Walker & Dunlop, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Walker & Dunlop originates, brokers, sells and services commercial real estate loans, primarily multifamily, and provides multifamily investment sales services. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and condition
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $166.4 | $147.9 | $324.9 | $242.1 |
| Income from operations | $56.1 | $51.7 | $112.2 | $75.9 |
| Walker & Dunlop net income | $34.6 | $32.0 | $77.8 | $47.5 |
| Diluted EPS | $1.08 | $1.05 | $2.43 | $1.55 |
| Operating margin | 34% | 35% | 35% | 31% |
| Adjusted EBITDA (non-GAAP) | $51.0 | $27.1 | $101.3 | $59.5 |
- Revenue mix: Q2 mortgage banking gains were $102.2 million, nearly flat year over year; servicing fees rose 32% to $43.2 million. For the first half, mortgage banking gains rose 33% to $198.6 million and servicing fees rose 32% to $84.7 million.
- Margins and costs: Q2 operating income increased 8%, slower than revenue growth of 13%, as total expenses rose 15% to $110.3 million. Personnel expense rose 14% and amortization and depreciation rose 24%, partly reflecting higher origination activity, headcount and MSR balances. First-half operating income rose 48% as revenue growth outpaced expense growth.
- Cash flow: First-half operating cash flow was $420.1 million, investing cash outflow $94.5 million and financing cash outflow $377.5 million. Cash, restricted cash and pledged securities totaled $161.5 million at June 30, versus $213.5 million at year-end; unrestricted cash and cash equivalents were $53.3 million. Operating cash flow includes substantial loan origination and sale activity and is affected by timing.
- Debt and liquidity: Warehouse notes payable were $1.630 billion and the corporate note payable was $164.0 million. Warehouse facilities totaled $4.195 billion in stated capacity, including a $1.5 billion uncommitted Fannie Mae facility. The company reported compliance with debt covenants. Operating-subsidiary operational liquidity was $102.6 million against a $27.7 million requirement; net worth was $575.1 million against a $141.2 million minimum.
- Servicing and credit: Servicing portfolio unpaid principal balance grew to $66.3 billion from $63.1 billion at year-end. Net MSRs were $573.2 million; fair value was $748.4 million. No interim loans were delinquent, impaired or on non-accrual, and there were no 60-day delinquencies in the at-risk servicing portfolio.
Material changes versus prior comparable periods
- Q2 revenue rose 13% and net income rose 8%; the quarter’s mortgage banking gains were essentially unchanged, while servicing fees and interest-related revenue increased.
- First-half revenue rose 34% and net income rose 64%. Loan origination volume increased 44% to $10.4 billion, led by brokered originations (+67%), HUD/Ginnie Mae (+159%) and higher Fannie Mae and Freddie Mac volume. First-half investment sales volume fell 18% to $638.6 million.
- First-half operating cash flow increased 21%; the company also recorded $15.0 million of acquisition spending, repurchased $17.6 million of stock and made $11.4 million of preferred equity investments.
Outlook, management commentary and risks
- Management expected the multifamily market to have record origination volumes in 2017 and described its outlook for the capital-markets platform as positive. The filing provides no company earnings or revenue guidance. Management cited a Freddie Mac estimate of $295 billion for the 2017 multifamily market and stated that GSEs remained major sources of capital.
- The company formed a joint venture in Q2, retaining a 15% interest and responsibility for sourcing, underwriting, servicing and asset management. It expected substantially all future loans meeting Interim Program criteria to be originated through the venture. Subsequent to quarter-end, it sold $119.8 million of interim loans to the JV at par.
- Management noted strong multifamily fundamentals but slowing rent growth and a slight increase in vacancy as construction remained high. It also cited intense competition, possible changes to GSE production limits, interest-rate and yield-curve uncertainty, and potential spread pressure if short-term rates rise faster than longer-term rates.
- Warehouse funding is important to loan origination; several facilities had maturities in 2017, and Agency Warehouse Facility #2 had only a short-term extension through September 11, 2017, with a longer extension and a separate facility expected. The company disclosed cross-default provisions among warehouse facilities.
- Fannie Mae DUS guarantees had a stated maximum quantifiable contingent exposure of $5.3 billion, which the company cautioned is not representative of expected loss. It expected to fund an additional $61.1 million of restricted liquidity over 48 months under then-current assumptions. Preferred equity commitments totaled $42.8 million, of which $36.2 million was funded; the remainder was expected to be funded by year-end.
- MSR fair value is sensitive to valuation assumptions: a 100-basis-point increase in the discount rate would reduce fair value by approximately $23.8 million. The company also disclosed that the expected credit-loss accounting standard, when adopted, is expected to increase its loan-loss and risk-sharing allowances; the amount was not yet determined.
- Ordinary-course litigation was described as not material. The company reported no material changes to risk factors from its 2016 Form 10-K and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether the growth in originations and servicing fees continues, and how changing product mix affects origination revenue and MSR gains.
- Warehouse facility extensions, renewal terms and available committed capacity, particularly following the disclosed 2017 maturities and short-term extension.
- Actual cash generation apart from loan origination and sale timing, and the liquidity impact of DUS collateral requirements and preferred equity commitments.
- Performance of the interim-loan joint venture and the extent to which it changes the company’s capital needs, risk exposure and earnings contribution.
- MSR valuation assumptions, prepayments and amortization, as well as realized losses under DUS risk-sharing relative to the disclosed maximum exposure.
- How multifamily rent growth, new supply, interest rates, GSE limits and competition affect loan demand, spreads and profitability.