Walker & Dunlop Reports Q3 2023 Financial Results

Servicing and Asset Management Segment Drives Strong Recurring Revenues

THIRD QUARTER 2023 HIGHLIGHTS

• Total transaction volume of $8.6 billion, down 49% from Q3’22
• Total revenues of $268.7 million, down 15% from Q3’22
• Net income of $21.5 million and diluted earnings per share of $0.64, both down 54% from Q3’22
• Adjusted EBITDA¹ of $74.1 million, down 1% from Q3’22
• Adjusted core EPS² of $1.11, down 21% from Q3’22
• Servicing portfolio of $129.0 billion at September 30, 2023, up 7% from September 30, 2022
• Declared quarterly dividend of $0.63 per share for the fourth quarter of 2023

YEAR-TO-DATE 2023 HIGHLIGHTS

• Total transaction volume of $23.7 billion, down 55% from 2022
• Total revenues of $780.1 million, down 20% from 2022
• Net income of $75.8 million and diluted earnings per share of $2.25, both down 56% from 2022
• Adjusted EBITDA of $212.5 million, down 9% from 2022
• Adjusted core EPS of $3.25, down 26% from 2022

BETHESDA, Md.–(BUSINESS WIRE)–Walker & Dunlop, Inc. (NYSE: WD) (the “Company,” “Walker & Dunlop,” or “W&D”) reported third quarter total transaction volume of $8.6 billion, down 49% year over year, due to the rapidly changing interest-rate environment and market dynamics during the third quarter of 2023. The drop in total transaction volume led to a decline in total revenues of 15% year over year. Net income was $21.5 million in the third quarter, down 54% year over year, while adjusted EBITDA declined only 1% due to the stability of revenues from our servicing and asset management segment.

“A 49% decrease in transaction volumes in the third quarter comes from a dislocated market. A much smaller 15% reduction in revenues is driven by dramatically lower originations offset by an exceptional business model that includes long-term, recurring revenue streams. An adjusted EBITDA reduction of just 1% is due to a business model and management team working exceptionally well in a highly challenging market. And that is the story of Walker & Dunlop in Q3 and for all of 2023,” commented Walker & Dunlop Chairman and CEO Willy Walker.

“We will continue to invest in our people, brand and technology in pursuit of our five-year business plan titled the Drive to ’25. Regardless of the rate environment in 2024, with a 73% increase in multifamily maturities between 2023 and 2024, we plan to capitalize on our brand and scale as financing and sales volumes return.”

CONSOLIDATED THIRD QUARTER 2023 OPERATING RESULTS

Discussion of Results:

• Debt financing volumes decreased 49% primarily due to the rapidly rising interest rate environment during the third quarter 2023.
• The decline in Fannie Mae and Freddie Mac (the “GSEs”) debt financing volumes was a result of reduced market-wide transaction volumes. The GSEs have only used 50% of their 2023 lending caps through the first nine months of 2023. During that period, Walker & Dunlop’s GSE market share was 11.3%.
• HUD volumes decreased 74% in the third quarter of 2023. As one of the largest construction lenders with HUD, a rising interest rate environment and elongated processing times are impacting our HUD pipeline and drove the decrease.
• 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 and evolving interest-rate environment.

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 paydowns and loan payoffs.
• During the third quarter of 2023, we added $2.3 billion of net loans to our servicing portfolio, and over the past 12 months, we added $8.2 billion of net loans to our servicing portfolio, 71% of which were Fannie Mae and Freddie Mac loans.
• $9.7 billion of Agency loans in our servicing portfolio are scheduled to mature over the next two years. These loans, with a low weighted-average servicing fee of 18.7 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 September 30, 2023 compared to $1.3 billion as of September 30, 2022.
• Assets under management (“AUM”) as of September 30, 2023 consisted of $15.2 billion of tax-credit equity funds, $1.4 billion of commercial real estate loans and funds, and $0.7 billion of loans in our interim lending joint venture.

Discussion of Results:

• The decrease in Walker & Dunlop net income was primarily due to the decline in total transaction volume and associated revenues, combined with an increase in the effective tax rate. The effective tax rate increased from 14.0% in the third quarter of 2022 to 25.1% in the third quarter of 2023. The effective tax rate was unusually low in the third quarter of 2022 due to a one-time benefit to tax expense related to our corporate restructuring and repatriation of intellectual property acquired from GeoPhy, which reduced our tax expense by $6.3 million.
• The slight decrease in adjusted EBITDA was primarily the result of lower fee income from the decline in total transaction volumes and a decrease in net warehouse interest income. These decreases were largely offset by increased placement fees and other interest income (formerly known as “escrows and other interest income”) and lower personnel and other operating expenses.
• Operating margin decreased due to the significant decline in total transaction volume this quarter that decreased 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.
• Return on equity declined due to the 54% decrease in net income combined with a 3% increase in stockholders’ equity over the past year.

