Image source: Walker & Dunlop.
With shares of Walker & Dunlop (WD 1.66%) up 16% in the wake of its strong second-quarter 2016 results late last week, it's obvious that the market is more than pleased with what the real estate financing specialist had to say. Now that the dust has settled, let's take a closer look at how Walker & Dunlop capped the first half of the year.
Walker & Dunlop's headline numbers
Quarterly revenue grew 29.9% year over year, to $147.9 million, and translated to 58.4% growth in net income, to $32 million, or $1.05 per diluted share. Both the top and bottom lines set new company records. Keeping in mind that Walker & Dunlop's board authorized a one-year $75 million repurchase plan in February, the company also repurchased a modest 121,000 shares during the quarter for $2.7 million, bringing year-to-date repurchases to 396,000 shares at a total cost of $9.2 million.
For perspective -- and though we don't generally pay much attention to Wall Street's short-term demands -- consensus estimates predicted only a slight year-over-year increase in revenue, to $114.5 million, and earnings of just $0.69 per share.
Walker & Dunlop chairman and CEO Willy Walker elaborated:
The second quarter of 2016 was the most active and profitable quarter in our company's history, as the combination of very liquid debt capital markets and continued investor demand for commercial real estate drove our record transaction volume. [...] Walker & Dunlop's extremely strong top- and bottom-line performance, coupled with significant capital deployment, pushed our annualized return on equity to 25%. For the third time in the last six quarters, Walker & Dunlop generated a return on equity of 20% or greater, reflecting the benefit of our scaled lending platform, high-margin servicing business, and prudent management of costs and capital.
Fannie Mae for the win
More specifically, Walker & Dunlop credits its higher transaction volume to strength in Fannie Mae lending volume, driving gains attributable to mortgage servicing rights up 72%. Total transaction volume jumped 42% year over year, to $5.4 billion, including a 96% jump in investment sales volume, to $624 million, and a 37% increase in loan origination volume, to $4.8 billion. Included within the latter was:
- 111% growth in loan originations from Fannie Mae, to $2.4 billion.
- 13% growth in brokered loan originations, to $1.1 billion.
- A 9% decline in loan originations with Freddie Mac, to $1.0 billion.
- 49% growth in interim loan originations, to $158.6 million.
- A 25% decline in HUD loan originations, to $111.9 million.
- An 11% decline in CMBS originations, to $30.7 million.
Meanwhile, Walker & Dunlop's servicing portfolio increased 20% year over year, to $57.3 billion, helped by both strong lending volume and the closing of its previously announced purchase of a $3.8 billion HUD servicing portfolio of multifamily and healthcare loans insured by the U.S. Department of Housing and Urban Development. In turn, servicing fees climbed 17% year over year, to $32.8 million.
Trending toward the bottom line, adjusted earnings before interest, taxes, depreciation, and amortization fell 6%, to $27.1 million, albeit primarily because of an increase in the percentage of earnings related to gains attributable to mortgage servicing rights, which generate non-cash revenue.
Looking forward
Walker & Dunlop isn't in the habit of providing specific quarterly financial guidance. But Walker did praise his company's long-term outlook, citing the strong fundamentals for the multifamily housing market, as well as historically low interest rates that let Walker & Dunlop's customers benefit from low financing costs. What's more, during the subsequent conference call, Walker suggested that U.S. commercial real estate is a likely winner from the recent Brexit vote, partly as "one of the world's real estate safe havens -- London -- lost some of its glimmer."
Walker added, "We entered the second half of the year feeling very good about our business, our client base, and our ability to generate double-digit EPS growth and returns on equity that are at the very high end of most financial services institutions."
In the end, this was an impressive report from Walker & Dunlop that not only saw its transaction revenue rebound from last quarter's surprising declines, just as investors had hoped, but also saw healthy growth in servicing fees that should help smooth out any future transaction-based bumps in the road going forward. All things considered, with shares still down slightly over the past year as of this writing, it's no surprise to see the market is willing to give Walker & Dunlop a closer look today.
