Walker & Dunlop Looks for a Brighter Future

Walker & Dunlop provides financing for commercial projects. Image source: Getty Images.

Real estate finance specialist Walker & Dunlop (WD 1.40%) has benefited greatly from the strength in the commercial real estate market over the past several years. Like many companies, however, Walker & Dunlop has identified the fact that its transaction-based business model leaves it vulnerable to industry slowdowns, and that has been a big part of why it has seen its growth trends slow recently. Coming into its second-quarter financial report on Aug. 3, Walker & Dunlop investors expect small gains in revenue and earnings, but the more important question will be whether attempts to change its strategy toward producing more recurring revenue will pay off. Let's take an early look at what Walker & Dunlop has been up to and what to look for in its quarterly report.

Stats on Walker & Dunlop

Data source: Yahoo! Finance.

Can Walker & Dunlop earnings grow faster?

Investors have kept their views on Walker & Dunlop earnings mixed in recent months. They've boosted their second-quarter estimates by more than a nickel per share, but they've cut full-year 2017 projections by a dime per share. The stock has moved upward, however, with a 9% rise since mid-April.

Walker & Dunlop's first-quarter results showed investors what can happen when the company faces challenging conditions. Revenue fell by 16%, which came as a surprise to those who had expected a small rise on the top line, and net income plunged by more than a quarter. Transaction volume took a 40% hit, with most of the pressure coming from declines in the amount of business Walker & Dunlop did with the federal government's sponsored mortgage enterprise companies. The mortgage-banking side of the business took the brunt of the hit, but servicing fee income offset some of those declines, rising by nearly a fifth. Walker & Dunlop pointed to greater stability in the financial markets as reason to hope that the second quarter would be better than the first, but shareholders were still nervous about what might happen next.

Where Walker & Dunlop is heading now

However, Walker & Dunlop made big strides during the quarter toward broadening its business and insulating it from transaction-volume volatility. In early June, the company said that it had agreed to purchase commercial mortgage servicing rights associated with a $3.8 billion servicing portfolio of multifamily and healthcare loans insured by the U.S. Department of Housing and Urban Development. The $45 million purchase closed later in the month, and Walker & Dunlop CFO Stephen Theobald noted that the move was in line with the company's "goal to increase the proportion of revenues that comes from servicing and other non-transaction based fees." Walker & Dunlop had made slow progress over the past several years toward that end, but as Theobald noted, "The opportunity to acquire a portfolio of this size is rare, and our strong cash position allowed us to move quickly to accelerate the accomplishment of our goal."

When the deal closed, Walker & Dunlop gave more details about its potential impact on the company's finances. Annual servicing revenue should be about $6.4 million, which would boost total servicing fees by about 20% from pre-deal levels. About three-quarters of the loans are tied to multifamily residential properties, while the rest are in senior housing and healthcare properties. The loans are long-lived with an average of 31 years remaining for future servicing needs, and Walker & Dunlop won't bear any loss-sharing risk from the portfolio. The company expects few prepayments, ensuring a long future and strengthening its already solid relationship with HUD.

In the Walker & Dunlop financial report, investors should watch closely to see whether transaction-based revenue rebounds from its surprising decline last quarter. Although markets responded favorably to signs of economic growth in bouncing back from losses early in the year, uncertainties from the Brexit vote in the U.K. and other macroeconomic impacts could weigh on results again. Walker & Dunlop's long-term strategy is sound, but it will take time to implement. In the meantime, shareholders will have to keep an eye on the health of the real estate market and Walker & Dunlop's place within it.