Walker & Dunlop, Inc. (NYSE: WD) (the “Company,” “Walker & Dunlop” or “W&D”) reported second quarter total transaction volume of $8.4 billion, down 63% year over year, due to the Federal Reserve’s continued tightening. Despite dramatically lower transaction volume, Walker & Dunlop’s total revenues were down just 20% year over year due to the strength of recurring, non-transaction-based servicing and asset management revenues. Net income was $27.6 million in the second quarter, down 49% year over year, while adjusted EBITDA declined significantly less, at 26%, due to our access to counter-cyclical capital and the strength of our servicing and asset management businesses.
“Q2 2023 was a hugely challenging macro-economic environment for commercial real estate but appears to be the first quarter in building back from the dramatic Federal Reserve tightening cycle that began in 2022,” commented Walker & Dunlop Chairman and CEO, Willy Walker. “Compared to the first quarter of 2023, our Q2 results showed sequential improvement with a 25% increase in total transaction volume driven predominantly by Fannie Mae and Freddie Mac. As a result of that top-line growth and continued expense management, diluted earnings per share and adjusted EBITDA both grew from Q1 to Q2. And year-to-date adjusted EBITDA is down just 12%, outperforming the majority of our commercial real estate services competitors and allowing us to continue investing in the people, brand, and technology of Walker & Dunlop.”
CONSOLIDATED SECOND QUARTER 2023 OPERATING RESULTS
TRANSACTION VOLUMES | |||||||||||||
(dollars in thousands) | Q2 2023 | Q2 2022 | $ Variance | % Variance | |||||||||
Fannie Mae | $ | 2,230,952 | $ | 3,918,400 | $ | (1,687,448 | ) | (43 | )% | ||||
Freddie Mac | 1,212,887 | 1,141,034 | 71,853 | 6 | |||||||||
Ginnie Mae - HUD | 147,773 | 201,483 | (53,710 | ) | (27 | ) | |||||||
Brokered (3) | 3,316,223 | 9,258,490 | (5,942,267 | ) | (64 | ) | |||||||
Principal Lending and Investing (4) | - | 131,551 | (131,551 | ) | (100 | ) | |||||||
Debt financing volume | $ | 6,907,835 | $ | 14,650,958 | $ | (7,743,123 | ) | (53 | )% | ||||
Property sales volume | 1,504,383 | 7,892,062 | (6,387,679 | ) | (81 | ) | |||||||
Total transaction volume | $ | 8,412,218 | $ | 22,543,020 | $ | (14,130,802 | ) | (63 | )% | ||||
Discussion of Results:
- The continued challenging macro-economic environment in the second quarter of 2023 primarily drove the 53% decrease in total debt financing volume, with a 43% decrease in Fannie Mae volumes, partially offset by a 6% increase in Freddie Mac volumes. Fannie Mae originations in the second quarter of 2022 included a $1.9 billion portfolio, with no comparable large transaction in the second quarter of 2023. The $8.4 billion in total transaction volumes represents a 25% sequential increase in transaction volumes from the first quarter of 2023.
- HUD volumes decreased 27% in the second quarter of 2023 as the interest-rate environment and long processing times continued to make HUD’s construction and streamlined refinancing products a less favorable source of capital for multifamily properties.
- Principal lending and investing volume activity, which includes interim loans, originations for WDIP separate accounts, and interim lending for our joint venture, remained inactive in the second quarter of 2023, reflecting the challenges of a higher rate environment within the transitional lending segment of the market.
- The decrease in brokered debt and property sales volume was driven by higher interest rates, decreased liquidity supplied to the commercial real estate sector and dramatically lower acquisition and capital markets activity as the commercial real estate industry continues to adjust to a higher interest rate environment.
MANAGED PORTFOLIO | |||||||||||||
(dollars in thousands, unless otherwise noted) | Q2 2023 | Q2 2022 | $ Variance | % Variance | |||||||||
Fannie Mae | $ | 61,356,554 | $ | 57,122,414 | $ | 4,234,140 | 7 | % | |||||
Freddie Mac | 38,287,200 | 36,886,666 | 1,400,534 | 4 | |||||||||
Ginnie Mae - HUD | 10,246,632 | 9,570,012 | 676,620 | 7 | |||||||||
Brokered | 16,684,115 | 15,190,315 | 1,493,800 | 10 | |||||||||
Principal Lending and Investing | 71,680 | 252,100 | (180,420 | ) | (72 | ) | |||||||
Total Servicing Portfolio | $ | 126,646,181 | $ | 119,021,507 | $ | 7,624,674 | 6 | % | |||||
Assets under management | 16,903,055 | 16,692,556 | 210,499 | 1 | |||||||||
Total Managed Portfolio | $ | 143,549,236 | $ | 135,714,063 | $ | 7,835,173 | 6 | % | |||||
Custodial escrow account balance at period end (in billions) | $ | 2.8 | $ | 2.3 | |||||||||
Weighted-average servicing fee rate (basis points) | 24.3 | 24.9 | |||||||||||
Weighted-average remaining servicing portfolio term (years) | 8.6 | 8.9 | |||||||||||
Discussion of Results:
- Our servicing portfolio continues to expand as a result of the additional GSE and brokered debt financing volumes over the past 12 months, partially offset by principal paydown and loan payoffs.
- During the second quarter of 2023, we added $2.1 billion of net loans to our servicing portfolio, and over the past 12 months, we added $7.6 billion of net loans to our servicing portfolio, 74% of which were Fannie Mae and Freddie Mac loans.
