Walker & Dunlop(WD) - 2024 Q4 - Annual Report

Part I Item 1. Business Walker & Dunlop provides commercial real estate services and finance, primarily in the U.S. multifamily sector, operating through three core segments - The company operates through three reportable segments: Capital Markets, Servicing & Asset Management, and Corporate, determined by the product or service provided[18] - The company's growth strategy, targeting $2 billion in annual revenues by the end of 2025, is unlikely to be achieved on schedule due to macroeconomic disruptions, though long-term goals remain[57][59] - As of December 31, 2024, the company employed 1,399 people, a 6% increase from the prior year, with a stable 8% voluntary annualized turnover rate[69][73] Capital Markets The Capital Markets segment offers diverse commercial real estate finance products, including Agency lending, debt brokerage, property sales, and housing market research - The company is one of 25 approved Fannie Mae DUS lenders, sharing in the risk of loss on originated loans, typically capped at 20% of the loan amount[20] - As one of 23 approved Freddie Mac lenders, the company originates and sells various multifamily loans, rarely having risk-sharing arrangements unlike the Fannie Mae DUS program[24] - The company is an approved HUD MAP and LEAN lender and Ginnie Mae issuer, providing construction and permanent loans for multifamily, affordable, and healthcare facilities, with minimal risk of loss due to U.S. government backing[25][26] - Through its subsidiary Zelman & Associates, the company provides housing market research and M&A advisory services, becoming a wholly-owned subsidiary in Q4 2024 after Walker & Dunlop purchased the remaining 25% interest[36] Servicing & Asset Management The Servicing & Asset Management segment generates recurring revenue from servicing fees, asset management fees, and net interest income, managing a loan portfolio and investment funds - The company retains servicing rights on nearly all Agency loans it originates, generating fees from servicing, escrow deposit placements, and other ancillary services[39] - Through its investment management subsidiary WDIP, the company manages $2.3 billion in regulatory assets under management (AUM) across various debt and equity funds, launching Debt Fund I in Q4 2023 and closing the first round of Debt Fund II in Q4 2024[47][48] - The company provides affordable housing services through its subsidiary WDAE, one of the largest LIHTC syndicators in the U.S., forming LIHTC funds with third-party investors and earning syndication and asset management fees as general partner[51] Our Growth Strategy The company's 2025 growth strategy targets significant increases in revenues, debt financing, property sales, and AUM, though macroeconomic challenges have delayed most milestones Progress Towards 2025 Milestones | Milestone (in thousands) | 2021 | 2022 | 2023 | 2024 | 2025 Milestone | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $ 1,259,178 | $ 1,258,753 | $ 1,054,440 | $ 1,132,490 | $ 2,000,000 | | Debt financing volume | 48,911,120 | 43,605,984 | 24,202,859 | 30,154,666 | 60,000,000 | | Small balance lending volume | 515,757 | 745,686 | 634,280 | 750,388 | 5,000,000 | | Property sales volume | 19,254,697 | 19,732,654 | 8,784,537 | 9,751,223 | 25,000,000 | | Servicing portfolio | 115,700,564 | 123,133,855 | 130,471,524 | 135,287,012 | 160,000,000 | | Assets under management | 16,437,865 | 16,748,449 | 17,321,452 | 18,423,463 | 10,000,000 | Item 1A. Risk Factors The company faces significant risks related to its business operations, regulatory environment, and corporate structure, including reliance on Agencies and potential DUS program losses - A primary risk is the potential loss of, or changes in, relationships with the Agencies (Fannie Mae, Freddie Mac, HUD), which are the source for all of its loans held for sale[83] - The company is subject to significant risk of loss from its Fannie Mae DUS program, generally absorbing the first 5% of losses on a defaulted loan, with a maximum loss capped at 20% of the original principal balance, with an at-risk servicing portfolio of $63.4 billion as of December 31, 2024[91] - The company may be required to repurchase loans or indemnify purchasers if there is a breach of representations or warranties, with five such requests in 2024 totaling $87.3 million in unpaid principal balance, resulting in a $14.2 million provision for credit losses[100] - The company is highly dependent on short-term warehouse facilities to fund its loan originations, with $3.8 billion of committed and uncommitted loan funding available through five commercial banks as of December 31, 2024, where termination or non-renewal would materially impact its ability to originate loans[97] Item 1C. Cybersecurity The company's cybersecurity program, guided by NIST CSF and overseen by the Audit and Risk Committee, manages