Walker & Dunlop, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited. Walker & Dunlop provides commercial real estate financing and services, with a primary focus on multifamily lending, loan servicing, debt brokerage, and property sales.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $346.3 million | $247.0 million | $852.0 million | $734.0 million |
| Operating income | $94.7 million | $69.1 million | $242.2 million | $212.9 million |
| Walker & Dunlop net income | $71.7 million | $53.2 million | $185.8 million | $163.1 million |
| Diluted EPS | $2.21 | $1.66 | $5.73 | $5.11 |
| Reported operating margin | 27% | 28% | 28% | 29% |
| Adjusted EBITDA (non-GAAP) | $72.4 million | $45.2 million | $199.6 million | $157.7 million |
Q3 revenue increased 40% and net income 35% year over year; nine-month revenue increased 16% and net income 14%. Adjusted EBITDA rose 60% in Q3 and 27% for the nine-month period. The filing reports return on equity of 22% versus 20% for Q3 and 20% versus 21% for the nine-month periods.
Revenue drivers and material changes
- Q3 growth reflected higher loan origination and debt brokerage fees (+47%), servicing fees (+17%), property sales broker fees (+398%), and other revenue (+162%). Property sales and brokered financing volumes rebounded sharply from pandemic-affected Q3 2020.
- Nine-month origination fees rose 29%, servicing fees 19%, and property sales broker fees 227%. Fair value of expected servicing cash flows declined 11% for the nine months, reflecting lower Agency financing volume, while it rose 15% in Q3.
- Total transaction volume was $18.5 billion in Q3, versus $8.4 billion; nine-month volume was $41.1 billion, versus $26.9 billion. Servicing portfolio unpaid principal balance reached $113.9 billion, up from $103.4 billion a year earlier.
- Expenses increased 41% in Q3 and 17% for nine months, particularly personnel costs, amortization and depreciation, and other operating expenses. Personnel costs reflected commissions, higher headcount, salaries and benefits, and stock compensation.
- The nine-month credit-loss line was a $14.4 million benefit, versus a $32.0 million provision in 2020, mainly from improved economic forecasts and lower estimated risk-sharing losses. The risk-sharing allowance was $61.6 million, down from $75.3 million at year-end 2020.
- Net warehouse interest income fell 26% in Q3 and 34% for nine months. Nine-month escrow and other interest income declined 62%, primarily due to lower short-term interest rates.
Cash flow, balance sheet, debt and liquidity
- Cash from operating activities was negative $197.0 million for the nine months, compared with negative $2.30 billion in 2020. Excluding loan origination activity, operating cash flow was positive $104.9 million, versus $109.5 million. Management attributes the reported volatility mainly to timing and volume of loans originated and sold.
- Investing cash flow was positive $49.3 million; financing cash flow was positive $194.3 million. Cash, cash equivalents, restricted cash and restricted cash equivalents totaled $404.6 million at period end. Cash and cash equivalents alone were $318.2 million.
- Total assets were $5.12 billion and total equity $1.38 billion at September 30, 2021. Loans held for sale were $2.71 billion; mortgage servicing rights had a $929.8 million net carrying value and $1.2 billion estimated fair value.
- Warehouse notes payable were $2.85 billion and the term loan carrying amount was $289.8 million (principal outstanding $292.5 million). Warehouse facilities provided $6.04 billion of total capacity, including uncommitted facilities; the company reported compliance with related covenants.
- Agency operational liquidity was $254.7 million against a $49.5 million minimum, and defined net worth was $1.1 billion against a $250.2 million requirement. An additional $64.2 million of restricted liquidity was expected to be funded over 48 months for Fannie Mae DUS requirements, assuming no portfolio changes.
- Dividends were $0.50 per share in each of the first three quarters, up from $0.36 in 2020. The board declared a further $0.50 dividend for Q4. A $75 million repurchase authorization remained unused at September 30; shares withheld for employee tax obligations are distinct from program repurchases.
Outlook, risks and unusual items
- Management described improving multifamily fundamentals, low interest rates, and recovering debt brokerage and property sales activity. It expected Agency lending to accelerate in Q4 2021, citing remaining GSE lending capacity. FHFA set 2022 multifamily origination caps at $78 billion each for Fannie Mae and Freddie Mac, announced after quarter-end.
- Management estimated a 25.5%–26.5% effective tax rate for the remainder of 2021. The filing provides no quantitative company revenue or earnings guidance.
- The pending Alliant acquisition had a stated enterprise value of $696 million: $361 million cash and assumed securitized debt, $90 million in Walker & Dunlop stock, and $100 million of earn-out participation. Closing was expected in Q4 2021, subject to approvals and consents. The company was arranging a $600 million, seven-year term loan to refinance existing debt and fund part of the cash consideration. Failure to close may entail transaction costs and, in some circumstances, a $20 million termination fee; integration and financing are also risks.
- In Q3, the company acquired a 75% interest in Zelman & Associates, adding housing research and investment banking services. Acquisition activity contributed $84.3 million of goodwill additions in the first nine months.
- Fannie Mae DUS risk-sharing creates contingent credit exposure. The maximum quantifiable exposure was $9.8 billion, which the company cautions is not representative of expected loss. Two loans totaling $48.5 million were in default; the company reported no defaults or material delinquencies in its broader at-risk servicing portfolio since the pandemic began, and had never been required to repurchase a loan.
- MSR valuations are sensitive to assumptions: a 100-basis-point increase in the discount rate would reduce fair value by an estimated $37.2 million. Most warehouse and corporate debt referenced LIBOR; the company was monitoring the transition to alternative rates. Management cited reliance on warehouse funding, Agency programs, market volumes, interest rates, staffing, and acquisition execution as relevant business risks. Ordinary-course litigation was not considered material.
Important facts for investors to verify
- Whether Alliant closed on the anticipated terms and timing, and the final acquisition funding, debt, and earn-out structure.
- Subsequent trends in origination and property sales volumes, Agency lending capacity, and the company’s ability to sustain servicing-fee growth.
- MSR valuation assumptions, amortization, prepayments, and sensitivity to interest-rate movements.
- Changes in the DUS risk-sharing allowance, defaults, collateral requirements, and required liquidity funding.
- Warehouse facility renewals and capacity, LIBOR transition arrangements, and the effect of borrowing costs on margins and liquidity.
- Cash conversion and operating cash flow excluding the timing effects of loan originations and sales; adjusted EBITDA is non-GAAP and is not a measure of free cash flow.