Walker & Dunlop, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Walker & Dunlop is a commercial real estate finance and services company focused primarily on multifamily lending; it originates, sells and services loans, brokers commercial real estate financing, and provides multifamily investment sales brokerage.
Financial performance and position
- Revenue: $711.9 million, up 24% from $575.3 million in 2016. Mortgage banking gains were $439.4 million (+20%) and servicing fees were $176.4 million (+25%).
- Profit: Operating income was $233.7 million (+26%); Walker & Dunlop net income was $211.1 million (+85%); diluted EPS was $6.56 versus $3.65. The 2017 effective tax rate was 9.3%, compared with 38.5% in 2016.
- Margins and returns: Operating margin was 33% versus 32%; return on equity was 31% versus 21%. Adjusted EBITDA, a non-GAAP measure, was $201.0 million, up 55%.
- Origination and servicing: Loan originations totaled $24.9 billion, up 49%; total transaction volume was $27.9 billion, up 45%. The servicing portfolio reached $74.5 billion, up 18%.
- Cash flow: Operating cash flow was $1.07 billion, but included timing-related loan origination and sale flows. Excluding loan origination activity, operating cash flow was $148.2 million, versus $102.7 million in 2016. Year-end cash and cash equivalents were $191.2 million; cash, restricted cash and pledged securities totaled $295.8 million.
- Debt and liquidity: Year-end warehouse notes payable were $937.8 million and the term note carrying value was $163.9 million. Warehouse capacity totaled $5.05 billion, including $3.3 billion committed and $1.5 billion uncommitted Agency capacity; outstanding warehouse balances were approximately $939.5 million. The company reported $238.6 million of operational liquidity against a $30.7 million requirement and $725.9 million of operating-subsidiary net worth against a $155.8 million requirement. It reported compliance with debt and warehouse covenants.
- Risk exposures: Fannie Mae risk-sharing obligations covered a $28.1 billion at-risk portfolio; the allowance was $3.8 million and the separate guaranty obligation was $41.2 million. One $6.0 million loan was 60 or more days delinquent, or 0.02% of the at-risk portfolio. Interim loans held for investment totaled $67.0 million across five loans.
Material changes versus 2016
- Revenue growth reflected higher originations, servicing income, escrow earnings and other fees. Personnel expense rose 27% to $289.3 million, and amortization and depreciation rose 18% to $131.2 million, reflecting business growth, higher staffing and a larger mortgage servicing rights (MSR) balance.
- Net income growth materially benefited from the December 2017 Tax Cuts and Jobs Act. Revaluation of deferred tax liabilities reduced tax expense by $58.3 million; excess stock-compensation tax benefits reduced tax expense by a further $9.5 million. The resulting earnings increase should not be treated as wholly representative of recurring operating growth.
- Year-end assets fell to $2.21 billion from $3.05 billion, primarily alongside a decline in loans held for sale to $951.8 million from $1.86 billion; warehouse notes payable also declined to $937.8 million from $2.0 billion. Equity increased to $815.0 million from $615.1 million.
- The company formed a 15%-owned Interim Program joint venture in 2017. It transferred $119.8 million of interim loans to the venture at par and expects substantially all qualifying future interim originations to be made through the venture, which assumes the loans’ full risk of loss.
Outlook, commentary and risks
- Management described multifamily fundamentals as strong, citing high occupancy, continued rent growth and low delinquencies, while noting rent growth had slowed and multifamily construction was near a 40-year high. It expected continued market strength in 2018.
- The company’s stated goals for the end of 2020 were annual loan originations of $30–$35 billion, investment sales volume of $8–$10 billion, a $100 billion servicing portfolio and $8–$10 billion of assets under management. These are targets, not guarantees.
- The FHFA set 2018 market-rate multifamily purchase caps of $35 billion each for Fannie Mae and Freddie Mac, with specified affordable-housing and other exclusions. Changes to GSE policy, conservatorship or lending capacity could materially affect originations, servicing and earnings.
- Key risks include dependence on Agency and institutional relationships; renewals and availability of short-term warehouse funding; Fannie Mae credit-sharing and loan repurchase or indemnification exposure; changes in interest rates, loan pricing and MSR values; competition; and a downturn or oversupply in commercial or multifamily real estate. A 100-basis-point increase in the MSR discount rate would reduce estimated MSR fair value by about $26.3 million.
- Management said Hurricanes Harvey and Irma had no material impact on the 2017 risk-sharing allowance based on information then available, but noted later delinquencies or defaults remained possible. Ordinary-course litigation was not considered material.
- The board declared a first-ever quarterly dividend of $0.25 per share in February 2018 and authorized a new $50 million share repurchase program. Dividends remain subject to board decisions and debt, liquidity and Agency restrictions.
- The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of year-end.
Fourth-quarter snapshot
Fourth-quarter 2017 revenue was $207.2 million and diluted EPS was $3.06. Net income was $99.0 million, compared with $36.8 million in fourth-quarter 2016; the filing attributes the sharp year-over-year comparison in part to the tax-law change and its effect on income tax expense.
Most important facts for investors to verify
- How much of 2017 net income and EPS growth is sustainable after excluding the $58.3 million tax-reform benefit and unusually large stock-compensation tax benefits.
- Whether origination growth, servicing-fee expansion and the 2020 strategic targets are achievable amid GSE limits, competitive pressure and changing multifamily supply and rent trends.
- The renewal terms and actual availability of committed and uncommitted warehouse facilities, including the effect of short-term maturities and cross-default provisions.
- Future credit performance, Fannie Mae risk-sharing losses, required collateral funding and any change in the allowance under the expected-credit-loss accounting standard.
- MSR valuation assumptions and sensitivity, including prepayment behavior, discount rates and the concentration of servicing income in Agency programs.
- The sustainability of the new dividend and repurchase activity after considering capital needs, debt covenants and regulatory liquidity requirements.