- $8.7 billion of Agency loans in our servicing portfolio are scheduled to mature over the next two years. These loans, with a relatively low weighted-average servicing fee of 18.3 basis points, represent only 9% of our total Agency loans in the portfolio.
- The mortgage servicing rights (“MSRs”) associated with our servicing portfolio had a fair value of $1.4 billion as of June 30, 2023, compared to $1.3 billion as of June 30, 2022.
- Assets under management (“AUM”) as of June 30, 2023 consisted of $14.7 billion of tax-credit equity funds, $1.3 billion of commercial real estate loans and funds, and $0.9 billion of loans in our interim lending joint venture.
KEY PERFORMANCE METRICS | |||||||||||||||
(dollars in thousands, except per share amounts) | Q2 2023 | Q2 2022 | $ Variance | % Variance | |||||||||||
Walker & Dunlop net income | $ | 27,635 | $ | 54,286 | $ | (26,651 | ) | (49 | )% | ||||||
Adjusted EBITDA | 70,501 | 94,844 | (24,343 | ) | (26 | ) | |||||||||
Diluted EPS | $ | 0.82 | $ | 1.61 | $ | (0.79 | ) | (49 | )% | ||||||
Adjusted core EPS | $ | 0.98 | $ | 1.74 | $ | (0.76 | ) | (44 | )% | ||||||
Operating margin | 13 | % | 22 | % | |||||||||||
Return on equity | 7 | 14 | |||||||||||||
Key Expense Metrics (as a percentage of total revenues): | |||||||||||||||
Personnel expenses | 49 | % | 49 | % | |||||||||||
Other operating expenses | 11 | 11 | |||||||||||||
Discussion of Results:
- The decrease in Walker & Dunlop net income was largely the result of a 51% decrease in income from operations, primarily due to the decline in total transaction volume and associated revenues.
- The decrease in adjusted EBITDA was primarily the result of lower origination fees (defined below), property sale broker fees, net warehouse interest income, and other revenues. These decreases were partially offset by increased escrow earnings and other interest income and lower personnel expense. During the second quarter of 2023, we resolved the only defaulted loan in the history of our interim loan program. The loan defaulted in 2019 and the collateral was sold in the second quarter. The sale returned $8.7 million to our balance sheet, and the $6.0 million allowance for loan losses was charged off, with an immaterial impact to the provision for loan losses. The charge off is included in adjusted EBITDA for the second quarter and contributed to the year-on-year decline in adjusted EBITDA.
- Operating margin decreased due to the significant decline in total transaction volume this quarter, resulting in the aforementioned decrease in income from operations. Our transaction-related businesses are scaled to execute a significantly larger volume of business, and lower commercial real estate transaction activity has put pressure on our operating margins. The workforce reduction announced in April had a minimal impact on current quarter results but is expected to benefit our operating margin in the second half of the year.
- Return on equity declined due to a 49% decrease in net income combined with a 4% increase in stockholders’ equity over the past year.
KEY CREDIT METRICS | |||||||||||||||
(dollars in thousands) | Q2 2023 | Q2 2022 | $ Variance | % Variance | |||||||||||
At-risk servicing portfolio (8) | $ | 56,430,098 | $ | 51,905,985 | $ | 4,524,113 | 9 | % | |||||||
Maximum exposure to at-risk portfolio (9) | 11,346,580 | 10,525,093 | 821,487 | 8 | |||||||||||
Defaulted loans | $ | 36,983 | $ | 78,659 | $ | (41,676 | ) | (53 | )% | ||||||
Key credit metrics (as a percentage of the at-risk portfolio): | |||||||||||||||
Defaulted loans | 0.07 | % | 0.15 | % | |||||||||||
Allowance for risk-sharing | 0.06 | 0.09 | |||||||||||||
Key credit metrics (as a percentage of maximum exposure): | |||||||||||||||
Allowance for risk-sharing | 0.29 | % | 0.46 | % | |||||||||||
Discussion of Results:
- Our at-risk servicing portfolio, which is comprised of loans subject to a defined risk-sharing formula, increased primarily due to the level of Fannie Mae loans added to the portfolio during the past 12 months. As of June 30, 2023, there were two defaulted loans. The at-risk servicing portfolio continues to exhibit strong credit quality, with very low levels of delinquencies and strong operating performance of the underlying properties in the portfolio.
- The on-balance sheet interim loan portfolio, which is comprised of loans for which we have full risk of loss, was $71.7 million as of June 30, 2023 compared to $252.1 million as of June 30, 2022. We did not have any defaulted loans in our interim loan portfolio as of June 30, 2023, compared to one defaulted loan of $14.7 million in our interim loan portfolio as of June 30, 2022. During the second quarter of 2023, we sold the defaulted asset and charged off the $6.0 million allowance for loan losses and recorded an immaterial amount of expense. The three remaining loans in the on-balance sheet interim loan portfolio are current and performing as of June 30, 2023. The interim loan joint venture held $895.5 million of loans as of June 30, 2023 and $899.3 million of loans as of June 30, 2022. We share in a small portion of the risk of loss, and as of June 30, 2023, all loans in the interim loan joint venture are current and performing.
- We take credit risk exclusively on loans backed by multifamily assets and have no credit exposure to losses in any other sector of the commercial real estate lending market.
SECOND QUARTER 2023 - FINANCIAL RESULTS BY SEGMENT
FINANCIAL RESULTS - CAPITAL MARKETS | |||||||||||||||
(dollars in thousands) | Q2 2023 | Q2 2022 | $ Variance | ||||||||||||
