Walker Dunlop, Inc. (WD) SEC Filing 10-Q Quarterly report for the period ending Tuesday, June 30, 2020

·

Record total transaction volume of $11.4 billion, up 91% from Q1’19

·

Record total revenues of $234.2 million, up 25% from Q1’19

·

Net income of $47.8 million  and diluted earnings per share of $1.49, up 8% and 7%, respectively from Q1’19

·

Adjusted EBITDA1 of $64.1 million,  down 4% from Q1’19

·

Servicing portfolio of $94.8 billion at March 31, 2020, up 8% from March 31, 2019

·

Cash and cash equivalents of $205.3 million as of March 31, 2020

·

Declared dividend of $0.36 per share for the quarter

TRANSACTION VOLUMES

(dollars in thousands)

Q1 2020

Q1 2019

$ Variance

% Variance

Fannie Mae

$

4,171,491

$

1,982,810

$

2,188,681

110

%

Freddie Mac

997,796

1,573,634

(575,838)

(37)

Ginnie Mae - HUD

354,687

178,258

176,429

99

Brokered

3,993,885

1,434,129

2,559,756

178

Principal Lending and Investing2

107,950

75,862

32,088

42

Debt financing volume

$

9,625,809

$

5,244,693

$

4,381,116

84

%

Property sales volume

1,730,617

696,611

1,034,006

148

Total transaction volume

$

11,356,426

$

5,941,304

$

5,415,122

91

%

·

During the first ten weeks of the first quarter of 2020, we saw high demand for debt financing and a very strong commercial real estate transaction market driven by strong macro conditions and low interest rates.  In mid-March, the spread of the COVID-19 pandemic materially changed the macroeconomic environment, and overall commercial real estate transaction volume slowed, particularly for debt brokerage and property sales transactions.  

·

Our first quarter volumes with Fannie Mae,  Freddie Mac and HUD reflected an active multifamily financing market due to strong demand for multifamily financing and a low interest rate environment.  The overall demand for our Agency loan products remained steady in the latter half of March despite the macroeconomic disruption caused by COVID-19. During the quarter, we originated the largest transaction in Company history, a Fannie Mae portfolio of over $2 billion, that contributed to record Fannie Mae volume.

·

Increased brokered volume in the first quarter of 2020 reflects the growth in our team of bankers, the strong market demand for all commercial real estate property types at the beginning of the year, and consistent execution by our team.

·

The increase in principal lending and investing volume, which includes interim loans, originations for JCR separate accounts, and joint venture bridge lending, was primarily due to a year-over-year increase in interim loans originated for our bridge lending joint venture. We did not originate any loans for our own balance sheet during the first quarter of 2020.

·

The growth in property sales volume was the result of the investments we have made to expand the number of property sales brokers on the platform, coupled with strong investor demand for multifamily assets during the first ten weeks of the quarter.

MANAGED PORTFOLIO

(dollars in thousands)

Q1 2020

Q1 2019

$ Variance

% Variance

Fannie Mae

$

41,166,040

$

36,835,756

$

4,330,284

12

%

Freddie Mac

32,191,699

31,367,939

823,760

 3

Ginnie Mae - HUD

9,750,696

9,986,488

(235,792)

(2)

Brokered

11,326,492

9,227,409

2,099,083

23

Principal Lending and Investing

387,314

274,090

113,224

41

Total servicing portfolio

$

94,822,241

$

87,691,682

$

7,130,559

 8

%

Assets under management

2,001,984

1,427,334

574,650

40

Total Managed Portfolio

$

96,824,225

$

89,119,016

$

7,705,209

 9

%

Weighted-average servicing fee rate (basis points)

23.3

24.0

Weighted-average remaining servicing portfolio term (years)

9.5

9.8

·

Our servicing portfolio has experienced steady growth over the past year due to our significant debt financing volumes and relatively few maturities and prepayments.

·

During the first quarter of 2020, we added $1.6 billion of net loans to our servicing portfolio, and over the past 12 months, we added $7.1 billion of net loans to our servicing portfolio, 72% of which were Fannie Mae and Freddie Mac loans.

·

Only $4.5 billion of Agency loans in our servicing portfolio, with a weighted-average servicing fee of 25.8 basis points, are scheduled to mature over the next two years. 

