BETHESDA, Md., Oct. 31, 2018 /PRNewswire/ --
THIRD QUARTER 2018 HIGHLIGHTS
- Total transaction volume of $7.7 billion
- Total revenues of $184.7 million
- Net income of $37.7 million, or $1.17 per diluted share
- Adjusted EBITDA1 of $58.3 million
- Servicing portfolio of $80.6 billion at September 30, 2018
- Assets under management of $1.1 billion at September 30, 2018
- Declared $0.25 per share dividend for the fourth quarter 2018
YEAR-TO-DATE 2018 HIGHLIGHTS
- Total transaction volume of $18.7 billion
- Total revenues of $510.3 million
- Net income of $115.7 million, or $3.60 per diluted share
- Adjusted EBITDA of $160.4 million
Walker & Dunlop, Inc. (NYSE: WD) (the "Company") reported third quarter 2018 net income of $37.7 million, or $1.17 per diluted share, an increase of 10% over the third quarter 2017. Total revenues were $184.7 million, an increase of 3%, generating adjusted EBITDA of $58.3 million, an increase of 30% and a quarterly record. The Company ended the third quarter with cash and short-term cash investments of $244.3 million and declared a $0.25 per share dividend for the fourth quarter 2018.
"Q3 represents the third strongest transaction volume in our history and another quarter of continued execution of our strategic growth initiatives," commented Chairman and CEO, Willy Walker. "Total transaction volume of $8 billion drove $1.17 of diluted earnings per share and record adjusted EBITDA of $58 million. Our servicing portfolio continues to grow, crossing $80 billion in the third quarter and driving dramatic growth in servicing fees and escrow earnings, which increased a combined 24% from Q3'17. We have added 16 bankers and brokers to Walker & Dunlop in 2018, bringing our total to over 160, ahead of schedule on our 10% annual growth objective. We remain focused on growing our transaction volumes, raising capital we control to meet our clients' financing needs, and adding valuable servicing rights to our $80 billion portfolio."
Mr. Walker continued, "Walker & Dunlop recently ranked on Fortune magazine's list of 100 Fastest Growing Companies for the second consecutive year based on three-year growth rates in revenues, earnings per share, and total shareholder return. We have been able to achieve this sustained financial performance by remaining focused on our long-term strategic objective of generating $1 billion in annual revenues by the end of 2020. To achieve that goal, we need to take debt financing volume from $25 billion in 2017 to $30 to $35 billion in 2020, investment sales volume from $3 billion in 2017 to $8 to $10 billion in 2020, our servicing portfolio from $70 billion in 2017 to over $100 billion in 2020, and assets under management from under $500 million in 2017 to $8 to $10 billion in 2020. The growth in our investment sales and debt brokerage volumes in 2018, the acquisition of a registered investment advisor in Q2 bringing total assets under management to over $1 billion at the end of Q3, and the growth in our servicing portfolio to over $80 billion, have us well on our way to achieving Vision 2020 and driving Walker & Dunlop closer and closer to our mission of being the premier commercial real estate financial services company in the United States."
Discussion of Results:
- 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.
- Our loan origination volume for the third quarter 2017 included a $1.9 billion transaction with Freddie Mac, the largest in the Company's history. We did not have any such large transactions in the third quarter 2018.
- Overall volumes with Fannie Mae and Freddie Mac, excluding the large 2017 transaction, increased due to continued strength in the multifamily financing market and the growth in the number of mortgage bankers and brokers on our platform.
- The investments we have made in our Capital Markets team over the past several years helped increase our brokered volume 30% to a quarterly record of $2.5 billion.
- We originated $185.8 million of interim loans during the third quarter 2018, with three loans totaling $73.6 million for our balance sheet and the remainder for our Interim Loan JV as we saw more opportunities to meet the financing needs of strong sponsors despite the competitive market for transitional lending.
Discussion of Results:
- During the third quarter 2018, we added $2.7 billion of net loans to our servicing portfolio, the majority of which were Fannie Mae and Freddie Mac loans, and over the past twelve months, we added $10.4 billion of net loans to our servicing portfolio.
- Our servicing portfolio has experienced strong growth over the past year due to our significant loan origination volumes and relatively few payoffs. During the past 12 months, we have originated $23.8 billion of loans, $15.4 billion of which were Agency loans.
- The decrease in the weighted-average servicing fee is the result of the net addition of $5.7 billion of Freddie Mac, HUD, and brokered loans serviced compared to a net increase of only $4.7 billion of Fannie Mae loans serviced during the past 12 months. Additionally, the weighted average servicing fee on our Fannie Mae originations has declined over the past 12 months generally due to increased competition for new loans, resulting in tighter credit spreads. Fannie Mae loans have the highest servicing fees of all the loan types we service because we share in the risk of loss.
