Walker & Dunlop’s Q1’23 Results Reflect Strength of Recurring Revenue Businesses Within Challenging Transactions Market

FIRST QUARTER 2023 HIGHLIGHTS

• Total transaction volume of $6.7 billion, down 47% from Q1’22
• Total revenues of $238.7 million, down 25% from Q1’22
• Net income of $26.7 million and diluted earnings per share of $0.79, both down 63% from Q1’22
• Adjusted EBITDA¹ of $68.0 million, up 9% from Q1’22
• Adjusted core EPS² of $1.17, up 10% from Q1’22
• Servicing portfolio of $124.6 billion at March 31, 2023, up 7% from March 31, 2022
• Declared quarterly dividend of $0.63 per share for the second quarter of 2023

BETHESDA, Md.–(BUSINESS WIRE)–Walker & Dunlop, Inc. (NYSE: WD) (the “Company,” “Walker & Dunlop” or “W&D”) reported total revenues of $238.7 million for the first quarter of 2023, a decrease of 25% year over year. First quarter total transaction volume was $6.7 billion, down 47% year over year. Net income for the first quarter of 2023 was $26.7 million, or $0.79 per diluted share, both down 63% year over year, as the first quarter of 2022 included a one-time benefit of $39.6 million that contributed $0.92 to diluted earnings per share. Adjusted EBITDA¹ was $68.0 million, up 9% over the same period in 2022. Adjusted core EPS was $1.17, up 10% year over year. The Company’s Board of Directors declared a dividend of $0.63 per share for the second quarter of 2023.

“Dramatically higher interest rates and market uncertainty pushed transaction volumes down across the commercial real estate industry in Q1 2023,” commented Walker & Dunlop Chairman and CEO, Willy Walker. “Our team, working closely with our clients, closed $6.7 billion of financing and sales transactions, down 47% from Q1 2022. Due to Walker & Dunlop’s scaled loan servicing and asset management platforms, we generated $68 million of adjusted EBITDA, up 9% over Q1 2022, and adjusted core EPS of $1.17, up 10%. That’s W&D’s counter-cyclical business model kicking in!”

“After reducing costs and lowering headcount by 8%, we are well positioned to operate at lower transaction volumes should they persist,” continued Mr. Walker. “Yet as the largest combined Fannie Mae and Freddie Mac lender on multifamily properties in the country, we expect GSE volumes to increase from Q1’23 levels. As banks pull back from commercial real estate lending, we expect our brokers to be hired more frequently to assist our clients in finding the best capital solution available. And as bank capital exits the market, we expect non-bank, private capital to step-in — with the help of Walker & Dunlop.”

Discussion of Results:

• The persistent challenging macro-economic environment primarily drove the 47% decrease in total debt financing volume in the first quarter of 2023.
• HUD volumes decreased 67% in the first quarter of 2023 as inflationary impacts on building products and the increasing interest-rate environment continued to make HUD’s construction and streamlined refinancing products a less favorable source of capital for multifamily properties.
• The absence of principal lending and investing volume, which includes interim loans, originations for WDIP separate accounts, and interim lending for our joint venture, reflects a conservative credit outlook in an uncertain commercial real estate lending environment.
• Brokered debt and property sales volume decreased in the first quarter due to (i) decreased liquidity supplied to the commercial real estate sector by banks due to the macroeconomic conditions and the banking crisis that occurred late in the quarter, and (ii) dramatically lower acquisition and capital markets activity. U.S. multifamily property sales declined 74% in the first quarter of 2023 according to CoStar, while our multifamily property sales volume declined 46% year over year.

Discussion of Results:

• Our servicing portfolio continues to expand as a result of the additional GSE and brokered debt financing volumes over the past 12 months, partially offset by principal paydown and loan payoffs.
• During the first quarter of 2023, we added $1.4 billion of net loans to our servicing portfolio, and over the past 12 months, we added $8.3 billion of net loans to our servicing portfolio, 71% of which were Fannie Mae loans.
• $7.8 billion of Agency loans in our servicing portfolio are scheduled to mature over the next two years. These loans, with a relatively low weighted-average servicing fee of 17.3 basis points, represent only 6% of the total portfolio.
• The mortgage servicing rights (“MSRs”) associated with our servicing portfolio had a fair value of $1.4 billion as of March 31, 2023, compared to $1.3 billion as of March 31, 2022.
• Assets under management (“AUM”) as of March 31, 2023 consisted of $14.4 billion of tax-credit equity funds, $1.3 billion of commercial real estate loans and funds, and $0.9 billion of loans in our interim lending joint venture.

