Walker & Dunlop, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 2, 2018. Walker & Dunlop originates, sells and services multifamily and other commercial real estate loans, and provides multifamily investment-sales brokerage services.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $147.5 million | $158.5 million; down 7% |
| Income from operations | $43.9 million | $56.1 million; down 22% |
| Walker & Dunlop net income | $36.9 million | $43.2 million; down 15% |
| Diluted EPS | $1.16 | $1.35 |
| Adjusted EBITDA (non-GAAP) | $52.1 million | $50.3 million; up 4% |
| Operating margin / return on equity | 30% / 18% | 35% / 28% |
| Operating cash flow | $177.0 million | $644.1 million |
| Cash, cash equivalents and restricted cash | $285.1 million | $286.7 million at Dec. 31, 2017 |
| Total assets / total equity | $2.05 billion / $832.3 million | $2.21 billion / $815.0 million at Dec. 31, 2017 |
Revenue mix included $81.5 million of mortgage-banking gains (down 15%), $48.0 million of servicing fees (up 16%), $1.9 million of net warehouse interest income (down 72%), and $7.3 million of escrow earnings and other interest income (up 123%). The Q1 effective tax rate was 16.4%; management cited tax reform and $4.1 million of excess tax benefits. Its estimated annual effective tax rate was 25.7%.
At March 31, warehouse notes payable were $802.5 million and the term note payable was $163.8 million. Total liabilities were $1.22 billion. Warehouse facilities had $5.0 billion of total capacity, including uncommitted capacity. The company reported compliance with its warehouse and term-loan covenants. The servicing portfolio was $76.0 billion, up from $74.5 billion at year-end 2017.
Material changes versus prior year
- Total loan originations were $4.51 billion, down 5%; total transaction volume was $4.85 billion, down 3%. Fannie Mae originations fell 34% to $1.24 billion, while Freddie Mac, HUD/Ginnie Mae and brokered originations increased. Brokered volume rose 18% and HUD volume rose 70%.
- Lower mortgage-banking gains reflected reduced Fannie Mae volume and lower MSR gains: MSR income was $32.7 million versus $45.5 million, and the MSR gain rate was 72 basis points versus 96 basis points. Origination fee rates remained 108 basis points.
- Servicing fees benefited from a 19% larger average servicing portfolio. Warehouse interest income declined as average loan balances fell and the loans-held-for-sale net spread narrowed to 46 basis points from 120 basis points.
- Operating cash flow was lower largely because cash received from loan origination activity, net of loan sales, was $163.3 million versus $653.7 million. Management cautioned that loan funding and sale timing affects period-end cash flows.
- The company paid its first public-company quarterly dividend, $0.25 per share, and repurchased 244,000 shares under a prior program. A new $50 million repurchase authorization was in place, with all capacity remaining at quarter-end.
Outlook, commentary and risks
- Management described multifamily market fundamentals as strong and expected continued market strength in 2018, while noting competition, moderating rent growth and increased vacancy in reported market data. No specific company revenue or earnings guidance was provided.
- Fannie Mae and Freddie Mac’s 2018 market-rate multifamily origination caps were set at $35 billion each, below $36.5 billion each in 2017. Management said reduced GSE production contributed to lower company GSE originations and that further declines could reduce non-cash MSR gains and future servicing revenue.
- The Federal Reserve raised its target rate by 25 basis points in Q1. Management warned that a flatter yield curve could continue to pressure warehouse spreads. A 100-basis-point increase in discount rate would reduce MSR fair value by an estimated $19.9 million; this is a sensitivity, not a forecast.
- Fannie Mae DUS risk-sharing maximum quantifiable contingent exposure was $5.9 billion; this is a contractual maximum under extreme assumptions, not management’s estimate of likely loss. The risk-sharing allowance was $3.1 million, and one loan in the at-risk portfolio was 60-plus days delinquent. Additional restricted liquidity of $64.8 million was expected to be funded over 48 months, assuming no portfolio changes.
- Most warehouse funding is short-term and partly uncommitted; renewals and continued access on acceptable terms are important. Higher short-term rates, GSE policy or cap changes, commercial real estate conditions, and borrower or property credit deterioration could affect results and liquidity.
- The company completed its $32 million cash acquisition of JCR Capital on April 12, 2018, after quarter-end. Purchase accounting was not complete when the filing was issued. It expected to continue quarterly dividends, subject to applicable debt and agency requirements.
- Management reported no material change in risk factors from the 2017 Form 10-K, no material litigation, and effective disclosure controls. The expected January 2020 adoption of the credit-loss standard was anticipated to increase the risk-sharing allowance; the amount of impact was not yet determined.
Important facts for investors to verify
- Whether GSE and Fannie Mae origination volumes, caps, and the expected increase in the full-risk-sharing cap to $175 million develop as management anticipated.
- Whether servicing growth and recurring servicing revenue can offset lower MSR gains, prepayments and amortization.
- Warehouse facility renewal terms, uncommitted availability, covenant compliance, and the effect of LIBOR changes on funding spreads and corporate debt.
- Changes in DUS delinquencies, watch-list loans, required restricted liquidity and realized losses relative to the disclosed maximum exposure.
- JCR acquisition accounting and performance, and the sustainability of dividends and share repurchases alongside liquidity and capital requirements.