- Just over $4.0 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 increased $8.3 million. Over the past 12 months, net MSR additions from loan originations were $49.7 million.
- The MSRs associated with the servicing portfolio had a fair value of $857.0 million as of September 30, 2018.
- Assets under management topped $1.0 billion for the first time during the third quarter 2018. Assets under management as of September 30, 2018 consisted of $837.8 million of loans and assets JCR Capital manages and $222.7 million of loans we manage for our interim lending joint venture.
- JCR closed its fourth fund, an approximately $300 million closed-end fund targeting value-add lending, during October 2018.
Discussion of Results:
- The decrease in gains attributable to MSRs is primarily the result of a year-over-year decrease in the weighted-average service fee on new Fannie Mae loan originations.
- The $10.4 billion increase in the servicing portfolio over the past 12 months was the principal driver of the growth in servicing fees year over year.
- The decrease in net warehouse interest income from loans held for sale was due to a significantly lower net interest margin year over year combined with a decrease in the average balance of loans held for sale. The decrease in the net interest margin is related to a substantial year-over-year 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 the flattening of the yield curve and the tightening of credit spreads year over year.
- Escrow earnings benefitted from an increase in the average balance of escrow accounts outstanding from the third quarter 2017 to the third quarter 2018. Additionally, the average placement fee on our escrow accounts has increased significantly over the past year as short-term interest rates have increased.
- The increase in other revenues was principally due to an increase in investment management fees due to the acquisition of JCR Capital in the second quarter 2018.
Discussion of Results:
- Personnel expense increased primarily due to the increase in headcount year over year, mostly offset by declines in variable compensation.
- 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 $59.3 million of MSRs, net of amortization and write offs due to prepayment.
- The increase in other operating expenses stems primarily from increased (i) office and travel costs due to an increase in our average headcount year over year, (ii) legal expenses in connection with our acquisition of JCR Capital, and (iii) recruiting fees due to increased hiring.
Discussion of Results:
- The increase in net income is largely attributable to a 35% decrease in income tax expense. Income tax expense was $12.9 million for the third quarter 2018 compared to $20.0 million during the same quarter last year. The decrease in income tax expense 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% in 2018. The reduction in the statutory tax rate led to a decrease in our estimated annual effective tax rate from 38.2% for the third quarter of 2017 to 26.2% for the third quarter 2018. Additionally, excess tax benefits increased from $0.3 million in the prior-year third quarter to $0.9 million for the current-year third quarter. The increase in the excess tax benefits was driven primarily by an increase in the number of options exercised, partially offset by 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 third quarter 2018 was 25.5% compared to 36.5% for the third quarter 2017.
- The increase in adjusted EBITDA was primarily driven by the increases in servicing fees, escrow earnings and other interest income, and other revenues, partially offset by an increase in other operating expenses and a decrease in net warehouse interest income.
- The decrease in operating margin was primarily driven by the aforementioned increases in amortization and depreciation and other operating expenses.
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 and an additional loan that had defaulted in our at risk servicing portfolio at September 30, 2018.
- The on-balance sheet interim-loan portfolio, which is comprised of loans for which the Company has full risk of loss, was $204.6 million at September 30, 2018 compared to $152.8 million at September 30, 2017. The portfolio at September 30, 2018 consisted of $134.5 million of loans held entirely by the Company and $70.1 million of loans whose credit risk the Company transferred. The Company was required to continue to report the transferred loans on its balance sheet as of September 30, 2018 as the transfer was not considered a loan sale under US GAAP. All of the Company's interim loans are current and performing at September 30, 2018. The interim loan joint venture holds $222.7 million of loans as of September 30, 2018.
YEAR-TO-DATE 2018 OPERATING RESULTS
Total transaction volume for the nine months ended September 30, 2018 was $18.7 billion, a 5% decrease from the same period last year.
Total revenues for the nine months ended September 30, 2018 were $510.3 million compared to $504.7 million for the same period last year, a 1% increase. The change in total revenues was largely driven by (i) a 14% increase in servicing fees related to an increase in our average servicing portfolio, (ii) a 110% increase in escrow earnings and other interest income resulting from an increase in escrow balances and the escrow earnings rate, (iii) 22% growth in investment sales broker fees due to an increase in investment sale volume and broker fee rate, and (iv) a 28% increase in other revenues due principally to investment management fees recorded in 2018 resulting from the JCR acquisition in the second quarter of 2018. Largely offsetting these increases were a 9% decrease in gains from mortgage banking activities and a 54% decrease in net warehouse interest income. The decrease in gains from mortgage banking activities was primarily the result of a 14% decrease in Agency loan origination volume, which led to a 15% reduction in gains attributable to MSRs. The decrease in net warehouse interest income was the result of a lower average balance of loans held for investment and a lower net interest spread on loans held for sale.
