Walker & Dunlop Reports Q2 2023 Financial Results

Continued Investments in People, Brand, and Technology Due to Strength of Recurring Revenues

SECOND QUARTER 2023 HIGHLIGHTS

Total transaction volume of $8.4 billion, down 63% from Q2’22
Total revenues of $272.6 million, down 20% from Q2’22
Net income of $27.6 million and diluted earnings per share of $0.82, both down 49% from Q2’22
Adjusted EBITDA¹of $70.5 million, down 26% from Q2’22
Adjusted core EPS² of $0.98, down 44% from Q2’22
Servicing portfolio of $126.6 billion at June 30, 2023, up 6% from June 30, 2022
Declared quarterly dividend of $0.63 per share for the third quarter of 2023

YEAR-TO-DATE 2023 HIGHLIGHTS

Total transaction volume of $15.1 billion, down 57% from 2022
Total revenues of $511.4 million, down 23% from 2022
Net income of $54.3 million and diluted earnings per share of $1.61, both down 57% from 2022
Adjusted EBITDA¹of $138.5 million, down 12% from 2022
Adjusted core EPS² of $2.14, down 24% from 2022

BETHESDA, Md.–(BUSINESS WIRE)–Walker & Dunlop, Inc. (NYSE: WD) (the “Company,” “Walker & Dunlop” or “W&D”) reported second quarter total transaction volume of $8.4 billion, down 63% year over year, due to the Federal Reserve’s continued tightening. Despite dramatically lower transaction volume, Walker & Dunlop’s total revenues were down just 20% year over year due to the strength of recurring, non-transaction-based servicing and asset management revenues. Net income was $27.6 million in the second quarter, down 49% year over year, while adjusted EBITDA declined significantly less, at 26%, due to our access to counter-cyclical capital and the strength of our servicing and asset management businesses.

“Q2 2023 was a hugely challenging macro-economic environment for commercial real estate but appears to be the first quarter in building back from the dramatic Federal Reserve tightening cycle that began in 2022,” commented Walker & Dunlop Chairman and CEO, Willy Walker. “Compared to the first quarter of 2023, our Q2 results showed sequential improvement with a 25% increase in total transaction volume driven predominantly by Fannie Mae and Freddie Mac. As a result of that top-line growth and continued expense management, diluted earnings per share and adjusted EBITDA both grew from Q1 to Q2. And year-to-date adjusted EBITDA is down just 12%, outperforming the majority of our commercial real estate services competitors and allowing us to continue investing in the people, brand, and technology of Walker & Dunlop.”

CONSOLIDATED SECOND QUARTER 2023 OPERATING RESULTS

TRANSACTION VOLUMES
(dollars in thousands)	Q2 2023		Q2 2022		$ Variance			% Variance
Fannie Mae	$	2,230,952	$	3,918,400	$	(1,687,448	)	(43	)%
Freddie Mac		1,212,887		1,141,034		71,853		6
Ginnie Mae – HUD		147,773		201,483		(53,710	)	(27	)
Brokered ⁽³⁾		3,316,223		9,258,490		(5,942,267	)	(64	)
Principal Lending and Investing ⁽⁴⁾		–		131,551		(131,551	)	(100	)
Debt financing volume	$	6,907,835	$	14,650,958	$	(7,743,123	)	(53	)%
Property sales volume		1,504,383		7,892,062		(6,387,679	)	(81	)
Total transaction volume	$	8,412,218	$	22,543,020	$	(14,130,802	)	(63	)%

Discussion of Results:

The continued challenging macro-economic environment in the second quarter of 2023 primarily drove the 53% decrease in total debt financing volume, with a 43% decrease in Fannie Mae volumes, partially offset by a 6% increase in Freddie Mac volumes. Fannie Mae originations in the second quarter of 2022 included a $1.9 billion portfolio, with no comparable large transaction in the second quarter of 2023. The $8.4 billion in total transaction volumes represents a 25% sequential increase in transaction volumes from the first quarter of 2023.
HUD volumes decreased 27% in the second quarter of 2023 as the interest-rate environment and long processing times continued to make HUD’s construction and streamlined refinancing products a less favorable source of capital for multifamily properties.
Principal lending and investing volume activity, which includes interim loans, originations for WDIP separate accounts, and interim lending for our joint venture, remained inactive in the second quarter of 2023, reflecting the challenges of a higher rate environment within the transitional lending segment of the market.
The decrease in brokered debt and property sales volume was driven by higher interest rates, decreased liquidity supplied to the commercial real estate sector and dramatically lower acquisition and capital markets activity as the commercial real estate industry continues to adjust to a higher interest rate environment.


