Walker & Dunlop, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022, compared with the corresponding 2021 periods. Walker & Dunlop provides commercial real estate financing and services, including agency lending, brokerage, property sales, servicing, and affordable-housing investment management.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $340.8 million (+21%) | $281.4 million | $660.3 million (+31%) | $505.7 million |
| Walker & Dunlop net income | $54.3 million (-3%) | $56.1 million | $125.5 million (+10%) | $114.1 million |
| Diluted EPS | $1.61 | $1.73 | $3.73 | $3.52 |
| Operating margin | 22% | 26% | 25% | 29% |
| Adjusted EBITDA (non-GAAP) | $94.8 million (+43%) | $66.5 million | $157.5 million (+24%) | $127.2 million |
- Revenue mix and performance: Q2 property sales broker fees rose 107% to $46.4 million, investment management fees rose 170% to $10.3 million, and servicing fees rose 8% to $74.3 million. Lower origination fees and servicing-rights fair-value income partly offset these gains. H1 other revenue included a $39.6 million nonrecurring gain from remeasuring the previously held Apprise investment.
- Cash flow: H1 operating cash flow was $853.9 million, investing cash outflow was $113.9 million, and financing cash outflow was $937.4 million. The operating cash figure was materially affected by loan originations and sales; excluding that activity, operating cash flow was $21.7 million, versus $27.6 million a year earlier. Cash, cash equivalents, and restricted cash totaled $195.8 million at June 30, down from $393.2 million at year-end 2021.
- Balance sheet and debt: Total assets were $4.53 billion, versus $5.21 billion at December 31, 2021, primarily reflecting lower loans held for sale as warehouse borrowings also declined. Warehouse notes payable were $1.13 billion and other notes payable $719.2 million. The $597.0 million term loan bears interest at adjusted Term SOFR plus 225 basis points; Alliant’s $126.9 million note bears fixed interest of 4.75%. Total equity was $1.67 billion.
- Liquidity: The company reported $116.0 million of operational liquidity at its operating subsidiary, against a $52.8 million requirement, and net worth of $621.6 million against a $266.2 million requirement. It had $5.90 billion of total warehouse facility capacity, with $1.13 billion outstanding, and reported compliance with applicable warehouse and credit-agreement covenants.
Material changes and business developments
- Total transaction volume rose 67% in Q2 to $22.5 billion and 56% in H1 to $35.2 billion. H1 debt financing volume increased 33%; property sales volume increased 141%.
- GeoPhy was acquired on February 28, 2022, bringing the company to full ownership of appraisal venture Apprise. Acquisition accounting remained provisional. The company recorded $937.9 million of goodwill at June 30, including acquisition-related additions.
- Assets under management increased to $16.7 billion from $1.8 billion a year earlier, mainly reflecting the Alliant acquisition. The total servicing portfolio grew to $119.0 billion from $112.3 billion.
- Despite overall volume growth, Q2 net income and diluted EPS declined, and reported operating margin fell. Personnel, amortization, corporate interest, and other operating expenses increased.
Outlook, commentary, and risks
- Management said multifamily fundamentals remained strong, citing low vacancy and rent growth, while noting inflation and rising rates. It expected commercial real estate transaction activity to slow from Q2 peaks but remain active, and anticipated Agency lending volumes to accelerate in H2 2022. Management also warned that servicing fees and profitability on Agency executions could decline as credit spreads tighten.
- No full-year earnings or revenue guidance was provided. Management estimated an effective tax rate of approximately 26.5%–27.5% for the remainder of 2022.
- The Board declared a $0.60-per-share Q3 dividend, payable September 2, 2022. A $75 million repurchase program had $63.9 million of capacity remaining at June 30.
- Interest-rate exposure includes higher warehouse and term-loan costs; a 100-basis-point rate increase was estimated to reduce annual income from operations by $6.0 million on corporate debt and annual net warehouse interest income by $11.3 million, before other effects. MSR valuations are also rate-sensitive: a 100-basis-point increase in the discount rate would reduce estimated MSR fair value by $40.6 million.
- Fannie Mae risk-sharing remains a material contingent exposure. The at-risk servicing portfolio was approximately $51.9 billion; the company’s maximum quantifiable contingent liability was $10.5 billion, which the filing says is not representative of expected losses. Three at-risk loans totaling $78.7 million were in default. The CECL reserve for the at-risk portfolio was $37.7 million.
- GeoPhy earnouts and other contingent consideration require estimates: contingent consideration liabilities totaled $218.2 million, with maximum remaining undiscounted earnouts of $323.8 million. Management noted uncertainty about whether historical achievement of earnouts at maximum amounts will continue. Ordinary-course litigation was not considered material; the filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of revenue and earnings growth is recurring, particularly given the $39.6 million Apprise revaluation gain and acquisition-related contributions?
- Whether higher rates, lower servicing-rights value, changing origination mix, or slower transaction activity pressure margins and earnings in subsequent quarters.
- How effectively the company integrates GeoPhy and Alliant, and whether acquisition earnout milestones and related payments are achieved.
- Whether liquidity remains adequate as warehouse funding, servicing advances, collateral requirements, dividends, repurchases, and debt service evolve; the filing estimates $70.4 million of additional DUS restricted liquidity over 48 months, assuming no portfolio runoff or defaults.
- Whether credit performance and reserves remain appropriate for the Fannie Mae risk-sharing portfolio, including the defaulted loans and the assumptions underlying CECL estimates.