Walker & Dunlop Reports Q1 2018 Net Income of $37 Million

BETHESDA, Md., May 2, 2018 /PRNewswire/ --

FIRST QUARTER 2018 HIGHLIGHTS

• Total transaction volume of $4.8 billion
• Total revenues of $147.5 million
• Net income of $36.9 million, or $1.16 per diluted share
• Adjusted EBITDA¹ of $52.1 million
• Servicing portfolio of $76.0 billion at March 31, 2018
• Declared $0.25 per share cash dividend for the second quarter 2018

Walker & Dunlop, Inc. (NYSE: WD) (the "Company") reported first quarter 2018 net income of $36.9 million, or $1.16 per diluted share, representing the third most-profitable quarter in its history. Total revenues for the first quarter 2018 were $147.5 million, generating adjusted EBITDA of $52.1 million. The results from the first quarter 2018 reflect the strength of Walker & Dunlop's brand and the scale and diversity of its business.

"Walker & Dunlop's strong first quarter results reflect the scale and diversification we've achieved through strategic investments in the platform over the past several years," commented Chairman and CEO, Willy Walker. "We earned net income of $37 million or $1.16 per diluted share on $4.8 billion of total transaction volume, the second strongest first quarter transaction volume in our history. Adjusted EBITDA increased year over year to $52 million, demonstrating the value of the long-term, prepayment-protected revenue streams generated by our $76 billion servicing portfolio."

Mr. Walker continued, "In the first few months of the year, we executed on several strategic initiatives that take us closer to achieving our goal of generating $1 billion in annual revenues by the end of 2020. In April, we completed the acquisition of JCR Capital, an alternative asset manager with a strong track record of raising capital to invest in debt, preferred equity, mezzanine equity and JV equity in the middle-market commercial real estate space. The acquisition of JCR is the first step towards achieving our goal of building an $8 to $10 billion asset management business. We also have continued to add bankers and brokers to W&D this year, including a capital markets team in Philadelphia and an investment sales team in Boston, both of which fill gaps in our platform in the Northeast, where we see a significant growth opportunity. We expect to continue to recruit and acquire additional broker and banker talent onto our platform as we seek to grow market share and achieve our long-term strategic goals."

Discussion of Results:

• The 34% decrease in Fannie Mae loan origination volume year over year was due principally to a 35% decrease in Fannie Mae's overall loan originations during the first quarter 2018 compared to the first quarter 2017. In addition, we originated two large portfolios with Fannie Mae in the first quarter 2017 totaling $793.3 million while no similarly large portfolios were originated during the same period in 2018.
• We continue to see strong demand for debt financing due to the strength of the commercial real estate and multifamily markets, positive macroeconomic fundamentals, a relatively low interest rate environment, and robust demand for rental properties. Even during this period of strong demand, we do experience quarterly variation in loan origination volumes.
• Continued strong demand for floating-rate debt financing, a loan product Freddie Mac excels in, led to a slight increase in Freddie Mac's overall loan originations year over year. Additionally, we originated a $287.2 million portfolio of Freddie Mac loans during the first quarter 2018 compared to no large portfolios in the prior year quarter.
• A $60.7 million period-over-period increase in construction lending was a significant contributor to the large percentage increase in HUD lending.
• A substantial increase in the average number of mortgage bankers with a primary expertise in brokered loan originations was the largest driver of the increase in brokered loan origination volume.

Discussion of Results:

• During the first quarter 2018, we added $1.5 billion of net loans to our servicing portfolio, nearly all of which were Fannie Mae and Freddie Mac loans.
• Our servicing portfolio has experienced significant growth over the past year due to our record loan origination volumes and relatively few payoffs. During the past 12 months, we have originated $24.7 billion of loans, $16.9 billion of which were Agency loans.
• The decrease in the weighted-average servicing fee is the result of the net addition of $7.9 billion of Freddie Mac, HUD, and brokered loans serviced compared to an increase of only $3.8 billion of Fannie Mae loans serviced during the past 12 months. Fannie Mae loans have the highest servicing fees of all the loan types we service.
• The decrease in the weighted-average remaining term is the result of the $11.1 billion increase in Fannie Mae, Freddie Mac, and brokered loans serviced compared to an increase of $0.6 billion in HUD loans serviced during the past 12 months. Fannie Mae, Freddie Mac, and brokered loans typically have terms of 10 years or fewer, while HUD loans typically have terms of 30 years or more.
• Fewer than $5.0 billion of Agency loans in our servicing portfolio are scheduled to mature over the next two years.
• Net mortgage servicing rights ("MSRs") from loan originations during the quarter decreased $3.7 million. The decrease was principally due to the relatively low volume of Fannie Mae loan originations, which produce the largest MSRs of all the loan products we originate. Over the past 12 months, net MSR additions were $68.5 million.
• The MSRs associated with the servicing portfolio had a fair value of $841.4 million as of March 31, 2018.

