Walker & Dunlop, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Walker & Dunlop provides commercial real estate finance and services, including agency lending, brokerage, loan servicing, property sales, and affordable-housing investment management.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $238.7 million | $319.4 million; down 25% |
| Income from operations | $34.6 million | $90.0 million; down 62% |
| Net income attributable to Walker & Dunlop | $26.7 million | $71.2 million; down 63% |
| Diluted EPS | $0.79 | $2.12 |
| Operating margin | 14% | 28% |
| Adjusted EBITDA (non-GAAP) | $68.0 million | $62.6 million; up 9% |
| Operating cash flow | $(546.7) million | $971.9 million |
| Total cash, cash equivalents and restricted cash | $234.7 million | $224.0 million at March 31, 2022 |
- Revenue pressure reflected lower transaction volumes: debt financing volume fell 47% to $4.83 billion and property sales volume fell 46% to $1.89 billion. Loan origination and debt brokerage fees declined 43%; servicing fees rose 4% to $75.8 million.
- Escrow earnings and other interest income increased to $30.9 million from $1.8 million as short-term rates rose. Net warehouse interest income fell to approximately zero from $4.8 million, with the company citing the inverted yield curve.
- Personnel expense declined 18% and other operating expense declined 25%, partially offsetting lower revenue. Corporate debt interest expense rose 138% to $15.3 million.
- Operating cash flow was driven by loan funding and sale timing: originations exceeded transfers of loans held for sale by $511.1 million in Q1 2023, versus sales exceeding originations by $1.0 billion in Q1 2022. The cash-flow swing should not be read as a like-for-like change in recurring operating earnings.
- At March 31, total assets were $4.49 billion, total liabilities $2.78 billion, and total equity $1.72 billion. Loans held for sale were $935.0 million; mortgage servicing rights had a $946.4 million carrying value.
- Warehouse notes payable were $1.03 billion and notes payable were $777.3 million on the balance sheet. The company reported $792.5 million of outstanding principal on its corporate term loans. It said it was in compliance with debt covenants.
Material changes and business developments
- Capital Markets net income fell to $0.5 million from $43.1 million, reflecting lower lending and property-sales activity. Servicing & Asset Management net income increased to $51.1 million from $28.1 million, supported by portfolio growth and higher escrow earnings.
- The total servicing portfolio grew 7% year over year to $124.6 billion; the total managed portfolio was $141.2 billion. Investment management fees were broadly stable.
- Q1 2022 included a $39.6 million one-time gain from revaluing the previously held Apprise investment; there was no comparable gain in 2023. Q1 2023 also included an $8.5 million increase in investment-banking revenue from the largest such transaction in company history.
- In January 2023, the company added a $200 million SOFR-based term loan, maturing December 2028, and used approximately $115.9 million of proceeds to repay the Alliant subsidiary note and related amounts.
- The board authorized a $75 million share-repurchase program in February. No shares were repurchased under that program through March 31; the company did repurchase shares to satisfy employee tax-withholding obligations. Q1 dividend paid was $0.63 per share; a $0.63 dividend for Q2 was declared May 3.
Outlook, risks and contingencies
- Management expects commercial real estate debt and property-sales activity to remain depressed in 2023 compared with early 2022, amid higher interest rates, constrained lending capital and banking-sector disruption. The filing provides no quantified earnings or revenue guidance.
- Management does not anticipate significant declines in GSE lending volumes for the rest of 2023, citing the GSEs’ countercyclical role. It expects new-loan servicing fees and profitability to remain below long-term historical levels. Transitional lending volumes are expected to remain low until conditions normalize.
- Q1 total transaction volume fell 47% year over year. Management reported declines in debt brokerage, HUD originations, property sales and GSE lending; it also noted continued pressure on prepayment-fee revenue as higher rates reduced refinancing and prepayments.
- On April 17, 2023, after quarter-end, the company completed a workforce reduction affecting approximately 8% of then full-time employees.
- The company’s Fannie Mae risk-sharing allowance was $33.1 million. Its stated maximum quantifiable contingent exposure on at-risk serviced loans was $11.1 billion; the filing emphasizes this is a hypothetical maximum, not an estimate of expected loss. Two at-risk loans with $37.0 million aggregate unpaid principal were in default at March 31.
- Management identified sensitivity of mortgage servicing rights to valuation assumptions: a 100-basis-point increase in the discount rate would reduce estimated MSR fair value by $43.4 million. The company also cited exposure to floating-rate borrowing costs, CRE market conditions, bank liquidity and uninsured deposits.
- Additional restricted liquidity of $75.3 million is expected to be funded over the next 48 months for Fannie Mae DUS requirements, assuming no portfolio paydowns, prepayments or defaults. The company reported meeting applicable net-worth and operational-liquidity requirements at quarter-end.
- The company reported no material pending litigation and no material change to other risk factors beyond risks associated with bank failures and financial-market illiquidity. It said the Q1 bank failures had no significant direct or indirect impact on its operations or results.
Important facts for investors to verify
- Whether debt-financing and property-sales volumes recover, and how much lower activity affects fee revenue and operating margins.
- Whether cash flow normalizes as loans held for sale are delivered, and the company’s ongoing funding needs under warehouse facilities.
- Changes in corporate debt, interest expense, covenant headroom and available liquidity, including the effect of floating SOFR rates.
- Performance and valuation of the servicing portfolio and MSRs, including discount-rate assumptions, prepayments and servicing-fee trends.
- Credit performance of Fannie Mae risk-sharing loans and interim loans, reserve assumptions, and required collateral funding.
- Execution and cost effects of the workforce reduction, as well as the company’s ability to sustain dividends and any future share repurchases.