Walker & Dunlop, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. Walker & Dunlop provides commercial real estate finance and services, with a primary focus on multifamily lending, loan servicing, debt brokerage and property sales.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $224.3 million | $234.2 million | Down 4% |
| Income from operations | $73.2 million | $60.3 million | Up 21% |
| Walker & Dunlop net income | $58.1 million | $47.8 million | Up 21% |
| Diluted EPS | $1.79 | $1.49 | Up 20% |
| Operating margin | 33% | 26% | Up 7 percentage points |
| Adjusted EBITDA (non-GAAP) | $60.7 million | $64.1 million | Down 5% |
Revenue declines reflected lower fair-value servicing income and escrow/other interest income, partly offset by 19% growth in servicing fees. The credit-loss line shifted from a $23.6 million expense in Q1 2020 to an $11.3 million benefit in Q1 2021, a principal contributor to higher operating income and net income.
- Revenue drivers: Loan origination and debt brokerage fees were $75.9 million, down 1%; fair value of expected net servicing cash flows was $57.9 million, down 15%; servicing fees were $66.0 million, up 19%. Escrow earnings and other interest income fell 80% to $2.1 million.
- Volumes: Total debt financing volume was $7.65 billion, down 21%; total transaction volume, including property sales, was $9.04 billion, down 20%. Fannie Mae volume fell to $1.53 billion from $4.17 billion, while brokered volume rose to $4.30 billion from $3.99 billion.
- Cash flow: Operating cash flow was $1.316 billion versus a $292.6 million use in Q1 2020. The large swing mainly reflected loan-sale proceeds exceeding originations by $1.34 billion in Q1 2021, compared with originations exceeding sales by $321.5 million a year earlier; it should not be read as recurring operating cash generation. Investing activities provided $81.2 million; financing activities used $1.423 billion, principally due to net warehouse debt repayments.
Financial position and liquidity
- At March 31, 2021, cash and cash equivalents were $277.3 million; restricted cash was $14.8 million. Including pledged cash and cash equivalents, total cash and restricted cash for cash-flow reporting was $331.6 million.
- Total assets were $3.204 billion, down from $4.651 billion at year-end, and total liabilities were $1.959 billion, down from $3.455 billion. The contraction largely tracked loans held for sale and related warehouse financing: loans held for sale declined to $1.048 billion from $2.449 billion, while warehouse notes payable fell to $1.112 billion from $2.517 billion.
- Stockholders’ equity was $1.245 billion, compared with $1.196 billion at year-end. The term loan had a $294.0 million outstanding principal balance; its balance-sheet carrying amount was $291.0 million. It matures in November 2025 and bears interest at 30-day LIBOR plus 200 basis points.
- Warehouse facilities totaled $5.795 billion of capacity, with $1.112 billion outstanding. The facilities include substantial uncommitted capacity; management said current facilities and capital were adequate for origination needs. The company reported compliance with warehouse and term-loan covenants.
- The servicing portfolio was $109.9 billion, up from $94.8 billion a year earlier. The at-risk Fannie Mae servicing portfolio was $45.4 billion, with a $64.6 million risk-sharing allowance. The maximum quantifiable contingent exposure under Fannie Mae guarantees was $9.3 billion; the filing emphasizes this is a worst-case measure, not an estimate of expected loss.
Material changes, outlook and risks
- Management attributed the Q1 2021 credit-loss benefit to improving economic conditions and lower forecast unemployment, which reduced the forecast-period loss rate for risk-sharing reserves from 6 to 4 basis points. The comparable Q1 2020 provision reflected pandemic-related unemployment expectations.
- Management described Agency lending as active and debt brokerage volumes as recovered to pre-pandemic levels. It said multifamily fundamentals remained relatively stable, while rent growth was broadly flat and property-sale activity was recovering. No full-year earnings or revenue guidance is provided. Management estimated a 25%–26% effective tax rate for the remainder of 2021.
- COVID-19-related borrower forbearance could increase delinquencies, losses and servicing advances if borrowers cannot resume payments. Advances outstanding under Fannie Mae and HUD arrangements were immaterial at quarter-end, but HUD advance obligations can continue until a loan is resolved or assigned.
- MSRs are a significant valuation-sensitive asset: the net carrying value was $909.9 million, and a 100-basis-point increase in the discount rate would reduce estimated fair value by $36.0 million. Rate changes also affect escrow income, warehouse spreads and corporate debt costs. The filing notes LIBOR is scheduled to cease after June 30, 2023 for the relevant tenor and that the company is assessing the transition.
- Other notable items: the company acquired certain assets of an investment-sale brokerage business for $12.7 million, including $7.5 million cash and $5.2 million contingent consideration; it authorized a $75 million share-repurchase program but made no repurchases under it during the quarter. It paid a $0.50-per-share dividend and declared the same amount for Q2 2021. Ordinary-course litigation was described as immaterial; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether earnings improvement persists without the unusually favorable year-over-year swing in credit-loss provisions.
- Origination mix and volumes—especially Fannie Mae activity—and the conversion of non-cash MSR income into recurring servicing fees and cash flow.
- MSR valuation assumptions, prepayment behavior and sensitivity to discount rates; the balance-sheet MSR carrying value differs from the disclosed portfolio fair value.
- Fannie Mae risk-sharing exposure, reserve adequacy, and possible future collateral requirements, including the stated $69.7 million of additional restricted liquidity to be funded over 48 months under stated assumptions.
- Warehouse facility renewals, availability of uncommitted lines, covenant compliance and the company’s exposure to LIBOR transition and interest-rate movements.
- Interim-loan credit performance, including the delinquent $14.7 million loan held for investment and the two defaults in the at-risk servicing portfolio.