MANAGED PORTFOLIO
(dollars in thousands, unless otherwise noted)	Q2 2023		Q2 2022		$ Variance			% Variance
Fannie Mae	$	61,356,554	$	57,122,414	$	4,234,140		7	%
Freddie Mac		38,287,200		36,886,666		1,400,534		4
Ginnie Mae – HUD		10,246,632		9,570,012		676,620		7
Brokered		16,684,115		15,190,315		1,493,800		10
Principal Lending and Investing		71,680		252,100		(180,420	)	(72	)
Total Servicing Portfolio	$	126,646,181	$	119,021,507	$	7,624,674		6	%
Assets under management		16,903,055		16,692,556		210,499		1
Total Managed Portfolio	$	143,549,236	$	135,714,063	$	7,835,173		6	%
Custodial escrow account balance at period end (in billions)	$	2.8	$	2.3
Weighted-average servicing fee rate (basis points)		24.3		24.9
Weighted-average remaining servicing portfolio term (years)		8.6		8.9

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 second quarter of 2023, we added $2.1 billion of net loans to our servicing portfolio, and over the past 12 months, we added $7.6 billion of net loans to our servicing portfolio, 74% of which were Fannie Mae and Freddie Mac loans.
$8.7 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 18.3 basis points, represent only 9% of our total Agency loans in the portfolio.
The mortgage servicing rights (“MSRs”) associated with our servicing portfolio had a fair value of $1.4 billion as of June 30, 2023, compared to $1.3 billion as of June 30, 2022.
Assets under management (“AUM”) as of June 30, 2023 consisted of $14.7 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.


KEY PERFORMANCE METRICS
(dollars in thousands, except per share amounts)	Q2 2023			Q2 2022			$ Variance			% Variance
Walker & Dunlop net income	$	27,635		$	54,286		$	(26,651	)	(49	)%
Adjusted EBITDA		70,501			94,844			(24,343	)	(26	)
Diluted EPS	$	0.82		$	1.61		$	(0.79	)	(49	)%
Adjusted core EPS	$	0.98		$	1.74		$	(0.76	)	(44	)%
Operating margin		13	%		22	%
Return on equity		7			14
Key Expense Metrics (as a percentage of total revenues):
Personnel expenses		49	%		49	%
Other operating expenses		11			11

Discussion of Results:

The decrease in Walker & Dunlop net income was largely the result of a 51% decrease in income from operations, primarily due to the decline in total transaction volume and associated revenues.
The decrease in adjusted EBITDA was primarily the result of lower origination fees (defined below), property sale broker fees, net warehouse interest income, and other revenues. These decreases were partially offset by increased escrow earnings and other interest income and lower personnel expense. During the second quarter of 2023, we resolved the only defaulted loan in the history of our interim loan program. The loan defaulted in 2019 and the collateral was sold in the second quarter. The sale returned $8.7 million to our balance sheet, and the $6.0 million allowance for loan losses was charged off, with an immaterial impact to the provision for loan losses. The charge off is included in adjusted EBITDA for the second quarter and contributed to the year-on-year decline in adjusted EBITDA.
Operating margin decreased due to the significant decline in total transaction volume this quarter, resulting in the aforementioned decrease in income from operations. Our transaction-related businesses are scaled to execute a significantly larger volume of business, and lower commercial real estate transaction activity has put pressure on our operating margins. The workforce reduction announced in April had a minimal impact on current quarter results but is expected to benefit our operating margin in the second half of the year.
Return on equity declined due to a 49% decrease in net income combined with a 4% increase in stockholders’ equity over the past year.