Total expenses for the nine months ended September 30, 2018 and 2017 were $362.8 million and $337.8 million, respectively. The 7% increase in total expenses was due primarily to increases in personnel expense, amortization and depreciation costs, and other operating expenses. Personnel expenses as a percentage of total revenues increased slightly from 39% in 2017 to 40% in 2018. Personnel expense increased 4% mostly due to an increase in salaries, benefits, stock compensation, and other personnel expenses resulting from a rise in average headcount year over year, partially offset by a decrease in bonus expense and a decrease in commission costs due to lower volumes year over year. Amortization and depreciation costs increased 9% due to an increase in the average balance of MSRs outstanding year over year. Other operating expenses increased 22% largely due to increases in (i) office and travel and entertainment expenses due to the increase in average headcount year over year, (ii) legal costs related to the acquisition of JCR Capital, and (iii) recruiting costs related to our mortgage banker and broker and investment sales broker hiring activity.
Operating margin for the nine months ended September 30, 2018 and 2017 was 29% and 33%, respectively. The decrease in operating margin was due to a 7% increase in total expenses and a 1% increase in total revenues as discussed above.
Net income for the nine months ended September 30, 2018 was $115.7 million compared to net income of $112.2 million for the same period last year, a 3% increase. The increase in net income is due to a 41% decrease in income tax expense, partially offset by a 12% decrease in income from operations. The lower income tax expense is related to a lower Federal statutory income tax rate due to tax reform, as discussed above, partially offset by a decrease in the reduction in income tax expense from excess tax benefits also due to tax reform, from $9.1 million during the nine months ended September 30, 2017 to $6.7 million during the same period in 2018. Diluted earnings per share also increased 3% year over year.
For the nine months ended September 30, 2018 and 2017, adjusted EBITDA was $160.4 million and $146.3 million, respectively. The 10% increase was driven by growth in servicing fees, escrow earnings and other interest income, and other revenues, partially offset by increases in personnel expense and other operating expenses and decreases in net warehouse interest income and origination fees.
For the nine months ended September 30, 2018, return on equity was 18% compared to 23% for the nine months ended September 30, 2017. The decrease is largely related to the small increase in net income, while stockholders' equity increased $189.7 million over the past year due primarily to the net income recorded over the past 12 months, including the large reduction to the Company's net deferred tax liabilities in the fourth quarter 2017 due to tax reform, partially offset by share repurchases and dividend payments.
DIVIDENDS AND SHARE REPURCHASES
On October 30, 2018, our Board of Directors declared a dividend of $0.25 per share for the fourth quarter 2018. The dividend will be paid December 4, 2018 to all holders of record of our restricted and unrestricted common stock and restricted stock units as of November 16, 2018.
During the third quarter 2018, we repurchased 75 thousand shares of our common stock at a weighted-average price of $54.01 per share under our 2018 share repurchase program for a total cost of $4.1 million. Of the $50.0 million of repurchase capacity approved by our Board of Directors under the 2018 share repurchase program, we had $45.9 million remaining as of September 30, 2018.
1 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."
2 The fair value of the expected net cash flows associated with the servicing of the loan, net of any guaranty obligations retained, as a percentage of Agency volume.
3 At risk servicing portfolio is defined as the balance of Fannie Mae DUS loans subject to the risk-sharing formula described below, as well as a small number of Freddie Mac loans on which we share in the risk of loss. Use of the at risk portfolio provides for comparability of the full risk-sharing and modified risk-sharing loans because the provision and allowance for risk-sharing obligations are based on the at risk balances of the associated loans. Accordingly, we have presented the key statistics as a percentage of the at risk portfolio.
For example, a $15 million loan with 50% risk-sharing has the same potential risk exposure as a $7.5 million loan with full DUS risk sharing. Accordingly, if the $15 million loan with 50% risk-sharing were to default, we would view the overall loss as a percentage of the at risk balance, or $7.5 million, to ensure comparability between all risk-sharing obligations. To date, substantially all of the risk-sharing obligations that we have settled have been from full risk-sharing loans.
4 Represents the maximum loss we would incur under our risk-sharing obligations if all of the loans we service, for which we retain some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement. The maximum exposure is not representative of the actual loss we would incur.
5 Includes loans that are not 60+ days delinquent but have defaulted as of both September 30, 2018 and 2017.
Conference Call Information
The Company will host a conference call to discuss its quarterly results on Wednesday, October 31, 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: WDQ318. 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 700 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."
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 and any updates or supplements in our most-recent Quarterly Report 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 .
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SOURCE Walker & Dunlop, Inc.