Walker & Dunlop, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although the request identifies 2011 Q4, this is an annual filing; selected fourth-quarter figures are included below. Amounts are in U.S. dollars.
Business context
Walker & Dunlop originates, sells and services commercial real estate loans, primarily multifamily, through Fannie Mae, Freddie Mac, HUD/Ginnie Mae and institutional investors. It retains servicing rights on most loans. Most loans are sold or placed with investors; Fannie Mae DUS lending carries risk-sharing obligations. The company launched an interim loan program in July 2011, taking full credit risk on loans held for investment; its first loan closed in February 2012.
Financial performance and position
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Total revenue | $152.4 million | $121.8 million | Up 25% |
| Income from operations | $56.7 million | $40.1 million | Up 41% |
| Operating margin | 37% | 33% | Up 4 percentage points |
| Net income | $34.9 million | $8.2 million | 2010 was depressed by $31.9 million of tax expense, including a one-time deferred tax charge |
| Diluted EPS | $1.60 | $0.55 | Not directly comparable due to 2010 tax-status change and share-count increase |
| Total originations | $4.03 billion | $3.17 billion | Up 27% |
| Servicing portfolio, year-end | $16.78 billion | $14.62 billion | Up 15% |
On a pro forma basis, applying corporate taxes to 2010 results, 2010 net income was $24.6 million; management reported 2011 net income was 42% above that adjusted comparison. Mortgage banking gains were $102.7 million, servicing fees $33.6 million, and other revenue $10.4 million. Other revenue included a $2.5 million assumption fee and a $1.75 million litigation settlement/break-up fee.
Fourth quarter: Revenue was $47.6 million, operating income $17.9 million, net income $11.0 million, diluted EPS $0.50, and originations $1.30 billion. Fourth-quarter 2010 revenue was $36.1 million and operating income $10.6 million; reported net loss of $21.3 million reflected the tax-status-related deferred tax charge.
Cash flow and liquidity: Operating cash flow was $58.1 million in 2011 versus cash used of $171.3 million in 2010, substantially reflecting timing and volume of loans funded and sold. Excluding loan purchases and sales, operating cash flow was $18.4 million versus $28.0 million. Capital expenditures were $3.8 million; financing cash outflow was $33.8 million. Year-end cash was $53.8 million, up from $33.3 million.
Debt and capital: At year-end, warehouse notes payable were $218.4 million and other notes payable $23.9 million. Warehouse borrowings generally fund loans held for sale; the balance-sheet also included $268.2 million of loans held for sale. The $23.4 million term note was extended to October 2015. The company reported compliance with warehouse and term-loan covenants. Required operational liquidity was $9.2 million against reported operational liquidity of $53.8 million; reported subsidiary net worth of $178.7 million exceeded Fannie Mae’s $49.4 million requirement.
Credit and servicing: Fannie Mae DUS at-risk servicing balances were $7.50 billion. The 60-plus-day delinquency rate declined to 0.25% from 0.85%; the risk-sharing allowance rose to $14.9 million from $10.9 million. 2011 net write-offs were $0.7 million. Serviced-loan advances and DUS loss-sharing can pressure cash flow if delinquencies rise.
Material changes versus the prior period
- Originations grew 27%, led by higher Fannie Mae, Freddie Mac and other investor volume; HUD originations declined. GSE/HUD loans represented 80% of originations versus 86% in 2010.
- Servicing fees increased 24%, reflecting portfolio growth and a higher weighted-average servicing fee rate (22 basis points versus 20).
- Origination fees per volume declined to 120 basis points from 133, while total mortgage banking gains still rose 21% with increased production and servicing-rights value.
- Total expenses rose 17%, less than revenue growth. Personnel and amortization/depreciation costs increased with production and MSR growth; risk-sharing provision fell 37% to $4.7 million as credit performance improved.
- Fannie Mae collateral requirements had increased for certain loan tiers, with approximately $9.6 million of additional collateral expected over three years based on the year-end portfolio. The company said announced 2012 changes were not expected to materially affect it, but future changes could.
Outlook, risks and unusual items
- Management expected GSEs and HUD to continue supplying significant multifamily-market capital in 2012 and anticipated increased commercial and multifamily refinancing activity. It gave no specific financial guidance.
- GSE reform remains uncertain and is a central business risk: a reduction or restructuring of Fannie Mae or Freddie Mac could impair loan production and servicing revenues. The company depends heavily on these programs.
- Warehouse funding is essential and some facilities require renewal or are uncommitted. The Freddie Mac master purchase and sale agreement was due to expire March 16, 2012. A March 8, 2012 amendment increased a PNC committed line from $150 million to $350 million, extended maturity to February 2013 and reduced the borrowing spread; after the agreement’s expiration, management expected $500 million of committed bank funding, plus Fannie Mae ASAP capacity and the interim-loan facility.
- Fannie Mae DUS risk-sharing can expose the company to losses of up to 20% of loan principal under the standard formula, potentially more in specified cases. The allowance is an estimate and may not cover actual losses. HUD/Ginnie Mae servicing also requires payment advances; Ginnie Mae was considering, but had not implemented, a change to its reimbursement obligation.
- The interim lending program introduces direct credit exposure, unlike the largely pre-sold loan model. Its $35 million committed facility is full recourse to the company.
- Capital Funding litigation remained in discovery, with trial scheduled for July 2012. The plaintiff sought substantial damages; contractual indemnification arrangements limit the company’s stated damage exposure to $3 million, though interim legal costs and recovery under indemnities remain relevant. A separate Drumm matter settled for a $1.75 million fee, recorded in Q4 2011, with no remaining exposure.
- Management described improving multifamily occupancy, rents and loan performance in 2011, while noting that broader economic weakness and market-specific fundamentals remained risks. The company does not anticipate cash dividends in the foreseeable future.
- The financial statements received an unqualified audit opinion from KPMG; management and the auditor reported effective internal control over financial reporting as of December 31, 2011.
Key facts for investors to verify
- Whether origination growth and margins persist, particularly given lower origination fees per volume and non-routine 2011 revenue items.
- Fannie Mae/Freddie Mac policy and reform developments, the company’s program approvals, and actual collateral requirements and funding.
- Delinquency trends, DUS allowance adequacy, advances, loss-sharing settlements and any loan repurchase or indemnification claims.
- Availability, renewal terms and covenant headroom of warehouse facilities, including the transition away from the Freddie Mac funding agreement.
- Performance and risk concentration of the new interim loan portfolio as it grows, and the impact of interest-rate or MSR valuation changes.
- Outcome and indemnity recovery in the Capital Funding litigation, and the reconciliation of reported net income with tax-normalized results.