KEY CREDIT METRICS
(dollars in thousands)	Q2 2023			Q2 2022			$ Variance			% Variance
At-risk servicing portfolio ⁽⁸⁾	$	56,430,098		$	51,905,985		$	4,524,113		9	%
Maximum exposure to at-risk portfolio ⁽⁹⁾		11,346,580			10,525,093			821,487		8
Defaulted loans	$	36,983		$	78,659		$	(41,676	)	(53	)%
Key credit metrics (as a percentage of the at-risk portfolio):
Defaulted loans		0.07	%		0.15	%
Allowance for risk-sharing		0.06			0.09
Key credit metrics (as a percentage of maximum exposure):
Allowance for risk-sharing		0.29	%		0.46	%

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 June 30, 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 $71.7 million as of June 30, 2023 compared to $252.1 million as of June 30, 2022. We did not have any defaulted loans in our interim loan portfolio as of June 30, 2023, compared to one defaulted loan of $14.7 million in our interim loan portfolio as of June 30, 2022. During the second quarter of 2023, we sold the defaulted asset and charged off the $6.0 million allowance for loan losses and recorded an immaterial amount of expense. The three remaining loans in the on-balance sheet interim loan portfolio are current and performing as of June 30, 2023. The interim loan joint venture held $895.5 million of loans as of June 30, 2023 and $899.3 million of loans as of June 30, 2022. We share in a small portion of the risk of loss, and as of June 30, 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 no credit exposure to losses in any other sector of the commercial real estate lending market.

SECOND QUARTER 2023 – FINANCIAL RESULTS BY SEGMENT


FINANCIAL RESULTS – CAPITAL MARKETS
(dollars in thousands)	Q2 2023			Q2 2022			$ Variance			% Variance
Loan origination and debt brokerage fees, net (“Origination fees”)	$	64,574		$	102,085		$	(37,511	)	(37	)%
Fair value of expected net cash flows from servicing, net (“MSR income”)		42,058			51,949			(9,891	)	(19	)
Property sales broker fees		10,345			46,386			(36,041	)	(78	)
Net warehouse interest income (expense), LHFS		(2,752	)		3,707			(6,459	)	(174	)
Other revenues		11,760			11,491			269		2
Total revenues	$	125,985		$	215,618		$	(89,633	)	(42	)%
Personnel	$	93,067		$	138,716		$	(45,649	)	(33	)%
Amortization and depreciation		1,089			1,083			6		1
Interest expense on corporate debt		4,727			1,535			3,192		208
Other operating (income) expenses		5,200			5,873			(673	)	(11	)
Total expenses	$	104,083		$	147,207		$	(43,124	)	(29	)%
Income from operations	$	21,902		$	68,411		$	(46,509	)	(68	)%
Income tax expense		5,572			17,499			(11,927	)	(68	)
Net income before noncontrolling interests	$	16,330		$	50,912		$	(34,582	)	(68	)%
Less: net income (loss) from noncontrolling interests		223			653			(430	)	(66	)
Walker & Dunlop net income	$	16,107		$	50,259		$	(34,152	)	(68	)%
Key revenue metrics (as a percentage of debt financing volume):
Origination fee margin ⁽⁵⁾		0.93	%		0.71	%
MSR margin ⁽⁶⁾		0.61			0.36
Agency MSR margin ⁽⁷⁾		1.17			0.99
Key performance metrics:
Operating margin		17	%		32	%
Adjusted EBITDA	$	(10,334	)	$	22,830		$	(33,164	)	(145	)%

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 origination fees was primarily the result of a decrease in our overall debt financing volume, partially offset by an increase in Agency debt financing volume as a percentage of overall debt financing volume and the aforementioned $1.9 billion Fannie Mae portfolio that was originated in the second quarter of 2022 with no comparable activity in the second quarter of 2023. The portfolio had a much lower origination fee than is typical for smaller loans.
The decrease in MSR income is attributable to a 32% decrease in Agency debt financing volume, partially offset by a 18% increase in the Agency MSR margin. The aforementioned portfolio had a lower servicing fee, resulting in a low Agency MSR margin for the second quarter of 2022.
The decrease in property sales broker fees was primarily driven by the 81% decrease in property sales volumes.
The decrease in net warehouse interest income was primarily due to an inverted yield curve during the second quarter of 2023. Short-term interest rates upon which we incur interest expense were higher than the long-term mortgage rates upon which we earn interest income.
Personnel expense decreased primarily due to a decrease in commissions expense as a result of the decline in origination fees and property sales broker fees.
The 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.