Discussion of Results:

• The decrease in loan origination fees was driven by the decrease in loan origination activity in the first quarter 2018 compared to the prior-year first quarter.
• The decreases in gains attributable to MSRs and the MSR gains metrics were primarily the result of the aforementioned decrease in Fannie Mae loan origination volume year over year.
• The $11.6 billion increase in the servicing portfolio over the past 12 months was the principal driver of the substantial growth in servicing fees year over year.
• The decrease in net warehouse interest income from loans held for sale was due to a lower average balance of loans outstanding during the first quarter 2018 compared to the first quarter 2017 and a significantly lower net interest margin year over year. The decrease in the net interest margin is related to a substantial increase in the short-term rates at which we borrow with a much smaller increase in the long-term interest rates on the loans we fund through those borrowings, resulting from a flattening of the yield curve year over year.
• The decrease in net warehouse interest income from loans held for investment was due to a lower average balance of loans outstanding resulting from the creation of our interim loan joint venture in the second quarter 2017. We transferred a significant portion of our loans held for investment to the joint venture upon its formation. Additionally, substantially all of the interim loan originations subsequent to the creation of the joint venture have been held by the joint venture. We own a 15% interest in the joint venture.
• Escrow earnings benefitted from an increase in the average balance of escrow accounts outstanding from the first quarter 2017 to the first quarter 2018. Additionally, the average placement fees on our escrow accounts has increased significantly over the past year as short-term interest rates have increased.
• The decrease in other revenues was principally due to decreases in prepayment and assumption fees.

Discussion of Results:

• Fixed compensation costs increased due to acquisitions and hiring to support our growth, resulting in a 9% increase in the average headcount from 573 in the first quarter 2017 to 625 in the same period in 2018.
• Variable compensation costs decreased as a result of a decrease in commissions expense resulting from the decreases in total transaction volume and origination fees and a decrease in the accrual for subjective bonuses.
• The increase in the personnel expenses metric was due to lower total revenues and the increase in fixed compensation costs year over year.
• Amortization and depreciation costs increased due to the growth of the average balance of MSRs outstanding year over year. Over the past 12 months, we have added $68.5 million of MSRs, net of amortization and write offs due to prepayment.
• The increase in other operating expenses stems from increased office and travel costs due to the increase in average headcount year over year and increased legal expenses in connection with our acquisition of JCR Capital Investment Corporation and subsidiaries in the second quarter 2018.

Discussion of Results:

• The average quarterly net income growth over the past 12 quarters is 53%, and the average quarterly diluted EPS growth is 52% during the three-year period.
• The quarter-over-quarter decrease in net income is largely attributable to the aforementioned decrease in total revenues on decreased total transaction volume, partially offset by a 45% decrease in income tax expense. Income tax expense was $7.2 million for the first quarter 2018 compared to $13.1 million during the same quarter last year. The decrease was largely related to the enactment of the Tax Cuts and Jobs Act ("tax reform") in December 2017. Tax reform significantly reduced the statutory Federal income tax rate from 35% to 21%. The reduction in the statutory tax rate led to a decrease in our estimated annual effective tax rate from 38.6% for the first quarter of 2017 to 25.7% for the first quarter 2018. Partially offsetting the decrease in the estimated annual effective tax rate was a decrease in excess tax benefits from $8.7 million in the prior-year first quarter to $4.1 million for the current-year first quarter. The decrease in the excess tax benefits was driven primarily by a reduction in the number of shares that vested and the decrease in the Federal statutory tax rate. After applying the estimated annual effective tax rate to income from operations and then reducing income tax expense by excess tax benefits, the resulting effective tax rate for the first quarter 2018 was 16.4% compared to 23.3% for the first quarter 2017.
• The increase in adjusted EBITDA was driven by increases in servicing fees and escrow earnings and other interest income and a decrease in personnel costs, partially offset by the decreases in origination fees, net warehouse interest income, and other revenues and the increase in other operating expenses.
• The decrease in operating margin was driven by the aforementioned decline in gains attributable to MSRs.
• The decrease in return on equity is largely related to the decrease in net income and a $183.4 million increase in stockholders' equity over the past 12 months due primarily to $204.8 million of net income recorded over the past year, partially offset by share repurchases and dividend payments.

