Walker & Dunlop, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The company originates, sells and services commercial real estate loans, primarily multifamily, through Fannie Mae, Freddie Mac and HUD programs, and also brokers loans for institutional investors. Financial amounts below are in U.S. dollars; “m” and “bn” mean million and billion.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $46.7m | $42.4m | $81.1m | $71.4m |
| Income from operations | $15.1m | $18.2m | $24.6m | $29.1m |
| Net income | $9.3m | $11.1m | $15.1m | $17.8m |
| Diluted EPS | $0.42 | $0.51 | $0.69 | $0.82 |
| Operating margin | 32% | 43% | 30% | 41% |
- Revenue increased 10% in Q2 and 14% for the half year, while net income decreased 17% and 15%, respectively. Expenses grew faster than revenue: 31% in Q2 and 34% for the half year.
- Mortgage banking gains were $33.9m in Q2 and $53.7m for the half year. Servicing fees were $9.8m and $19.2m, respectively. The servicing portfolio grew 14% year over year to $17.6bn; its weighted-average servicing fee rate rose to 0.23% from 0.22%.
- Origination volume was $1.34bn in Q2, up 2%, and $2.01bn for the half year, up 11%. “Other” originations increased notably; HUD/Ginnie Mae volume declined.
- Personnel expense rose 35% in Q2 and 31% for the half year, reflecting higher commissions, platform expansion, four new regional offices and 41 additional full-time employees year over year. Other operating expenses rose 55% and 54%, including $1.1m of acquisition-related legal and advisory costs for the half year. Amortization and depreciation increased, including $1.4m of MSR write-offs for prepaid loans in the first half.
- Risk-sharing provision declined to $0.8m in Q2 and $2.0m for the half year. The company recorded $1.6m and $3.3m of net write-offs, respectively, against previously provided losses.
Cash flow, balance sheet and liquidity
- At June 30, cash and cash equivalents were $46.2m, compared with $53.8m at December 31, 2011; total assets were $676.2m and stockholders’ equity was $180.4m.
- Six-month operating cash flow was negative $140.2m, versus negative $158.1m in 2011, primarily reflecting the timing and volume of loan originations and sales. Investing cash flow was negative $20.1m, including $16.4m invested in interim loans; financing cash flow was positive $152.6m. Cash declined $7.7m over the period.
- Warehouse notes payable were $373.0m and other notes payable were $22.1m. Warehouse borrowings increased from $218.4m at year-end, broadly supporting the larger loan pipeline. The company reported compliance with debt covenants.
- Committed warehouse capacity totaled $535m, plus a $250m uncommitted Fannie Mae facility. Required operational liquidity was $9.6m; reported operational liquidity was $45.6m. The company stated that cash flows from operations should meet current obligations for the next 12 months.
- There were no dividends anticipated in the foreseeable future. Fannie Mae collateral requirements could require approximately $17.8m of additional collateral over the life of the existing portfolio.
Outlook, risks and unusual items
- Management reported improving multifamily occupancy and effective rents, but noted that the broader real estate recovery remained constrained by the slow economic recovery. GSE reform, regulatory changes and the effects of Dodd-Frank remained uncertain. No numerical earnings guidance was provided.
- The company agreed to acquire CWCapital for approximately $220m, subject to shareholder, regulatory and other approvals. Consideration was expected to include $80m cash and $140m in stock, potentially issuing approximately 11.6m shares, or about 34% of the company on a fully diluted basis. Management expected closing by the end of Q3 2012. A financing commitment contemplated up to $83m of additional senior term debt.
- Acquisition risks include failure to obtain approvals or close, dilution, integration and retention challenges, unanticipated liabilities, and increased leverage. The announced stock issuance required shareholder approval at an August 30, 2012 meeting.
- Fannie Mae DUS risk-sharing exposure is material: the maximum quantifiable contingent liability was $1.9bn, which the filing says is not an estimate of expected loss. The recorded allowance was $13.6m; 60-plus-day delinquencies were 0.05% of the at-risk portfolio, down from 0.14% a year earlier.
- Interest-rate sensitivity includes an estimated $3.7m annual decrease in net warehouse interest income from a 100-basis-point LIBOR increase, based on the period-end warehouse balance. A 100-basis-point increase in MSR discount rates would reduce MSR fair value by about $5.3m.
- Capital Funding litigation remained pending, with settlement discussions underway. The company stated its loss exposure was limited to $3.0m under an indemnification arrangement; the outcome was not assured.
- The company recognized a $2.5m benefit in other revenue in the first half from an amendment to a fee-allocation agreement with Credit Suisse. Management stated disclosure controls were effective and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the CWCapital acquisition closed, its final purchase price and financing, and the actual share issuance and dilution.
- Post-acquisition debt, covenant headroom, integration costs and realization of anticipated benefits.
- Subsequent revenue and expense trends, particularly whether personnel and other operating cost growth moderates relative to revenue.
- Changes in warehouse funding capacity, operational liquidity and Fannie Mae collateral requirements.
- Developments in DUS delinquencies, risk-sharing allowances and realized losses, and the outcome of the Capital Funding litigation.
- Changes in MSR valuation assumptions and the effect of interest rates and prepayments on servicing asset values.