Walker & Dunlop, Inc. — Q1 2013 Form 10-Q
Business context and period. Quarterly report for the three months ended March 31, 2013. Walker & Dunlop originates, sells and services commercial real estate loans, primarily multifamily, through GSE and HUD programs, and provides related advisory and asset-management services. Results include CWCapital, acquired in September 2012; the acquisition materially limits comparability with Q1 2012.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Total revenue | $69.2 million | $34.4 million | +101% |
| Income from operations | $12.3 million | $9.5 million | +30% |
| Net income | $7.7 million | $5.8 million | +32% |
| Diluted EPS | $0.23 | $0.27 | Lower despite higher net income; weighted-average diluted shares rose to 34.2 million from 21.8 million |
| Operating margin | 18% | 28% | Adjusted margin, excluding specified acquisition-related intangible amortization, was 20% versus 28% |
| Operating cash flow | $612.0 million | $(21.4) million | Highly affected by timing of loan originations and sales; excluding loan purchases and sales, operating cash flow was $3.4 million versus $(14.7) million |
- Revenue drivers: Mortgage banking gains increased 117% to $42.9 million; servicing fees rose 125% to $21.1 million. Originations increased 157% to $1.73 billion, and the servicing portfolio grew 118% year over year to $36.8 billion.
- Expenses: Total expenses rose 128% to $56.9 million, faster than revenue. Personnel expense increased 143% to $28.3 million, and amortization and depreciation increased 138% to $17.3 million, reflecting business growth, the acquisition and a larger MSR portfolio. Acquisition-related intangible amortization was $1.3 million.
- Cash and liquidity: Cash and cash equivalents were $65.4 million at quarter-end, versus $65.0 million at December 31, 2012. Restricted cash was $7.8 million and pledged securities were $34.6 million. Management said operating cash flows should cover current obligations for the next 12 months. Operational liquidity was $62.7 million against a $16.1 million minimum.
- Debt: Warehouse notes payable were $476.2 million, down from $1.085 billion at year-end, primarily reflecting loan sales and related repayments. Corporate notes payable were $78.9 million; the term loan matures August 31, 2017, with annual debt service of $8.3 million. The company reported compliance with debt covenants. Warehouse facilities totaled $1.61 billion of maximum capacity, including an uncommitted $500 million line.
- Other balance-sheet items: Total assets were $1.060 billion, down from $1.689 billion at year-end, mainly due to the decline in loans held for sale. MSRs were $336.4 million on the balance sheet; their estimated fair value was $373.7 million. Stockholders’ equity was $363.1 million.
Material changes, outlook and risks
- Growth reflected both organic expansion and CWCapital. The company added 14 regional offices and 254 full-time employees year over year. Increased expenses and a lower operating margin accompanied the higher revenue.
- Management described improving multifamily occupancy and rents, but noted uncertainty about GSE reform, Dodd-Frank and HUD funding. FHFA communicated a goal to reduce GSE multifamily originations 10% from 2012 levels; HUD warned its funding might not cover all requests through September 30, 2013 if first-half volumes continued. Management believed GSEs and HUD would continue to provide sufficient market capital, while pursuing revenue diversification. No specific earnings or revenue guidance was provided.
- Fannie Mae increased DUS collateral requirements. The company reported an additional $49.9 million of restricted liquidity to be funded over eight quarters (about $6.2 million quarterly); it funded an additional $1.9 million in April to meet revised requirements then in effect. Management did not expect a material operating impact but cautioned that future collateral changes could affect liquidity.
- DUS risk sharing is a significant contingent exposure: the maximum quantifiable guarantee liability was $2.8 billion, which the filing says is not representative of expected loss and would require all relevant loans to default with collateral worth nothing. The risk-sharing allowance was $16.1 million; no at-risk balances were more than 60 days delinquent at quarter-end. The company had advanced $4.5 million on loans associated with the allowance.
- MSR valuations depend on estimates and market assumptions. A 100-basis-point increase in the discount rate would reduce estimated MSR fair value by about $11.7 million. A 100-basis-point LIBOR increase was estimated to reduce annual net warehouse interest income by about $1.4 million and annual earnings on corporate debt by about $0.8 million.
- Capital Funding litigation remained pending; a court dismissed some claims and denied summary judgment on others. Trial was scheduled for July 8, 2013. The company stated its loss exposure was capped at $3.0 million under an indemnification arrangement and had not recorded a loss contingency.
- Other notable item: a lease modification resulted in a $0.8 million expense in Q2 2013. The company said it did not anticipate dividends in the foreseeable future.
Important facts for investors to verify
- How much of reported growth and future servicing revenue is attributable to CWCapital versus organic originations, and how acquisition-related costs affect comparable performance.
- Whether GSE and HUD funding, origination volumes and Fannie Mae collateral requirements change, including the schedule and cash impact of the remaining restricted-liquidity funding.
- MSR valuation assumptions, prepayment and discount-rate sensitivity, and the adequacy of risk-sharing reserves as the servicing portfolio expands.
- Warehouse facility renewals, capacity and covenants, alongside the company’s ability to maintain liquidity and meet term-loan obligations.
- Developments and outcome of the Capital Funding litigation and any other material legal or contingent exposures.