The pandemic didn't stop mortgage finance companies from posting record profits in 2020. Low rates were a tailwind to many in the industry, including Walker & Dunlop (WD -1.54%), PennyMac Financial Services, and Mr. Cooper Group. Record low mortgage rates were welcomed by these lenders, which resulted in a record number of refinancings.
However, smart investors are closely watching Walker & Dunlop, particularly because of its laser focus on multifamily lending, and the opportunities presented in that space. With a wave of refinancing opportunities in the coming years, Walker & Dunlop is perfectly positioned to lead the way.
A "wave of maturities"
Walker & Dunlop is a leading lender focused on multifamily properties such as apartment complexes. This focus sets it apart from competitors in the single-family housing space. While single-family housing saw record refinancing activity, that record rate is not sustainable. According to Fannie Mae, mortgage refinance originations are expected to drop from an all-time high of $2.8 trillion in 2020 down to $2.2 trillion and $1.4 trillion in the next two years.
However, the multifamily space has an opportunity to see a consistent flow of refinancings in the coming years. That's because of something called prepayment protection, which causes limitations on refinancing in the multifamily space. Prepayment protections are in place to prevent borrowers from making prepayments on loans, which negatively affects a lender's expected future interest income. This in turn prevents wide-scale refinancing of loans in the multifamily space. Prepayment protections like this are less common in the single-family space -- part of the reason refinancings could be done at the rate they were last year.
Once loans on multifamily properties mature, borrowers have an opportunity to refinance them without penalty. This is the opportunity that excites Walker & Dunlop CEO Willy Walker the most. The CEO is particularly interested the next five-year window during which a "wave of maturities" in multifamily loans will occur. In total, $378 billion worth of multifamily loans will mature over the next five years, giving Walker & Dunlop a great opportunity to grab market share.
The company keeps on humming in 2021. During the year, the lender has announced a number of huge financing deals, such as agreements for skilled nursing facilities and the Hudson Research Center in the amounts of $127 million and $205 million, respectively. The lender continues to grow aggressively as it takes on competitors like JPMorgan Chase and CBRE Group in a race to be the biggest multifamily lender in the U.S.
Prepared for a high interest rate environment, too
While originations are a key driver of growth for the lender when interest rates are low, Walker & Dunlop is prepared if rates were to rise in the coming years. As loans mature and borrowers refinance, Walker & Dunlop will be looking to scale up its servicing portfolio. Management acknowledges how important it is for the company to maintain servicing rights on loans. While there may be fewer financing opportunities in a high interest rate environment, a large servicing portfolio will provide a steady stream of revenue in the form of servicing fees.
As of now, the lender has mortgage servicing rights at a fair value of $1.1 billion. In 2020 the company was able to grow its mortgage servicing portfolio by 15%. Since 2011, the multifamily lender has grown its servicing portfolio at a compound annual growth rate of 22.9%, helping servicing fees increase at a compound annual growth rate of 14.6% at the same time.
A great opportunity in real estate
Despite the pandemic, the multifamily lender was able to make it out of 2020 as a winner while checking off a number of five-year goals in the process -- including $1 billion in annual revenue and a servicing portfolio of $100 billion. The lender doesn't plan on stopping, either. By 2025, Walker & Dunlop hopes to build its servicing portfolio to $160 billion while establishing investment banking capabilities with $10 billion in assets under management.
Smart investors are watching Walker & Dunlop because it is in a great position to take advantage of a wave of maturities in the multifamily lending space. Additionally, investors should be pleased with the company's growing mortgage servicing portfolio, which will help the lender weather a potential higher mortgage rate environment by providing it with a steady stream of income. If you want exposure to real estate, Walker & Dunlop is one of the best stocks in the game you can own over the next five to 10 years.