Walker & Dunlop, Inc. (NYSE:WD) reported third quarter 2016 net income of $29.6 million, or $0.96 per diluted share, a 46% increase from third quarter 2015 net income of $20.3 million, or $0.66 per diluted share. Total revenues were $154.8 million for the third quarter 2016 a 28% increase over the third quarter 2015. Adjusted EBITDA for the third quarter 2016 was $36.2 million compared to $31.0 million for the third quarter 2015, a 17% increase.
“The third quarter was yet another great quarter for Walker & Dunlop, led by the 28% growth in revenue and 45% growth in EPS over the third quarter of 2015,” commented Willy Walker, Walker & Dunlop’s Chairman and CEO. “With year-to-date EPS of $2.51, up 26% over last year, and a very strong pipeline leading into the fourth quarter, we will once again generate strong double digit earnings per share growth in 2016 for the third consecutive year.”
“The United States continues to create over one million households per year, and increasingly those households live in rental housing. Walker & Dunlop’s market position, having supplied over 5% of total debt capital to the Multifamily industry in 2015, and ever-expanding footprint and financial products, positions our company extremely well for continued growth in this expanding, dynamic industry,” Walker continued. “Freddie Mac recently released their 2016-2020 multifamily financing market projections, and with projected growth from $282 billion in 2016 to $300 billion in 2017, Walker & Dunlop has the clients, scale, and expertise to continue growing at a dramatic pace. Our team, and partnerships with clients and capital sources, have never been stronger nor more valuable.”
THIRD QUARTER 2016 OPERATING RESULTS
TOTAL REVENUES were $154.8 million for the third quarter 2016 compared to $120.8 million for the third quarter 2015, a 28% increase, driven by growth in the volume of Fannie Mae and HUD loans originated during the quarter. HUD and Fannie Mae loan originations, our most profitable executions, comprised 46% of loan origination volume, which drove gains from mortgage banking activities up 42% over the third quarter 2015.
GAINS FROM MORTGAGE BANKING ACTIVITIES for the third quarter 2016 were $100.6 million compared to $70.8 million for the third quarter 2015, a 42% increase. GAINS ATTRIBUTABLE TO MORTGAGE SERVICING RIGHTS (“MSRs”) were $48.2 million for the third quarter 2016, a 43% increase from $33.8 million for the third quarter 2015. LOAN ORIGINATION FEES were $52.4 million for the third quarter 2016 compared to $37.0 million for the third quarter 2015, a 42% increase.
SERVICING FEES were $37.1 million for the third quarter 2016 compared to $29.3 million for the third quarter 2015. The 27% increase in servicing fees was driven by a one basis point increase in the weighted average servicing fee from 25 basis points to 26 basis points, coupled with continued growth of the portfolio resulting from strong loan origination activity, and the acquisition of a HUD servicing portfolio during the second quarter 2016.
NET WAREHOUSE INTEREST INCOME, which includes net interest earned on loans held for sale and loans held for investment (the Company’s on balance sheet interim loan portfolio), was $5.6 million for the third quarter 2016, an 18% decrease from $6.9 million for the third quarter 2015. The decrease in net warehouse interest income was a result of a decrease in the average balance of loans held for investment and a flattening of the yield curve that decreased the spread earned on loans held for sale.
TOTAL EXPENSES were $106.1 million for the third quarter 2016 compared to $87.3 million for the third quarter 2015, a 21% increase, which was primarily driven by a 31% increase in personnel costs due to increased average headcount and increased variable compensation costs, a product of the Company’s strong financial performance during the quarter. As a percentage of total revenues, personnel expense was 42% during the third quarter 2016 compared to 41% in the prior year’s third quarter. Additionally, amortization and depreciation costs increased 14% due to the growth of the servicing portfolio year over year.
PROVISION FOR CREDIT LOSSES was $0.3 million for the third quarter 2016 compared to $0.1 million for the third quarter 2015 as the credit quality of our at risk portfolio remains stable. NET WRITE-OFFS during the third quarter 2016 were $2.6 million, compared to zero in the third quarter 2015, as we settled the remaining defaulted loans in our at risk portfolio with Fannie Mae.
OPERATING MARGIN was 31% for the third quarter 2016, up from 28% for the third quarter 2015. The increase in operating margin was driven by the benefits of scale in our loan origination activity and in our servicing portfolio, which drove total revenues up 28%, while total expenses grew only 21%.
NET INCOME was $29.6 million, or $0.96 per diluted share, for the third quarter 2016 compared to net income of $20.3 million, or $0.66 per diluted share, for the third quarter 2015. The 46% increase in net income was driven by increased gains from mortgage banking activities and growth in servicing fees, partially offset by increases in personnel costs and amortization and depreciation.
ADJUSTED EBITDA was $36.2 million for the third quarter 2016 compared to $31.0 million for the third quarter 2015. The 17% increase was driven by increases in loan origination fees and servicing fees, partially offset by increases in personnel costs and net write-offs.