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 September 30, 2023, no at-risk loans were in default compared to three loans totaling $78.2 million as of September 30, 2022, as losses on two loans were settled with Fannie Mae over the past year, and another loan was brought current. 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 $40.0 million as of September 30, 2023 compared to $251.8 million as of September 30, 2022. We did not have any defaulted loans in our interim loan portfolio as of September 30, 2023, compared to one defaulted loan of $14.7 million in our interim loan portfolio as of September 30, 2022. During the second quarter of 2023, we sold the defaulted asset. The two remaining loans in the on-balance sheet interim loan portfolio are current and performing as of September 30, 2023. The interim loan joint venture held $736.3 million of loans as of September 30, 2023 and $900.0 million of loans as of September 30, 2022. We share in a small portion of the risk of loss, and, as of September 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.

THIRD QUARTER 2023 – FINANCIAL RESULTS BY SEGMENT

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 the origination fee margin due to (i) an increase in Agency debt financing volume as a percentage of overall debt financing volume from 44% in the third quarter of 2022 to 48% in the third quarter of 2023 and (ii) increased profitability from our Agency debt financing volume.
• The decrease in MSR income is attributable to a 45% decrease in Agency debt financing volume, partially offset by a 17 basis point increase in the Agency MSR margin due to an increase in the prepayment-protected term of the loans year over year.
• The decrease in property sales broker fees was primarily driven by the decrease in property sales volumes.
• The significant decrease in net warehouse interest income was driven by an inverted yield curve during the third 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 decreases in (i) commissions expense as a result of the decline in origination fees and property sales broker fees and (ii) salaries and bonuses due to the workforce reduction announced in April and our financial performance.
• The increase in interest expense on corporate debt is the result of increases in (i) interest rates year over year, as our term loan carries a floating interest rate, and (ii) the balance of our corporate debt.
• The decrease in other operating expenses is the result of our cost-reduction initiatives in 2023.
• The decrease in adjusted EBITDA is due to the decreases in origination fees and property sales broker fees, partially offset by the decreases in personnel costs and other operating expenses.

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 $8.2 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.
• Placement fees and other interest income increased largely as a result of higher placement fees from escrow deposits due to substantially higher short-term interest rates.
• Personnel expense was lower due to a decrease in performance-based compensation expenses year over year.
• The decrease in the provision (benefit) for credit losses was related to a lower increase in the at-risk servicing portfolio during the third quarter of 2023 than during the third quarter of 2022.
• The increase in interest expense on corporate debt is the result of increases in (i) interest rates year over year, as our term loan carries a floating interest rate, and (ii) the balance of our corporate debt.
• The increase in adjusted EBITDA was largely the result of a significant increase in placement fees and other interest income.

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 combined with an increase in average balances held in interest earning accounts. Additionally, other revenues, which primarily consist of gains and losses on equity-method investments, shifted to a smaller loss year over year due to improved performance of several equity-method investments.
• The increase in personnel expense is related to the timing of adjustments to performance-based compensation. In the third quarter of 2022, we significantly decreased the accruals for subjective bonuses and performance-based stock compensation due to the Company’s performance during the third quarter of 2022 and expectations for the remainder of the year, resulting in very low net personnel expenses. For the third quarter of 2023, there were no such adjustments.
• The increase in interest expense on corporate debt is the result of increases in (i) interest rates year over year, as our term loan carries a floating interest rate, and (ii) the balance of our corporate debt.
• The decrease in other operating expenses is the result of our cost-reduction initiatives in 2023.

CONSOLIDATED YEAR-TO-DATE 2023 OPERATING RESULTS

Discussion of Year-to-Date Results:

• The decrease in total transaction volume was driven by declines in every execution, including a 36% decrease in Agency debt financing volume, a 59% decrease in brokered debt financing volume, and a 64% decrease in property sales volume.
• The decrease in Walker & Dunlop net income was primarily driven by the decreased transaction volume.
• The decrease in adjusted EBITDA was driven by decreases in (i) origination fees and property sales broker fees driven by the decreases in related transaction volumes and (ii) net warehouse interest income due to the inverted yield curve throughout 2023, partially offset by an increase in placement fees and other interest income and investment banking fees and decreases in (i) commissions costs from lower transaction volume, and (ii) other operating expenses due to our cost-reduction initiatives that have resulted in $16.0 million in savings year to date in 2023.
• Operating margin decreased primarily as a result of the significant decline in our transaction activity.
• Return on equity declined largely as a result of the 56% decrease in net income combined with a 3% increase in stockholders’ equity over the past year.

YEAR-TO-DATE 2023 – FINANCIAL RESULTS BY SEGMENT

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 the origination fee margin due to (i) an increase in Agency debt financing volume as a percentage of overall debt financing volume and (ii) increased profitability in our GSE debt financing volume.
• The decrease in MSR income is primarily attributable to a 36% decrease in Agency debt financing volume partially offset by a five-basis point increase in our Agency MSR margin.
• The decrease in property sales broker fees was primarily driven by a 64% decrease in property sales volumes.
• The decrease in net warehouse interest income was primarily due to an inverted yield curve during 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.
• The increase in other revenues was primarily a result of an increase in investment banking revenues, driven by a large transaction closed by our team during the first quarter of 2023, and assumptions fees.
• The decrease in personnel expense was primarily driven by a decrease in commissions expense related to lower year-over-year property sales broker fees and origination fees.

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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