risks and has not identified any material past incidents - The cybersecurity risk management program is guided by the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF)[154] - Oversight is provided by the Board's Audit and Risk Committee, which receives quarterly reports from the Chief Information Security Officer (CISO)[156][158] - The company has not identified any past cybersecurity threats or incidents that have materially affected its operations, business strategy, results, or financial condition[156] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Walker & Dunlop's common stock trades on the NYSE, with the company paying quarterly dividends and having a share repurchase program, though no shares were repurchased in 2024 - During 2024, the Board of Directors declared and paid four quarterly dividends totaling $2.60 per share, with the dividend increased by 3% to $0.67 per share for the first quarter of 2025[168] - A share repurchase program authorized for up to $75.0 million was in place for 2024, but no shares were purchased under it, with a new $75.0 million program authorized for a 12-month period beginning February 21, 2025[173] Common Stock Repurchases for Q4 and Year Ended Dec 31, 2024 | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Purchased as Part of Publicly Announced Programs | Value of Shares that May Yet Be Purchased Under Programs | | :--- | :--- | :--- | :--- | :--- | | 4th Quarter 2024 | 3,375 | $109.52 | — | $75,000,000 | | October 1-31, 2024 | 997 | $110.82 | — | $75,000,000 | | November 1-30, 2024 | 2,378 | $108.97 | — | $75,000,000 | | December 1-31, 2024 | — | — | — | $75,000,000 | | Total Year 2024 | 126,744 | N/A | — | $75,000,000 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Total revenues increased 7% to $1.13 billion in 2024, but net income remained flat due to higher expenses and a $14.2 million provision for credit losses Consolidated Financial Results (2024 vs. 2023) | (in thousands) | 2024 | 2023 | Dollar Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $1,132,490 | $1,054,440 | $78,050 | 7% | | Total expenses | $1,000,989 | $916,243 | $84,746 | 9% | | Income from operations | $131,501 | $138,197 | $(6,696) | (5%) | | Walker & Dunlop net income | $108,167 | $107,357 | $810 | 1% | Total Transaction Volume (2024 vs. 2023) | Transaction Volume (in thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Debt Financing Volume | $30,154,666 | $24,202,859 | | Property Sales Volume | $9,751,223 | $8,784,537 | | Total Transaction Volume | $39,905,889 | $32,987,396 | - The commercial real estate market in 2024 was challenged by elevated interest rates and slower rent growth, but showed signs of recovery in the second half of the year, leading to increased transaction volumes, with GSEs' combined lending caps for 2025 set at $146 billion, a 22% increase over 2024 volumes[214][216][220] - A goodwill impairment of $33.0 million was recognized in 2024, attributed to one of the reporting units associated with the GeoPhy acquisition, due to challenging macroeconomic conditions and lower projected cash flows[211][244] Critical Accounting Estimates Management identifies MSRs, Allowance for Risk-Sharing, Contingent Consideration, and Goodwill as critical accounting estimates, with a $33.0 million goodwill impairment in 2024 - The fair value of Mortgage Servicing Rights (MSRs) is a critical estimate, highly sensitive to assumptions like discount rates and placement fees on escrow accounts, where a 100-basis point change in the discount rate would impact capitalized MSRs for 2024 by 3%[194][196] - The Allowance for Risk-Sharing Obligations is calculated using a CECL model based on the weighted-average remaining maturity (WARM) method, with the estimate sensitive to the forecasted loss rate; a 10% change in this rate as of December 31, 2024, would change the allowance by 8%[198][204] - Contingent consideration liabilities from acquisitions are remeasured to fair value periodically, with revised forecasts in 2024 leading to a $50.3 million reduction in these liabilities, including a $34.5 million reduction for the GeoPhy earnout and a $10.8 million reduction for the Alliant earnout[206][207] - Goodwill was impaired by $33.0 million in 2024 related to a reporting unit within the Capital Markets segment associated with the GeoPhy acquisition, due to declines in projected cash flows amid challenging market conditions[211] Segment Results In 2024, Capital Markets net income rose 62%, Servicing & Asset Management net income decreased 5%, and Corporate reported a wider net loss due to increased expenses Segment Net Income (Loss) (2024 vs. 2023) | (in thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Capital Markets | $66,664 | $41,180 | | Servicing & Asset Management | $157,750 | $166,316 | | Corporate | $(116,247) | $(100,139) | | Walker & Dunlop Net Income | $108,167 | $107,357 | Liquidity and Capital