ANNUALIZED RETURN ON EQUITY was 22% for the third quarter 2016 up from 18% for the third quarter 2015. In the third quarter 2016, return on equity benefitted from increased total revenues and net income.
TOTAL TRANSACTION VOLUME
TOTAL TRANSACTION VOLUME for the third quarter 2016 was $5.0 billion, up 2% from $4.9 billion for the third quarter 2015. Total transaction volume includes loan origination and investment sales volumes.
LOAN ORIGINATION VOLUME was up 3% from the third quarter 2015 to $4.2 billion. Loan originations with Fannie Mae were $1.6 billion, an increase of 25% from the third quarter 2015. Loan originations with Freddie Mac were $1.3 billion, a 3% decrease from the third quarter 2015. Brokered loan originations totaled $923.0 million, a 30% decrease from the third quarter 2015. HUD loan originations totaled $382.6 million, a 249% increase from the third quarter 2015. Interim loan originations were $76.5 million, a 155% increase from the third quarter 2015. We did not originate any CMBS loans in the third quarter 2016 compared to $56.7 million in the third quarter 2015.
INVESTMENT SALES VOLUME was $788.2 million for the third quarter 2016, a 4% decrease from the third quarter 2015.
SERVICING PORTFOLIO
The SERVICING PORTFOLIO totaled $59.1 billion at September 30, 2016, an increase of 24% from $47.8 billion at September 30, 2015. During the third quarter 2016, $1.8 billion of loans were added to the servicing portfolio. At September 30, 2016, the weighted average remaining term of the portfolio increased to 10.5 years, compared to 9.7 years in the third quarter 2015, and the WEIGHTED AVERAGE SERVICING FEE increased to 26 basis points from 25 basis points.
CREDIT QUALITY
The Company’s AT RISK SERVICING PORTFOLIO, which is comprised of loans subject to a defined risk-sharing formula, was $22.4 billion at September 30, 2016 compared to $18.8 billion at September 30, 2015. There were no 60+ DAY DELINQUENCIES in the Company’s at risk servicing portfolio at September 30, 2016. There were $2.6 million of NET WRITE-OFFS for the third quarter 2016 as we settled losses on three previously defaulted loans with Fannie Mae that were fully reserved for in earlier periods. As of September 30, 2016, we have no defaulted loans in our at risk portfolio and no losses pending settlement with Fannie Mae.
The on-balance sheet INTERIM LOAN PORTFOLIO, which is comprised of loans for which Walker & Dunlop has full risk of loss, was $264.5 million at September 30, 2016 compared to $347.3 million at September 30, 2015. All of the Company’s interim loans are current and performing at September 30, 2016.
YEAR-TO-DATE RESULTS
TOTAL TRANSACTION VOLUME for the nine months ended September 30, 2016 was $13.0 billion compared to $13.1 billion for the same period last year, a less than 1% decrease.
TOTAL REVENUES for the nine months ended September 30, 2016 were $396.9 million compared to $346.8 million for the same period last year, a 14% increase. The increase in total revenues was largely driven by a 17% increase in gains from mortgage banking activities and a 21% increase in servicing fees.
TOTAL EXPENSES for the nine months ended September 30, 2016 were $272.3 million compared to $245.3 million for the nine months ended September 30, 2015, an increase of 11%. The increase in total expenses was due primarily to increased personnel costs and amortization and depreciation expense. Personnel expense as a percentage of total revenues for the nine months ended September 30, 2016 was flat to the same period last year at 39%.
OPERATING MARGIN for the nine months ended September 30, 2016 was 31% compared to operating margin of 29% for the same period last year. The lift in operating margin was driven by significant growth in our gains from mortgage servicing a result, total revenues grew 14% while total expenses increased only 11%.
NET INCOME for the nine months ended September 30, 2016 was $77.1 million, or $2.51 per diluted share, compared to net income of $61.7 million, or $1.99 per diluted share, for the same period last year, a 25% increase.
ADJUSTED EBITDA was $95.7 million for the nine months ended September 30, 2016 compared to $95.3 million for the same period last year, a less than 1% increase.
Adjusted EBITDA is a non-GAAP financial measure the Company presents to help investors better understand our operating performance. For a reconciliation of adjusted EBITDA to net income, refer to the sections of this press release below titled “Non-GAAP Financial Measures” and “Adjusted Financial Metric Reconciliation to GAAP.”
Conference Call Information
The Company will host a conference call to discuss its quarterly results on Wednesday, November 2, 2016 at 8:30 a.m. Eastern time. Analysts and investors interested in participating are invited to call (888) 632-3381 from within the United States or (785) 424-1678 from outside the United States and are asked to reference the Conference ID: WDQ316. 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.
A telephonic replay of the call will also be available from approximately 11:00 a.m. Eastern time November 2, 2016 through November 16, 2016. Please call (800) 839-2492 from the United States or (402) 220-7225 from outside the United States. 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 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 500 professionals in 24 offices across the nation with an unyielding commitment to client satisfaction.