·

The decrease in the weighted-average servicing fee was due primarily to a lower weighted-average servicing fee on our new Fannie Mae debt financing volume than on the Fannie Mae loans that have matured or prepaid over the past year. However, this impact was slightly offset during the first quarter by an increase in the servicing fee margin on Fannie Mae debt financing volume.

·

We added net mortgage servicing rights (“MSRs”) of $3.7 million in the quarter and $44.5 million over the past 12 months. 

·

The MSRs associated with our servicing portfolio had a fair value of $868.4 million as of March 31, 2020, compared to $867.8 million as of March 31, 2019.

·

Assets under management (AUM) as of March 31, 2020 consisted of $1.2 billion of loans and funds managed by our registered investment adviser, JCR Capital Investment Corporation, and $0.8 billion of loans we manage for our interim lending joint venture and for an affiliate of Blackstone Mortgage Trust. The year-over-year increase in AUM is related to both JCR Capital’s fundraising activity over the past 12 months and growth in the interim lending joint venture.  

·

For most of the loans we service under the Fannie Mae DUS program and for loans under Ginnie Mae’s program, should a borrower fail to make debt service payments, we are obligated to advance the principal and interest and guaranty fees, and we will be reimbursed by either Fannie Mae or Ginnie Mae. At the end of April, the first month principal and interest payments were due following the onset of COVID-19 in the U.S., we had $1.6 million of outstanding advances under our Fannie Mae and HUD servicing agreements. We are not obligated to make advances for any of the other loan types that we service.  

·

On May 5, 2020, we received a commitment from one of our warehouse lending banks to create a $100.0 million sublimit to our Agency warehouse line that would be used to fund our advances of principal and interest payments related to our Fannie Mae portfolio. The facility would provide 90% of the principal and interest advance payment and will be collateralized by Fannie Mae’s commitment to repay the advance. Completion of the facility is subject to final documentation, consent of the majority of holders of our term loan, and approval from Fannie Mae.

REVENUES

(dollars in thousands)

Q1 2020

Q1 2019

$ Variance

% Variance

Loan origination and debt brokerage fees, net

$

76,373

$

57,797

$

18,576

32

%

Fair value of expected net cash flows from servicing, net

68,000

40,938

27,062

66

Servicing fees

55,434

52,199

3,235

 6

Net warehouse interest income, LHFS

1,492

29

1,463

5,045

Net warehouse interest income, LHFI

4,003

6,992

(2,989)

(43)

Escrow earnings and other interest income

10,743

14,068

(3,325)

(24)

Property sales broker fees

9,612

4,541

5,071

112

Other revenues

8,500

10,873

(2,373)

(22)

Total revenues

$

234,157

$

187,437

$

46,720

25

%

Key revenue metrics (as a percentage of debt financing volume):

Origination related fees3

0.79

%

1.11

%

Gains attributable to MSRs3

0.71

0.79

Gains attributable to MSRs - Agency loans4

1.23

1.10

·

The increase in loan origination and debt brokerage fees was primarily the result of the 84%  increase in overall debt financing volume.

·

A substantial increase in Fannie Mae debt financing volume, including a $2 billion portfolio, led to the increase in the fair value of expected net cash flows from servicing, net.

·

The $7.1 billion net increase in the servicing portfolio over the past 12 months was the principal driver of the growth in servicing fees year over year, partially offset by the decline in the servicing portfolio’s weighted-average servicing fee.

·

The increase in net warehouse interest income from loans held for sale (“LHFS”) was due to a higher net interest margin year over year partially offset by a decrease in the average balance of LHFS outstanding.

·

The decrease in net warehouse interest income from loans held for investment (“LHFI”) was primarily due to a  lower spread earned on the LHFI outstanding,  as a larger percentage of our LHFI outstanding in 2019 was funded fully with corporate cash.

·

Escrow earnings and other interest income decreased due to a year-over-year decrease in short-term interest rates, upon which our earnings rates are based, partially offset by an increase in the average escrow balance.

·

The increase in property sales broker fees was primarily the result of the large increase in property sales volume year over year.

