Walker & Dunlop (WD 0.10%) had a pretty lackluster first quarter. The multifamily mortgage finance company missed analysts' consensus estimates on both the top and bottom lines, and investors responded by sending its stock down 11% on May 6, the day of the report. As of Wednesday's close, the stock is still down 14% from its pre-earnings price.
However, during the company's Q1 earnings call, management pointed to a number of positives that investors should be paying attention to, including a deal that could be a key driver of Walker & Dunlop's growth in years to come.
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Slower earnings to start the year
Walker & Dunlop booked revenue of $224 million and earnings of $1.79 per share in Q1, well shy of analysts' estimates for revenue of $246 million and earnings of $1.94 per share. Total revenue dropped 4.2% year over year due to the decrease in interest rates, while loan originations fell by 0.6%. Debt financing volume was down 21% compared to the prior-year quarter due largely to a decrease in transactions from Fannie Mae. Last year, the company originated its largest transaction ever with Fannie Mae, in the amount of $2.1 billion.
Expenses in the quarter were down as well, by 13%. The largest change was an adjustment for credit loss provisions, which provided an $11 million net benefit to the company. Estimates improved thanks to improving economic conditions and unemployment rate projections. At the end of the day, Walker & Dunlop's net income grew by 21.4% year over year to $458 million.
Don't let earnings disappointments distract from the good news
On the positive side, the company announced that it was officially the top multifamily lender in the U.S., according to Mortgage Bankers Association. With $30.8 billion in loan originations, it edged out CBRE Group and Jones Lang LaSalle, which each posted about $29 million in loan originations. For Walker & Dunlop, this achieved a five-year goal set in 2015.
The company also became the fourth-largest lender in the broader category of U.S. commercial real estate, jumping six spots from the year prior. With $24.7 billion in loans in this space, the company trailed only KeyCorp, Wells Fargo, and JPMorgan Chase.
As I've previously written, Walker & Dunlop is optimistic about the coming wave of loan maturities that will drive volume in the coming years. The company is also anticipating increased activity from Fannie Mae and Freddie Mac. CEO Willy Walker noted that the government-sponsored entities got off to a slow start in 2021, but have been more active in the second quarter. They also have another $105 billion in combined lending capacity available to be used for the rest of this year.
Finally, in an important move, Walker & Dunlop announced it was purchasing a 75% stake in Zelman & Associates, a leading housing-focused research firm. This deal gives it exposure to a segment of the industry that it hasn't previously served, which could light the fuse for future growth.
Gaining exposure to one of the fastest-growing real estate segments
Walker & Dunlop expects the Zelman & Associates deal to close in the second half of the year, and forecasts that the transaction will add between $0.15 and $0.20 to its earnings per share in the first year.
The deal helps Walker & Dunlop in two ways. First, it supports the company's commitment to get into investment banking. Zelman was an advisor on the initial public offerings of Rocket and Invitation Homes. Second, it gives the company a wider foothold in the single-family rental space.
Zelman is a provider of research and analytics for both multifamily and single-family housing. Walker sees these two businesses overlapping in the single-family homes rental market. It will utilize Zelman's expertise and relationships with single-family housing developers and owner/operators to expand into the single-family rental space -- one of the fastest-growing spaces in the U.S. housing market. Walker & Dunlop noted that the market for single-family rentals is estimated at $3.4 trillion, compared to the $3.5 trillion multifamily market. This would mark an important shift into a new market for the company, and could be a key driver of growth.
Walker & Dunlop's first quarter disappointed investors. However, I think an acceleration in activity from Fannie Mae and Freddie Mac, and the potential of its controlling stake in Zelman & Associates, combine to make Walker & Dunlop an attractive real estate stock to hold for the long haul.
