Inflation and rapidly rising interest rates make for tough market conditions, which have weighed on numerous stocks over the last year. Times like this make it difficult for investors to remain patient and maintain a long-term investing mindset. However, it's crucial to remember that short-term volatility creates long-term opportunities for patient investors.
One real estate stock that has taken a hit in the past year is Walker & Dunlop (WD 0.10%). The multifamily lender has faced challenges that have put pressure on its profit margins during the year. However, it ended the year as the top multifamily lender through government agencies, and its stock price makes it an intriguing buy today. Here's what you need to know about the business and what can propel its growth from here.
CEO Willy Walker has transformed this small, family run business
Walker & Dunlop provides financing for apartment buildings and multifamily houses and is one of the largest in the U.S. Last year, it took the title of the top lender through government agencies Fannie Mae and Freddie Mac.
Walker & Dunlop's impressive growth can be credited to its current Chief Executive Officer, Willy Walker. Walker is the grandson of Oliver Walker, one of the firm's co-founders in 1937. It was originally a small, family run business. Willy Walker took over as CEO in 2007, took the firm public in 2010, and has since grown it into the real estate behemoth it is today.
Since going public, the firm's revenue and diluted earnings per share have grown by 22% and 7% annually. Investors who bought it have seen an 892% return on investment, or about 21% annually.
WD Revenue (TTM) data by YCharts
Short-term headwinds have affected Walker & Dunlop
Macroeconomic headwinds weighed down numerous businesses last year, and Walker & Dunlop wasn't immune. High inflation levels have affected the real estate company because of the Federal Reserve's policies to bring them down.
In 2022, the federal funds rate, or the interest rate banks can borrow or lend at overnight, went from near zero to 4.25%. The Fed sets the federal funds rate, which affects interest rates on mortgage loans, credit card debt, or other lending products. The rapid increase in interest rates has led to disruptions in capital markets and a decline in lending activity in the multifamily space.
Walker said that "as rate hikes got more consistent and significant, the commercial real estate transaction markets slowed down dramatically." During the year, transaction volume for the real estate company was down 7% to $63.3 million. Fourth-quarter transaction volume plummeted, down 59% from last year, to $11.2 billion.
Image source: Walker & Dunlop Investor Presentation.
Lending markets also affected its revenue from mortgage servicing rights on loans originated for Fannie Mae. Because interest rates rose rapidly, Walker & Dunlop had to adjust prices to make deals worthwhile for clients, resulting in lower servicing income for Walker & Dunlop. As a result, mortgage servicing income fell 59% in the third quarter. Net income for the year was down 20% compared with the prior year, and that figure fell 48% in the fourth quarter.
Walker & Dunlop's long-term growth potential is solid
It has been a challenging year for Walker & Dunlop. Volumes are down, margins have taken a hit, and tough markets have all weighed on its growth. However, it has made strides.
This year it became the top lender through government agencies Fannie Mae and Freddie Mac for the first time in the company's history. As a top lender, it's well-positioned to take advantage of hundreds of billions of dollars in loans in the multifamily space that borrowers need to refinance in the coming years.
Most loans in the multifamily space tend to be shorter-term of up to 10 years, with a lump sum payment at the end of the loan. Rather than paying that lump sum, most borrowers choose to refinance their loan at the end of the term. Over the next four years, $381 billion in multifamily loans will mature and become eligible for refinancing. This far exceeds 2018 to 2022, when $174 billion in loans matured. This "wave of maturities" presents Walker & Dunlop with an opportunity to be the lender of choice and grow its market share further.
Image source: Walker & Dunlop Investor Presentation.
A solid stock for patient investors
Conditions will likely be tough for Walker & Dunlop in the first half of this year, and it expects slower transaction activity to continue. One positive development would be the Federal Reserve slowing its interest rate hikes and stabilizing markets. This would create a more favorable lending environment and boost its servicing fees as interest rates become more predictable.
Investors should know that the stock will likely see volatility until lending conditions improve. Interest rates continue rising as the Fed fights inflation, and markets are expecting interest rates to increase another 0.75% by June. Not only that, but the National Association of Home Builders sees multifamily construction falling 28% in 2023 before stabilizing next year, creating near-term headwinds for Walker & Dunlop.
However, the long-term demand for affordable housing is robust. According to a study commissioned by the National Multifamily Housing Council and the National Apartment Association, the housing shortage will persist, especially in the affordable housing space. To meet this demand, 4.3 million new apartments will need to be built in the U.S. With this long-term growth opportunity, Walker & Dunlop looks like a solid company you can buy the dip on throughout this year.
