Walker & Dunlop, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Walker & Dunlop originates, sells and services primarily multifamily commercial real estate loans, including through Fannie Mae, Freddie Mac and HUD programs.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $112.1 million | $64.8 million | +73% |
| Income from operations | $35.4 million | $11.9 million | +197% |
| Net income | $21.3 million | $7.1 million | +198% |
| Diluted EPS | $0.66 | $0.21 | — |
| Adjusted EBITDA (non-GAAP) | $35.4 million | $19.8 million | +79% |
| Operating margin / return on equity | 32% / 20% | 18% / 7% | — |
Mortgage banking gains rose 110% to $72.7 million, principally on higher originations. Servicing fees increased 15% to $26.8 million, while net warehouse interest income nearly doubled to $4.4 million. Personnel expense rose 63% to $40.0 million, mainly from commissions and bonuses; amortization and depreciation increased 34% to $24.7 million, including higher MSR write-offs from prepayments. Origination fee and MSR income rates declined amid stronger competition, larger average loans and a higher share of adjustable-rate loans.
Total loan originations were $4.35 billion, up 175%. Fannie Mae and Freddie Mac volumes increased substantially, brokered originations rose 83%, and HUD originations fell 39% to $156.9 million. The servicing portfolio reached $46.1 billion, compared with $38.9 billion a year earlier.
Cash flow, balance sheet and debt
- Operating cash flow was negative $220.7 million, versus negative $74.9 million in Q1 2014, primarily because loan originations exceeded loan-sale cash receipts by $220.0 million. Management noted these loans are generally held for less than 60 days; operating cash use excluding loan origination activity was $0.7 million.
- Investing cash flow was negative $8.9 million. Financing cash flow was positive $181.7 million, including $221.5 million net warehouse borrowings and $47.8 million used for share repurchases. Cash and cash equivalents ended the quarter at $65.5 million, down from $113.4 million at year-end 2014.
- At March 31, total assets were $2.23 billion, including $1.29 billion of loans held for sale and $375.2 million of net mortgage servicing rights (MSRs). Total liabilities were $1.81 billion and stockholders’ equity was $413.6 million.
- Warehouse notes payable were $1.44 billion, supporting loan funding; corporate note payable was $171.4 million carrying value ($172.8 million outstanding principal). The company reported compliance with debt covenants. Warehouse facilities totaled $2.605 billion of capacity, with $1.444 billion outstanding.
- At its operating subsidiary, the company reported $76.9 million of operational liquidity against a $19.2 million requirement, and $361.8 million of net worth against a $99.8 million requirement. It expects to fund an additional $39.5 million of DUS-related restricted liquidity over the following 48 months, assuming no portfolio paydowns, prepayments or defaults.
Material changes, outlook and risks
- Management attributed the volume surge to strong multifamily fundamentals, refinancing activity, increased GSE competition and broader market demand. It expected transitional lending to remain active and anticipated growth in brokered originations in 2015; no formal earnings or revenue guidance was provided.
- Management described competition as intense and said it pressured origination and MSR rates. GSE production caps, possible future FHFA changes, HUD funding and processing, interest-rate movements, and the availability and terms of warehouse funding could affect results. Management noted that any decline in GSE originations could disproportionately reduce non-cash revenue.
- MSR fair value was $491.6 million, compared with a $375.2 million net carrying amount. A 100-basis-point increase in the MSR discount rate would reduce estimated fair value by $16.1 million; the filing cautions that this sensitivity is hypothetical and excludes interactions among assumptions.
- The at-risk servicing portfolio had $22.5 million of loans more than 60 days delinquent (0.13% of the at-risk portfolio), versus none a year earlier. The risk-sharing allowance was $4.1 million. The stated maximum quantifiable DUS contingent exposure was $4.1 billion, which the company says is not representative of expected loss.
- Litigation: Capital Funding’s appeal of a $1.8 million judgment was pending; the company said its exposure was limited to $3.0 million under an indemnification arrangement and believed it was covered. CA Funds Group seeks a $5.1 million placement fee plus interest and costs; the company said it would defend the claim and had not recorded a loss reserve because it did not consider a loss probable.
- The company repurchased 3.0 million shares at $15.60 per share during the quarter, in addition to restricted-stock repurchases; total cash used for repurchases was $47.8 million. The company does not pay a cash dividend. Management reported effective disclosure controls and no material change in risk factors from its 2014 Form 10-K.
Most important facts for investors to verify
- Whether the exceptional origination growth and earnings persist as competitive pricing weighs on fee and MSR rates.
- How much of reported profit reflects non-cash MSR valuation at loan commitment, and how prepayments or discount-rate changes affect MSR value and amortization.
- Whether cash conversion improves as loans held for sale are delivered, and whether warehouse capacity and liquidity remain adequate as volumes grow.
- Developments in the newly delinquent DUS loans, risk-sharing reserves and required future restricted liquidity.
- Updates on GSE production caps and the two pending lawsuits, including any changes to management’s stated exposure or reserve assessments.