FINANCIAL RESULTS – SERVICING & ASSET MANAGEMENT
(dollars in thousands)	Q2 2023			Q2 2022			$ Variance			% Variance
Origination fees	$	394		$	520		$	(126	)	(24	)%
Servicing fees		77,061			74,260			2,801		4
Investment management fees		16,309			16,186			123		1
Net warehouse interest income, LHFI		1,226			1,561			(335	)	(21	)
Escrow earnings and other interest income		32,337			6,648			25,689		386
Other revenues		15,513			25,780			(10,267	)	(40	)
Total revenues	$	142,840		$	124,955		$	17,885		14	%
Personnel	$	21,189		$	17,819		$	3,370		19	%
Amortization and depreciation		53,550			58,469			(4,919	)	(8	)
Provision (benefit) for credit losses		(734	)		(4,840	)		4,106		(85	)
Interest expense on corporate debt		10,707			4,528			6,179		136
Other operating expenses		9,946			5,269			4,677		89
Total expenses	$	94,658		$	81,245		$	13,413		17	%
Income from operations	$	48,182		$	43,710		$	4,472		10	%
Income tax expense		14,787			11,175			3,612		32
Net income before noncontrolling interests	$	33,395		$	32,535		$	860		3	%
Less: net income (loss) from noncontrolling interests		(2,337	)		(832	)		(1,505	)	181
Walker & Dunlop net income	$	35,732		$	33,367		$	2,365		7	%
Key performance metrics:
Operating margin		34	%		35	%
Adjusted EBITDA	$	108,459		$	103,371		$	5,088		5	%

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 $7.6 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 and an increase in the average escrow balance.
Other revenues decreased primarily due to a significant decline in prepayment activity and a decrease in syndication fees from our low-income housing tax credits (“LIHTC”) operations.
Personnel expense increased due to increases in performance-based compensation expenses year over year, partially offset by a decrease in performance stock compensation expense in response to our overall financial performance.
For the second quarter of 2023, the benefit for credit losses was driven by an update in our collateral-based reserve for a property that was settled with Fannie Mae in July 2023. The settlement totaled $2.0 million and will be included as an adjustment to adjusted EBITDA and adjusted core EPS in the third quarter of 2023. For the second quarter of 2022, the benefit for credit losses was a result of a decrease in the forecast-period loss rate from 3.0 basis points as of March 31, 2022 to 2.2 basis points as of June 30, 2022, compared to no change in the forecast-period loss rate during the second quarter of 2023.
The 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 increased primarily due to an increase in other professional fees.


FINANCIAL RESULTS – CORPORATE
(dollars in thousands)	Q2 2023			Q2 2022			$ Variance			% Variance
Other interest income	$	3,049		$	103		$	2,946		2,860	%
Other revenues		741			172			569		331
Total revenues	$	3,790		$	275		$	3,515		1,278	%
Personnel	$	19,049		$	11,833		$	7,216		61	%
Amortization and depreciation		1,653			1,551			102		7
Interest expense on corporate debt		1,576			349			1,227		352
Other operating expenses		15,584			25,053			(9,469	)	(38	)
Total expenses	$	37,862		$	38,786		$	(924	)	(2	)%
Income from operations	$	(34,072	)	$	(38,511	)	$	4,439		(12	)%
Income tax expense		(9,868	)		(9,171	)		(697	)	8
Walker & Dunlop net income	$	(24,204	)	$	(29,340	)	$	5,136		(18	)%
Key performance metric:
Adjusted EBITDA	$	(27,624	)	$	(31,357	)	$	3,733		(12	)%

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 increase in total revenues was primarily driven by the increase in interest income from our corporate cash balances due to higher short-term interest rates.
Personnel expense increased due to increases in our variable compensation expense, as the Company reduced incentive compensation estimates in the second quarter of 2022 based on our overall financial performance without similar adjustments for the second quarter of 2023, partially offset by a decrease in performance stock compensation expense in response to our overall financial performance.
The 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 due to cost saving strategies, resulting in lower professional, marketing, travel and entertainment, and other expenses.

