Real estate makes a solid investment vehicle because it tends to provide a consistent cash stream and returns that have the potential to be as strong as those found in the stock market, but with much less volatility. Alternatively, investors can put their cash to work is in real estate stocks, which potentially offer similar returns but often at a much lower price point than buying property.
One real estate stock to look into is the multifamily lender Walker & Dunlop (WD -1.30%). Walker & Dunlop has posted stellar earnings so far in 2021, but that's no real surprise to long-term investors in the company. They've gotten used to the company's years of strong performance, built on long-standing relationships with multifamily property owners and government lenders.
Let's look at why 2022 is likely to keep building on past performances.
Being a top lender has its advantages
One of Walker & Dunlop's greatest strengths is its leading position as a multifamily lender. According to Mortgage Bankers Association (MBA), Walker & Dunlop finished 2020 as the top multifamily lender in the U.S., beating out competitors CBRE Group and Jones Lang LaSalle.
This position is part of why the firm saw transaction volume grow at an eye-popping 120% rate in the third quarter compared to last year, reaching a record level for the lender at $18.5 billion. This growth helped both the top and bottom lines in Q3, with revenue increasing 40% year over year to $346 million, while earnings per share (EPS) grew 33% to $2.21.
Being one of the top lenders wouldn't be possible without its association with government-sponsored enterprises (GSEs), more commonly known as Fannie Mae and Freddie Mac. These government agencies extend hundreds of billions of dollars in financing every year through their lending programs and can be a big source of income for multifamily lenders.
Increased funds coming for multifamily lending in 2022
When these GSEs increase their spending on housing projects, Walker & Dunlop is a beneficiary because of its leading position. Last year, the two agencies were given lending caps of $140 billion ($70 billion to each) to put toward creating affordable, mission-driven housing.
In October 2021, the Federal Housing Finance Agency (FHFA) established loan origination caps at $78 billion per agency, up 11% from 2021. This rise in lending caps will benefit Walker & Dunlop, which itself has an 11% share of the GSE lending market this year.
Walker & Dunlop make a move to capture market share
In late August, Walker & Dunlop announced it was buying Alliant, a market leader in the affordable housing industry, for roughly $700 million using cash, debt assumption, and stock (the deal should close before the end of the year). Adding Alliant allows Walker & Dunlop to expand its affordable lending platform. This is important because 50% of multifamily loans secured through Fannie Mae and Freddie Mac must be based on mission-driven, affordable housing financing. Purchasing Alliant helps Walker & Dunlop better position its affordable housing footprint. The company expects Alliant to add $90 million to $100 million to revenue in 2022 and boost diluted earnings per share by $0.45 to $0.60.
Elsewhere, Walker & Dunlop's multifamily loan originations are projected to rise in 2022. According to the Mortgage Bankers Association, multifamily loan originations are expected to grow 3% next year, while Freddie Mac is more optimistic and sees originations jumping 16%.
This stock is having a good year
Walker & Dunlop is a well-run company with a history of steady growth and intelligent moves to grow its earnings. Investors have recognized its potential and the stock is trading up about 60.2% so far in 2021 and is currently near 52-week highs. Despite that sharp rise, its price-to-earnings ratio is still a reasonable 17.8. The stock also offers a solid annualized $2 per share dividend, currently yielding just 1.4% because of the stock price runup. The dividend was first offered in 2018 and the quarterly payout has already doubled the initial offer. It's for these reasons (and others) that savvy investors are buying up Walker & Dunlop stock.