Discussion of Results:

• The decrease in Walker & Dunlop net income was the result of a 62% decrease in income from operations, primarily due to the decline in total transaction volume and associated revenues. Additionally, the first quarter of 2022 included a one-time $39.6 million increase in other revenues due to the revaluation of our existing 50% ownership interest in Apprise, our appraisal business, in conjunction with our acquisition of GeoPhy.
• The increase in adjusted EBITDA was primarily the result of increased escrow earnings, servicing fees, investment banking revenues and lower variable compensation and other operating expenses, partially offset by the decreases in transaction related revenues, net warehouse interest income, prepayment fees and higher fixed compensation costs.
• Diluted EPS decreased 63% in the first quarter of 2023, while adjusted core EPS increased 10% year over year. Refer to the section of this press release below titled “Non-GAAP Financial Measures” and “Adjusted Core EPS Reconciliation” for additional insight.
• Personnel expense as a percentage of total revenues increased to 50% in the first quarter of 2023, primarily due to increases in fixed personnel costs, while non-commissionable revenues remained relatively flat. In April 2023, the Company announced a workforce reduction of approximately 8% in response to continued challenging conditions in the commercial real estate financing and services market. The Company expects to recognize the savings benefit from this action in the third and fourth quarters of this year.
• Operating margin decreased due to the significant decline in transaction activity this quarter. Our transaction related businesses are scaled to execute a significantly larger volume of business, and as commercial real estate transaction activity slows down, our operating margins will decline. The workforce reduction in April is expected to benefit operating margins in the second half of the year.
• Return on equity declined due to a 6% increase in stockholders’ equity over the past year combined with a 63% decrease in net income.

Discussion of Results:

• Our at-risk servicing portfolio, which is comprised of loans subject to a defined risk-sharing formula, increased primarily due to the level of Fannie Mae loans added to the portfolio during the past 12 months. As of March 31, 2023, there were two defaulted loans. The at-risk servicing portfolio continues to exhibit strong credit quality, with very low levels of delinquencies and strong operating performance of the underlying properties in the portfolio.
• The on-balance sheet interim loan portfolio, which is comprised of loans for which we have full risk of loss, was $187.5 million as of March 31, 2023 compared to $221.6 million as of March 31, 2022. There was one defaulted loan in our interim loan portfolio as of March 31, 2023. All other loans in the on-balance sheet interim loan portfolio are current and performing as of March 31, 2023. The interim loan joint venture held $895 million of loans as of March 31, 2023 and $930 million of loans as of March 31, 2022. We share in a small portion of the risk of loss, and as of March 31, 2023, all loans in the interim loan joint venture are current and performing.
• We take credit risk exclusively on loans backed by multifamily assets and have zero exposure to losses in any other sector of the commercial real estate lending market.

Capital Markets – Discussion of Quarterly Results:

The Capital Markets segment includes our Agency lending, debt brokerage, property sales, appraisal and valuation services, and housing market research businesses.

• The decrease in loan origination and debt brokerage fees, net (“origination fees”) was primarily the result of a decrease in our overall debt financing volume, partially offset by an increase in the origination fee margin due to the mix of our origination volume, as Agency debt financing volume as a percentage of overall debt financing volume increased. Brokered volumes were significantly impacted by less liquidity supplied by the capital markets since the third quarter 2022, driven by the uncertainty from rising interest rates and macroeconomic fundamentals. The banking crisis that occurred in March 2023 further restricted the supply of capital toward the end of the quarter.
• The decrease in MSR income is attributable to a 27% decrease in Agency debt financing volume and a 22% decline in the Agency MSR margin. The decline in the Agency MSR margin was largely related to a decline in the weighted-average servicing fee on Fannie Mae loan originations, as spreads tightened due to rising interest rates.
• The decrease in property sales broker fees was primarily driven by the 46% decrease in property sales volumes year over year, driven by economic uncertainty that caused a broad slowdown in acquisition activity across the commercial real estate sector.
• The significant decrease in net warehouse interest income was driven by the interest rate environment in the first quarter of 2023. During the first quarter of 2023, the yield curve was inverted. Our warehouse lines are indexed to SOFR, while the loans we originate are indexed to long-term US Treasury rates. Although we have materially reduced the number of days our loans are outstanding before delivery to an investor, we are earning a negative spread for the period of time the loans are outstanding for most of our loan originations.
• The increase in other revenues was primarily a result of an increase in investment banking and research subscription revenues, driven by a large investment banking transaction closed by our investment banking team.
• Personnel expense decreased primarily due to the decrease in commissions expense as a result of the decline in property sales broker fees and origination fees.
• The significant increase in interest expense on corporate debt is the result of increases in both interest rates year over year, as our term loan carries a floating interest rate, and the balance of our corporate debt.