CONSOLIDATED YEAR-TO-DATE 2023 OPERATING RESULTS


YEAR-TO-DATE OPERATING RESULTS AND KEY PERFORMANCE METRICS
(dollars in thousands)	YTD 2023			YTD 2022			$ Variance			% Variance
Debt financing volume	$	11,733,633		$	23,785,975		$	(12,052,342	)	(51	)%
Property sales volume		3,399,065			11,423,752			(8,024,687	)	(70	)
Total transaction volume	$	15,132,698		$	35,209,727		$	(20,077,029	)	(57	)%
Total revenues		511,361			660,292			(148,931	)	(23	)
Total expenses		440,744			496,692			(55,948	)	(11	)
Walker & Dunlop net income	$	54,300		$	125,495		$	(71,195	)	(57	)%
Adjusted EBITDA		138,476			157,480			(19,004	)	(12	)
Diluted EPS	$	1.61		$	3.73		$	(2.12	)	(57	)%
Adjusted core EPS	$	2.14		$	2.83		$	(0.69	)	(24	)%
Operating margin		14	%		25	%
Return on equity		6			16

Discussion of Year-to-Date Results:

The decrease in total transaction volume was primarily driven by a 39% decrease in Fannie Mae debt financing volume, a 62% decrease in brokered debt financing volume, and a 70% decrease in property sales volume, partially offset by a 3% increase in Freddie Mac debt financing volume.
The decrease in Walker & Dunlop net income was a result of the 57% decrease in income from operations.
The decrease in adjusted EBITDA was largely driven by decreases in origination fees and property sales broker fees driven by the decreases in related transaction volumes as well as the charge-off resulting from the sale of the only defaulted loan in our on-balance sheet interim loan program.
Operating margin decreased primarily as a result of the significant decline in our transaction activity. The workforce reduction announced in April is expected to benefit our operating margin in the second half of the year.
Return on equity declined due to a 57% decrease in net income combined with a 4% increase in stockholders’ equity over the past year.

YEAR-TO-DATE 2023 – FINANCIAL RESULTS BY SEGMENT


YEAR-TO-DATE FINANCIAL RESULTS – CAPITAL MARKETS
(dollars in thousands)	YTD 2023			YTD 2022		$ Variance			% Variance
Origination fees	$	111,530		$	183,908	$	(72,378	)	(39	)%
MSR income		72,071			104,679		(32,608	)	(31	)
Property sales broker fees		21,969			69,784		(47,815	)	(69	)
Net warehouse interest income (expense), LHFS		(4,441	)		7,237		(11,678	)	(161	)
Other revenues		28,860			18,827		10,033		53
Total revenues	$	229,989		$	384,435	$	(154,446	)	(40	)%
Personnel	$	183,529		$	243,675	$	(60,146	)	(25	)%
Amortization and depreciation		2,275			1,139		1,136		100
Interest expense on corporate debt		8,996			3,058		5,938		194
Other operating (income) expenses		10,844			13,074		(2,230	)	(17	)
Total expenses	$	205,644		$	260,946	$	(55,302	)	(21	)%
Income from operations	$	24,345		$	123,489	$	(99,144	)	(80	)%
Income tax expense		6,076			29,410		(23,334	)	(79	)
Net income before noncontrolling interests	$	18,269		$	94,079	$	(75,810	)	(81	)%
Less: net income (loss) from noncontrolling interests		1,658			718		940		131
Walker & Dunlop net income	$	16,611		$	93,361	$	(76,750	)	(82	)%

Capital Markets – Discussion of Year-to-Date Results:

The decrease in origination fees was primarily the result of a decrease in our overall debt financing volume, partially offset by an increase in Agency debt financing volume as a percentage of overall debt financing volume and the aforementioned $1.9 billion Fannie Mae portfolio that was originated in 2022 with no comparable activity in 2023. The portfolio had a much lower origination fee than is typical for smaller loans.
The decrease in MSR income is primarily attributable to a 30% decrease in Agency debt financing volume.
The decrease in property sales broker fees was primarily driven by a 70% decrease in property sales volumes.

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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