Walker & Dunlop, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Unless noted otherwise, amounts are U.S. dollars. The company originates, sells and services commercial real estate loans, primarily multifamily, and provides investment-sales brokerage services.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $94.2 million | $112.1 million |
| Income before tax | $24.2 million | $35.4 million |
| Walker & Dunlop net income | $15.5 million | $21.3 million |
| Diluted EPS | $0.50 | $0.66 |
| Adjusted EBITDA (non-GAAP) | $32.4 million | $35.4 million |
| Operating margin / return on equity | 26% / 13% | 32% / 20% |
| Loan origination volume | $2.46 billion | $4.35 billion |
| Servicing portfolio | $51.0 billion | $46.1 billion at March 31, 2015 |
Revenue fell 16% year over year, primarily because mortgage-banking gains declined 36% to $46.3 million as loan volume and origination fees fell. Servicing fees rose 18% to $31.6 million as the portfolio expanded; net warehouse interest income rose 55% to $6.7 million. Expenses declined 9% to $70.1 million, mainly from lower commissions and bonuses, partly offset by higher salaries. Net income declined 27%.
Cash and cash equivalents were $98.2 million at March 31, versus $137.0 million at year-end. Total assets were $1.50 billion, down from $3.51 billion, while warehouse notes payable fell to $640.3 million from $2.65 billion. The large balance-sheet movements largely reflect the reduction in loans held for sale and associated warehouse funding. Corporate note payable was $164.4 million. Total equity was $506.3 million.
Operating cash flow was $1.96 billion, investing cash flow was $40.0 million, and financing cash flow was negative $2.04 billion. These amounts were strongly affected by short-term loan-origination and sale activity and matching warehouse borrowing and repayments; operating cash flow excluding loan-origination activity was negative $16.2 million. The filing cautions that these flows reflect loans held for short periods and point-in-time balances.
Material changes versus the prior comparable period
- Total loan originations decreased 43%. GSE originations declined 56%, with management attributing the comparison in part to two large portfolios totaling $1.1 billion in Q1 2015; brokered volume increased 6%.
- HUD originations decreased 21%; CMBS originations were $63.3 million versus $64.1 million as presented for the prior period. Investment-sales transactions contributed $157.0 million in Q1 2016.
- The company took full ownership of its CMBS Program effective January 1, 2016 and began consolidating it. Previously, it held a noncontrolling partnership interest and used equity-method accounting, affecting comparability of reported balances and results.
- Servicing fees increased with the average servicing portfolio, while mortgage-banking gains and profitability measures weakened. Adjusted EBITDA declined 8%.
Outlook, commentary, risks and unusual items
- Management described multifamily and commercial real estate fundamentals as strong, citing rental demand, occupancy, rents and low delinquencies. It expected the GSEs to remain significant market lenders and expressed a positive outlook for brokered capital-markets activity, but gave no specific company earnings or revenue guidance.
- Management said it believed current cash flows and warehouse facilities were adequate for near-term needs. The company reported $97.5 million of operational liquidity against a $21.8 million requirement and net worth of $481.0 million against a $113.5 million Fannie Mae requirement.
- Additional restricted liquidity of $47.2 million is expected to be funded over 48 months for DUS reserve requirements, assuming no further portfolio paydowns, prepayments or defaults. Changes in Fannie Mae collateral standards could reduce available cash.
- Fannie Mae DUS risk-sharing is a significant contingent exposure: maximum quantifiable exposure was $4.2 billion, which the filing says is not representative of expected loss. The allowance for risk-sharing obligations was $5.1 million; no at-risk balances were more than 60 days delinquent, and the company reported no net write-offs.
- The company had $42.8 million of preferred-equity funding commitments, of which $1.3 million had been funded, with funding expected over 12–24 months. It repurchased 0.3 million shares for $6.5 million in Q1 and had $68.5 million of authorized capacity remaining. It pays no common dividends.
- CMBS activity is exposed to interest-rate and credit-spread volatility; management cited recent market volatility and lower demand as factors weighing on Q1 CMBS volume. Other risks include competition, GSE lending limits, dependence on warehouse funding, and potential changes in rates and regulation.
- At March 31, the company was compliant with warehouse covenants except for one CMBS Facility #2 covenant, for which it received a one-time waiver. Second-quarter amendments extended certain facility maturities and a new $100 million CMBS facility was established.
- The company early adopted stock-compensation accounting guidance in Q1, with an immaterial cumulative equity adjustment. New lease accounting guidance is effective for the company in 2019; its impact was still under evaluation.
- The CAF Funds Group litigation was settled on April 6, 2016: the appeal and underlying claims were dismissed with prejudice, and CAFG paid a portion of the company’s legal fees. The matter is concluded.
Important facts for investors to verify
- Whether loan originations, especially GSE production, recover after the unusually weak year-over-year comparison and how GSE production limits affect the business.
- How much of earnings depends on noncash MSR gains and whether servicing-asset valuations remain supportable. The filing reports MSR fair value of $519.0 million; a 100-basis-point increase in the discount rate would reduce estimated fair value by $16.3 million.
- Warehouse facility renewals, covenant compliance and the effect of pledged collateral, committed funding needs and the planned $47.2 million increase in restricted liquidity.
- Performance of the risk-sharing portfolio, interim loans and CMBS exposures, including whether the disclosed maximum contingent guarantee exposure translates into actual losses.
- Execution and funding of the $42.8 million preferred-equity commitments, and the impact of share repurchases on liquidity and per-share results.