Servicing & Asset Management – Discussion of Quarterly Results:

The Servicing & Asset Management segment includes loan servicing, principal lending and investing, management of third-party capital invested in tax credit equity funds focused on the affordable housing sector and other commercial real estate, and real estate-related investment banking and advisory services.

• The $8.3 billion net increase in the servicing portfolio over the past 12 months was the principal driver of the growth in servicing fees year over year, partially offset by a decrease in the servicing portfolio’s weighted-average servicing fee.
• Escrow earnings and other interest income increased as a result of higher escrow earnings due to substantially higher short-term interest rates, partially offset by a smaller average escrow balance.
• Other revenues decreased primarily due to a significant decline prepayment activity in a higher interest rate environment which decreased prepayment fees, partially offset by increases in other revenues.
• Personnel expense decreased in the first quarter of 2023 primarily due to lower bonus accruals tied to company performance, which was partially offset by an increase in salary and benefits expense due to increased average headcount year over year.
• The benefit for credit losses in the first quarter of 2023 was primarily attributable to the annual update in our historical loss rate factor.
• The significant increase in interest expense on corporate debt is the result of increases in both interest rates year over year, as our term loan carries a floating interest rate, and the balance of our corporate debt.
• Other operating expenses decreased in the first quarter of 2023 primarily due to the write off of the unamortized premium associated with the payoff of the note payable of one of our subsidiaries.

Corporate – Discussion of Quarterly Results:

The Corporate segment consists of corporate-level activities including accounting, information technology, legal, human resources, marketing, internal audit, and various other corporate groups (“support functions”). The Company does not allocate costs from these support functions to its other segments in presenting segment operating results.

• The decrease in total revenues was primarily driven by the $39.6 million gain from the revaluation of Apprise in connection with the acquisition of GeoPhy, a unique transaction in 2022, and a decrease in income from our other equity method investments. These decreases were partially offset by an increase in interest income from our corporate cash balances.
• Personnel expense decreased dramatically in the first quarter due to substantial decreases in subjective bonus and performance stock compensation expenses compared to the prior year period in response to our overall financial performance.
• The significant increase in interest expense on corporate debt is the result of increases in both interest rates year over year, as our term loan carries a floating interest rate, and the balance of our corporate debt.
• Other operating expenses decreased primarily due to lower professional fees and reduced travel and entertainment expenses, partially offset by an increase in office expenses. In the first quarter of 2022, we incurred professional fees associated with the acquisition of GeoPhy, with no comparable activity in 2023.

CAPITAL SOURCES AND USES

On May 3, 2023, the Company’s Board of Directors declared a dividend of $0.63 per share for the second quarter of 2023. The dividend will be paid on June 2, 2023 to all holders of record of the Company’s restricted and unrestricted common stock as of May 18, 2023.

On January 12, 2023, the Company entered into a lender joinder agreement and amendment to our existing credit agreement that provided for an incremental term loan with a principal amount of $200 million. The incremental term loan bears interest at a rate equal to adjusted Term SOFR plus 3.00% per annum and matures in December 2028. Proceeds from the debt were used to repay $116 million of debt assumed in the Company’s acquisition of Alliant and strengthen its balance sheet for general corporate purposes.

On February 20, 2023, our Board of Directors authorized the repurchase of up to $75.0 million of the Company’s outstanding common stock over a 12-month period ending February 23, 2024 (“2023 Share Repurchase Program”). As of March 31, 2023, the Company had $75.0 million of authorized share repurchase capacity remaining under the 2023 Share Repurchase Program.

Any purchases made pursuant to the 2023 Share Repurchase Program will be made in the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The repurchase program may be suspended or discontinued at any time.

Contacts

Headquarters:

Phone 301.215.5500

info@walkeranddunlop.com

Investors:

Kelsey Duffey

Senior Vice President, Investor Relations
Phone 301.202.3207

investorrelations@walkeranddunlop.com

Media:

Carol McNerney

Chief Marketing Officer
Phone 301.215.5515

info@walkeranddunlop.com

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