Discussion of Results:

• Our at risk servicing portfolio, which is comprised of loans subject to a defined risk-sharing formula, increased due to the significant level of Fannie Mae loan origination volume during the past 12 months. There was one loan 60+ days delinquent in our at risk servicing portfolio at March 31, 2018.
• The on-balance sheet interim-loan portfolio, which is comprised of loans for which the Company has full risk of loss, was $60.2 million at March 31, 2018 compared to $313.4 million at March 31, 2017. All of the Company's interim loans are current and performing at March 31, 2018. We expect to see a continued decline in this portfolio as most of our future loan originations are expected to be executed through our interim loan joint venture instead of originated using our balance sheet. The interim loan joint venture holds $155.3 million of loans as of March 31, 2018.

DIVIDENDS AND SHARE REPURCHASES

On May 1, 2018, our Board of Directors declared a dividend of $0.25 per share for the second quarter 2018. The dividend will be paid June 5, 2018 to all holders of record of our restricted and unrestricted common stock and restricted stock units as of May 18, 2018.

During the first quarter 2018, we repurchased 244 thousand shares of our common stock at a weighted-average price of $46.77 per share.

Conference Call Information

The Company will host a conference call to discuss its quarterly results on Wednesday, May 2, 2018 at 8:30 a.m. Eastern time. Analysts and investors interested in participating are invited to call (877) 876-9174 from within the United States or (785) 424-1672 from outside the United States and are asked to reference the Conference ID: WDQ118. A simultaneous webcast of the call will be available on the Investor Relations section of the Walker & Dunlop website at http://www.walkerdunlop.com. Presentation materials related to the conference call will be posted to the Investor Relations section of the Company's website prior to the call. An audio replay will also be available on the Investor Relations section of the Company's website, along with the presentation materials.

About Walker & Dunlop

Walker & Dunlop (NYSE: WD), headquartered in Bethesda, Maryland, is one of the largest commercial real estate services and finance companies in the United States providing financing and investment sales to owners of multifamily and commercial properties. Walker & Dunlop, which is included in the S&P SmallCap 600 Index, has over 650 professionals in 29 offices across the nation with an unyielding commitment to client satisfaction.

Non-GAAP Financial Measures

To supplement our financial statements presented in accordance with United States generally accepted accounting principles ("GAAP"), the Company uses adjusted EBITDA, a non-GAAP financial measure. The presentation of adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. When analyzing our operating performance, readers should use adjusted EBITDA in addition to, and not as an alternative for, net income. Adjusted EBITDA represents net income before income taxes, interest expense on our term loan facility, and amortization and depreciation, adjusted for provision (benefit) for credit losses net of write-offs, stock-based incentive compensation charges, and non-cash revenues such as gains attributable to MSRs. Because not all companies use identical calculations, our presentation of adjusted EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, adjusted EBITDA is not intended to be a measure of free cash flow for our management's discretionary use, as it does not reflect certain cash requirements such as tax and debt service payments. The amounts shown for adjusted EBITDA may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges that are used to determine compliance with financial covenants.

We use adjusted EBITDA to evaluate the operating performance of our business, for comparison with forecasts and strategic plans, and for benchmarking performance externally against competitors. We believe that this non-GAAP measure, when read in conjunction with the Company's GAAP financials, provides useful information to investors by offering:

• the ability to make more meaningful period-to-period comparisons of the Company's on-going operating results;
• the ability to better identify trends in the Company's underlying business and perform related trend analyses; and
• a better understanding of how management plans and measures the Company's underlying business.

We believe that adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP and that adjusted EBITDA should only be used to evaluate the Company's results of operations in conjunction with net income. For more information on adjusted EBITDA, refer to the section of this press release below titled "Adjusted Financial Metric Reconciliation to GAAP."

Forward-Looking Statements

Some of the statements contained in this press release may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," or "potential" or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

The forward-looking statements contained in this press release reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause actual results to differ significantly from those expressed or contemplated in any forward-looking statement.

While forward-looking statements reflect our good faith projections, assumptions and expectations, they are not guarantees of future results. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law. Factors that could cause our results to differ materially include, but are not limited to: (1) general economic conditions and multifamily and commercial real estate market conditions, (2) regulatory and or legislative changes to Freddie Mac, Fannie Mae or HUD, (3) our ability to retain and attract loan originators and other professionals, and (4) changes in federal government fiscal and monetary policies, including any constraints or cuts in federal funds allocated to HUD for loan originations. 

For a further discussion of these and other factors that could cause future results to differ materially from those expressed or contemplated in any forward-looking statements, see the section titled ''Risk Factors" in our most recent Annual Report on Form 10-K, as it may be updated or supplemented by our Quarterly Reports on Form 10-Q and our other filings with the SEC. Such filings are available publicly on our Investor Relations web page at www.walkerdunlop.com.