real estate loans, primarily through Fannie Mae, Freddie Mac, and HUD programs. It also provides loan brokerage, interim lending, and multifamily investment sales services. During 2016 the company consolidated its CMBS program after acquiring full ownership; it terminated that program in the fourth quarter and was winding it down.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Change |
|---|---|---|---|
| Total revenue | $154.8 million | $120.8 million | +28% |
| Income from operations | $48.7 million | $33.4 million | +46% |
| Walker & Dunlop net income | $29.6 million | $20.3 million | +46% |
| Diluted EPS | $0.96 | $0.66 | +45% |
| Operating margin (company-reported) | 31% | 28% | +3 percentage points |
| Adjusted EBITDA (non-GAAP) | $36.2 million | $31.0 million | +17% |
For the nine months, revenue was $396.9 million (+14%), net income was $77.1 million (+25%), and diluted EPS was $2.51 versus $1.99. Adjusted EBITDA was $95.7 million, essentially unchanged from $95.3 million. Nine-month operating margin was 31% versus 29%; return on equity was 20% versus 19%.
- Q3 revenue growth chiefly reflected higher mortgage banking gains (+42%) and servicing fees (+27%). Mortgage banking gains benefited from a higher share of Fannie Mae and HUD originations, which generally generate stronger gain-on-sale margins and servicing-rights value.
- Personnel expense rose 31% in Q3, reflecting commissions, higher headcount, and performance-based stock compensation. Amortization and depreciation rose 14%, principally as the servicing-rights portfolio expanded.
- At September 30, total assets were $2.43 billion and equity was $572.8 million. Cash and cash equivalents were $83.9 million, down from $137.0 million at year-end 2015. Loans held for sale were $1.30 billion, down from $2.50 billion.
- Warehouse notes payable were $1.44 billion, down from $2.65 billion at year-end; the term note’s carrying amount was $164.2 million. The term loan’s outstanding principal was $167.6 million. The company reported compliance with debt covenants.
- Nine-month operating cash flow was $1.266 billion, investing cash outflow was $76.7 million, and financing cash outflow was $1.242 billion. The large operating cash inflow primarily reflected timing and net cash receipts from loan origination and sale activity; it should not be read as recurring operating cash generation. Excluding loan origination activity, operating cash flow was $27.5 million, versus $39.1 million in 2015.
Material changes versus the prior comparable period
- Servicing fees increased as the average servicing portfolio grew. The portfolio reached $59.1 billion at quarter-end, versus $47.8 billion at September 30, 2015; the company also purchased servicing rights on a HUD portfolio with approximately $3.6 billion of unpaid principal balance.
- Q3 total loan origination volume was $4.24 billion versus $4.11 billion. Nine-month volume declined to $11.47 billion from $11.93 billion, with lower Freddie Mac and brokered volume partly offset by Fannie Mae, HUD, and interim lending growth.
- Nine-month Fannie Mae originations increased 26% and HUD originations increased 48%; brokered originations declined 8%. Interim loan originations rose to $235.0 million from $145.0 million.
- The company settled loss-sharing amounts for its last three previously defaulted at-risk loans during Q3. No at-risk loans were 60 days delinquent at quarter-end; the risk-sharing allowance was $3.4 million.
Outlook, commentary, risks, and contingencies
- Management described commercial and multifamily real estate fundamentals as strong, with low delinquencies and rising occupancy and rents. It cited continued demand and expected loan maturities through 2017, but provided no specific earnings or revenue guidance.
- Management viewed its capital markets and HUD platforms positively, while noting competition and uncertainty over future GSE limits. FHFA raised 2016 market-rate multifamily origination caps to $36.5 billion for each GSE; future limits remain uncertain.
- CMBS market volatility, wider credit spreads, and uncertainty around risk-retention requirements weakened CMBS activity; the company subsequently terminated its CMBS program and began winding it down.
- Fannie Mae DUS guarantees create contingent credit exposure. Maximum quantifiable exposure was $4.6 billion, which the filing says is not representative of expected loss. The company expected to fund an additional $52.4 million of DUS restricted liquidity over 48 months, assuming no portfolio paydowns, prepayments, or defaults.
- Unfunded preferred-equity investment commitments were $27.3 million ($42.8 million committed, $15.5 million funded), expected to be funded over 12–18 months. The company said it had operational liquidity of $94.8 million against a $24.1 million requirement at its operating subsidiary.
- MSRs are sensitive to valuation assumptions: a 100-basis-point increase in the discount rate would reduce estimated fair value by $19.4 million. The company also disclosed sensitivity of earnings to LIBOR and noted that future GSE, market, regulatory, and funding changes could affect results and liquidity.
- Management reported no material litigation, no material changes to the risk factors in its 2015 Form 10-K, and effective disclosure controls. It did not declare dividends.
Important facts for investors to verify
- How much reported earnings growth reflects recurring fees and origination economics versus noncash servicing-rights gains and valuation assumptions.
- Whether the unusually large operating cash flow is understood in light of loan funding and sale timing, and how cash and warehouse balances evolve after the quarter.
- Servicing portfolio performance, MSR valuation assumptions, prepayments, and the effect of the acquired HUD servicing portfolio.
- Actual losses and reserve adequacy under Fannie Mae risk-sharing, including the distinction between the $4.6 billion maximum exposure and expected losses.
- Progress and costs in winding down the CMBS program, and the impact on future volumes, earnings, and warehouse capacity.
- Funding of preferred-equity commitments and required DUS liquidity, together with warehouse facility renewals and covenant compliance.