Resources The company maintains strong liquidity with $5.3 billion in warehouse facilities and $253.9 million in operational liquidity, while managing a growing at-risk servicing portfolio - As of December 31, 2024, the company had $5.3 billion in total Agency Warehouse Facilities, including $1.65 billion committed, to fund its loan originations[550] - The company was required to maintain $64.5 million of liquid assets for operational liquidity and held $253.9 million as of December 31, 2024, with its net worth of $992.6 million also exceeding the Fannie Mae requirement of $324.4 million[341][342] Key Credit Metrics | (in thousands) | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total risk-sharing servicing portfolio | $68,211,744 | $63,722,521 | | Total non-risk-sharing servicing portfolio | $67,075,268 | $66,708,864 | | Total servicing portfolio UPB | $135,323,938 | $130,471,524 | | At risk servicing portfolio | $63,365,672 | $58,801,055 | | Defaulted loans | $41,737 | $27,214 | | Defaulted loans as a % of at-risk portfolio | 0.07% | 0.05% | - In 2024, the company received repurchase demands for five loans with an aggregate unpaid principal balance (UPB) of $87.3 million, resulting in a $14.2 million provision for credit losses and $10.6 million in related operating costs[368] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk affecting placement fees and borrowing costs, and market value risk on MSRs, with a 100-basis point rate change having a material impact Annual Impact of a 100 Basis Point Change in Interest Rates (as of Dec 31, 2024) | Impact on: | 100 bps Increase (in millions) | 100 bps Decrease (in millions) | | :--- | :--- | :--- | | Placement fee revenue | $26.9 | $(26.9) | | Net warehouse interest income | $(6.2) | $6.2 | | Income from operations (Corporate Debt) | $(7.8) | $7.8 | - The fair value of MSRs is subject to market value risk, where a 100-basis point increase in the discount rate would decrease the MSR fair value by approximately $41.9 million as of December 31, 2024[377] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2024, with an unqualified auditor opinion - Management concluded that both disclosure controls and procedures, and internal control over financial reporting were effective as of December 31, 2024[381][382] - The independent auditor, KPMG LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2024[382] Part III Part III Part III incorporates information by reference from the company's Proxy Statement, covering directors, executive compensation, security ownership, and related transactions Part IV Part IV Part IV lists financial statements, schedules, and exhibits filed with the Form 10-K, including consolidated financial statements and the independent auditor's report Item 15. Exhibits and Financial Statement Schedules This section lists all documents filed with the Form 10-K, including consolidated financial statements, auditor's report, and various corporate exhibits Financial Statements and Supplementary Data Reports of Independent Registered Public Accounting Firm KPMG issued unqualified opinions on the financial statements and internal controls, identifying MSR valuation as a critical audit matter due to subjective judgments - The auditor issued an unqualified opinion, stating the financial statements are presented fairly in all material respects in conformity with U.S. GAAP[419] - The auditor identified the initial fair value measurement of Mortgage Servicing Rights (MSRs) as a Critical Audit Matter, highlighting the high degree of subjective judgment required to assess key assumptions like the discount rate and placement fee rate[424][425] Notes to the Consolidated Financial Statements The notes detail accounting policies, financial instruments, and operations, including a $33.0 million goodwill impairment and a $14.2 million provision for credit losses in 2024 - In 2024, the company received repurchase or indemnification requests for five loans, resulting in the recognition of loans held for investment and secured borrowings on the balance sheet, a $14.2 million provision for credit losses, and $10.6 million in other operating expenses[478][483][485] Roll Forward of MSRs (in thousands) | | 2024 | 2023 | | :--- | :--- | :--- | | Beginning balance | $907,415 | $975,226 | | Additions, following the sale of loan | 156,984 | 142,129 | | Amortization | (203,600) | (199,633) | | Pre-payments and write-offs | (8,400) | (10,307) | | Ending balance | $852,399 | $907,415 | Roll Forward of Allowance for Risk-Sharing Obligations (in thousands) | | 2024 | 2023 | | :--- | :--- | :--- | | Beginning balance | $31,601 | $44,057 | | Provision (benefit) for risk-sharing obligations | (974) | (10,448) | | Write-offs | (468) | (2,008) | | Other | (2,000) | — | | Ending balance | $28,159 | $31,601 | - A single customer (Fannie Mae) represented 35.6% of total revenues for the year ended December 31, 2024[679]