Investors quickly learn that, just because a business is fundamentally strong, it doesn't necessarily mean that the stock price will always move higher in the short run. That's a phenomenon that Walker & Dunlop (WD 1.98%) is dealing with today. Even though the commercial real estate market has helped the real estate services and financing specialist enjoy blowout results lately, ever-improving results inspire investors to have ever-higher expectations for future performance.
Coming into Wednesday's second-quarter financial report, Walker & Dunlop investors seemed to be looking for only modest bottom-line gains, but wanted to see strong sales growth. The real estate specialist's results were better than expected on the net income front, but a slight shortfall in sales was enough to spur a big sell-off for the stock. Let's look more closely at Walker & Dunlop and what its latest results say about the future for the company.
Image source: Walker & Dunlop.
Walker & Dunlop keeps building
Walker & Dunlop's second-quarter results seemed strong by most measures. Revenue rose 13%, to $166.4 million, which was only slightly below what most investors had expected to see on the top line. Net income jumped 8%, to $34.6 million, and that produced earnings of $1.08 per share, topping the consensus forecast among those following the stock for $1.06 per share.
Looking more closely at Walker & Dunlop's numbers, the company highlighted its loan-origination volume, which jumped 19%, to $5.68 billion for the quarter. Most of the gains came from brokered mortgage loans, with negative moves from Fannie Mae offsetting gains from Freddie Mac and Ginnie Mae. Walker & Dunlop said that the average number of mortgage bankers and brokers climbed by more than 40% during the period, and strength in the commercial and multifamily real estate markets boosted total transaction volume by 12%, to $6.03 billion.
Walker & Dunlop also kept boosting the size of its mortgage-servicing portfolio. Total assets were up 16%, to $66.3 billion, as payoffs virtually disappeared because of a rising-interest-rate environment. Servicing fees have jumped substantially over the past year due, in large part, to greater origination of Fannie Mae loans, which have the most favorable servicing-fee provisions.
In terms of revenue for Walker & Dunlop, the company saw mixed numbers. Mortgage banking-activity revenue was flat, as increased loan-origination fees were offset completely by declines in gains attributable to mortgage-servicing rights. Servicing fees were up by nearly a third from the year-ago quarter, however, and higher income from interest and escrow earnings also helped boost Walker & Dunlop's prospects. Credit metrics remained favorable, with no 60-day delinquencies and only minimal allowances for risk sharing in its financial statements.
What's ahead for Walker & Dunlop?
CEO Willy Walker was pleased with how well things went for the company. The "increase in mortgage bankers and brokers at Walker & Dunlop, coupled with the underlying health of the commercial real estate industry and our company's expanding reputation as an industry leader," Walker said, "drove record loan origination volume." The CEO also pointed to strong earnings stemming from an efficient business model and the long-term value of the mortgage-servicing portfolio.
Walker & Dunlop was even more excited about the future. As Walker put it, "W&D's client base continues to expand, creating growth opportunities across our business, such as our joint venture with Blackstone Mortgage Trust and the recently announced engagement to finance Greystar's acquisition of Monogram." The company is confident in its ability to finish 2017 better than it had originally hoped and to keep growing into the future.
Yet perhaps because of the more than 50% rise in Walker & Dunlop stock coming into the report, investors didn't seem optimistic enough about the company's future to translate into greater demand to purchase shares, and the stock fell 7% in the morning trading session following the announcement. Nevertheless, given everything that the company is doing right, Walker & Dunlop's strategic vision appears to have the potential to carry the real estate specialist still higher in the months and years ahead.