EXPENSES

(dollars in thousands)

Q1 2020

Q1 2019

$ Variance

% Variance

Personnel

$

89,525

$

71,631

$

17,894

25

%

Amortization and depreciation

39,762

37,903

1,859

 5

Provision (benefit) for credit losses

23,643

2,675

20,968

784

Interest expense on corporate debt

2,860

3,652

(792)

(22)

Other operating expenses

18,090

15,492

2,598

17

Total expenses

$

173,880

$

131,353

$

42,527

32

%

Key expense metrics (as a percentage of total revenues):

Personnel expenses

38

%

38

%

Other operating expenses

 8

 8

·

The growth in personnel expenses was largely the result of a 14% increase in average headcount and associated salaries and benefits, as we continued to scale our business through strategic acquisitions and organic hiring, and an  increase in commissions expense driven by a significant increase in total transaction volume.

·

Amortization and depreciation increased primarily due to the growth in the average balance of MSRs outstanding year over year.

·

The substantial increase in provision for credit losses was primarily related to the macroeconomic deterioration that resulted from the COVID-19 pandemic and its potential impacts on expected future losses in our at risk servicing portfolio. During the quarter, the Company adopted the current expected credit loss (CECL) accounting standard.

·

The increase in other operating expenses stemmed primarily from increased office costs due to an increase in our average headcount year over year.

KEY PERFORMANCE METRICS

(dollars in thousands, except per share amounts)

Q1 2020

Q1 2019

$ Variance

% Variance

Walker & Dunlop net income

$

47,829

$

44,218

$

3,611

 8

%

Adjusted EBITDA

64,129

66,684

(2,555)

(4)

Diluted EPS

$

1.49

$

1.39

$

0.10

 7

%

Operating margin

26

%

30

%

Return on equity

19

20

·

The increase in net income was the result of  a 7% increase in income from operations,  inclusive of the aforementioned 784% increase in provision for credit losses.  

·

The decrease in adjusted EBITDA was primarily driven by the increases in personnel and other operating expenses and decreases in net warehouse interest income and escrow earnings, partially offset by increases in loan origination fees and servicing fees.

KEY CREDIT METRICS

(dollars in thousands)

Q1 2020

Q1 2019

$ Variance

% Variance

At risk servicing portfolio5

$

37,864,262

$

33,438,052

$

4,426,210

13

%

Maximum exposure to at risk portfolio6

7,729,120

6,985,874

743,246

11

Defaulted loans

$

48,481

$

20,981

$

27,500

131

%

Key credit metrics (as a percentage of the at risk portfolio):

Defaulted loans

%

%

Allowance for risk-sharing

Key credit metrics (as a percentage of maximum exposure):

Allowance for risk-sharing

%

%

·

Our at risk servicing portfolio, which is comprised of loans subject to a defined risk-sharing formula, increased due to the significant level of Fannie Mae volume during the past 12 months. There were two defaulted loans in our at risk servicing portfolio as of March 31, 2020 which defaulted and were provisioned for during the first and fourth quarters of 2019. Both properties have been foreclosed on and final settlement of any losses will occur in the future upon disposition of the assets by Fannie Mae.

·

Pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Fannie Mae instituted a mortgage forbearance program in April in response to the COVID-19 crisis. Under the terms of the forbearance program, borrowers impacted by COVID-19 can request that debt service payments be deferred for a period of up to three months, after which the deferred payments must be repaid over a 12-month period. As of April 30, 2020, we had granted COVID-19-related forbearance on 5  loans in our at risk servicing portfolio with an aggregate outstanding unpaid principal balance of  $91.9 million.  

·

The allowance for risk-sharing as a percentage of the at risk portfolio increased substantially due to the $31.6 million increase to the allowance stemming from the adoption of CECL on January 1, 2020 and the  $22.5 million provision for risk sharing obligations in the first quarter of 2020 based on our forecast of an increase in short term future losses as a result of the COVID-19 crisis.

·

The on-balance sheet interim loan portfolio, which is comprised of loans for which the Company has full risk of loss, was $387.3 million at March 31, 2020, compared to $274.1 million at March 31, 2019. There was one defaulted loan in our interim loan portfolio at March 31, 2020, which defaulted and was provisioned for during the first quarter of 2019. All other loans in the on-balance sheet interim loan portfolio are current and performing as of March 31, 2020.  The Company recorded an additional provision expense of $1.1 million for our on-balance sheet interim loan portfolio based on the increase in the near-term loss forecast stemming from the COVID-19 crisis. The interim loan joint venture holds $731.4 million of loans as of March 31, 2020, for which the Company indirectly shares in a small portion of the risk of loss. All loans in the interim loan joint venture are current and performing as of March 31, 2020.