Walker & Dunlop(WD) - 2021 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements The company presents its unaudited condensed consolidated financial statements for the period ending June 30, 2021 Condensed Consolidated Balance Sheets Total assets decreased to $3.94 billion while stockholders' equity grew to $1.29 billion by June 30, 2021 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $326,518 | $321,097 | | Loans held for sale, at fair value | $1,718,444 | $2,449,198 | | Mortgage servicing rights | $915,519 | $862,813 | | Total assets | $3,943,121 | $4,650,975 | | Liabilities | | | | Warehouse notes payable | $1,823,982 | $2,517,156 | | Total liabilities | $2,649,626 | $3,454,753 | | Total stockholders' equity | $1,293,495 | $1,196,222 | Condensed Consolidated Statements of Income and Comprehensive Income Q2 2021 revenues rose 11% YoY to $281.4 million, though net income declined to $56.1 million Q2 2021 vs Q2 2020 Performance (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Total revenues | $281,411 | $252,825 | | Property sales broker fees | $22,454 | $3,561 | | Fair value of expected net cash flows from servicing, net | $61,849 | $90,369 | | Provision (benefit) for credit losses | $(4,326) | $4,903 | | Total expenses | $207,113 | $169,287 | | Walker & Dunlop net income | $56,058 | $62,059 | | Diluted earnings per share | $1.73 | $1.95 | Consolidated Statements of Changes in Equity Stockholders' equity increased to $1.29 billion, driven by net income and offset by dividend payments - Key drivers for the change in equity in the first six months of 2021 include net income of $114.1 million, cash dividends of $32.1 million ($1.00 per share), and stock-based compensation of $15.7 million[15] Condensed Consolidated Statements of Cash Flows Operating cash flow was a positive $759.3 million, a reversal from the prior year due to loan sale activity Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $759,342 | $(822,643) | | Net cash provided by investing activities | $75,411 | $73,971 | | Net cash provided by (used in) financing activities | $(802,999) | $903,974 | | Net increase in cash | $31,754 | $155,302 | Notes to Condensed Consolidated Financial Statements Notes detail key accounting policies for MSRs, risk-sharing, debt, and recent strategic acquisitions - The company originates, sells, and services commercial real estate debt and equity financing products, primarily through Fannie Mae, Freddie Mac, and HUD programs[21][22] - The allowance for risk-sharing obligations decreased to $60.3 million as of June 30, 2021, from $75.3 million at year-end 2020, driven by an improved economic outlook and a reduction in the forecast period loss rate[52][53] - Total warehouse facility capacity was $5.8 billion as of June 30, 2021, with an outstanding balance of $1.8 billion[61] - The company acquired a controlling interest in Zelman, a housing market research and investment banking firm, for $53.6 million in cash and $5.3 million in stock[72] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong transaction volume recovery, revenue growth, and strategic initiatives Total Transaction Volume (in millions) | Period | Q2 2021 | Q2 2020 | Change | | :--- | :--- | :--- | :--- | | Debt Financing Volume | $10,187 | $6,681 | +52% | | Property Sales Volume | $3,342 | $447 | +648% | | Total Transaction Volume | $13,528 | $7,128 | +90% | - The business environment in H1 2021 was characterized by recovering macroeconomic conditions, low interest rates, and strong multifamily property fundamentals[149][154] - Adjusted EBITDA, a non-GAAP measure, increased 37% to $66.5 million in Q2 2021 from $48.4 million in Q2 2020, driven by higher cash revenues[213][215] Results of Operations Q2 2021 revenue grew 11% YoY, but higher expenses led to an 11% decline in income from operations Q2 2021 vs Q2 2020 Financial Results (in thousands) | Line Item | Q2 2021 | Q2 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $281,411 | $252,825 | $28,586 | 11% | | Loan origination and debt brokerage fees, net | $107,472 | $77,907 | $29,565 | 38% | | Fair value of expected net cash flows from servicing, net | $61,849 | $90,369 | $(28,520) | -32% | | Property sales broker fees | $22,454 | $3,561 | $18,893 | 531% | | Total expenses | $207,113 | $169,287 | $37,826 | 22% | | Personnel | $141,421 | $106,920 | $34,501 | 32% | | Provision (benefit) for credit losses | $(4,326) | $4,903 | $(9,229) | -188% | | Income from operations | $74,298 | $83,538 | $(9,240) | -11% | - The increase in origination fees was driven by a 320% growth in brokered debt financing volume, which offset a lower origination fee rate[186] - The benefit for credit losses in 2021 was due to improvements in the forecasted unemployment rate, reversing a significant provision made at the onset of the pandemic[201][202] Liquidity and Capital Resources The company maintains strong liquidity with $5.8 billion in warehouse capacity and exceeds all capital requirements - The company's net worth of $1.1 billion significantly exceeded the Fannie Mae requirement of $245.4 million as of June 30, 2021[230] - A quarterly dividend of $0.50 per share was paid in Q1 and Q2 2021, a 39% increase from the prior year[231] - As of June 30, 2021, the company had $75.0 million of authorized capacity remaining under its share repurchase program[233] Warehouse Facility Capacity (in thousands) | Facility Type | Total Capacity | Outstanding Balance | | :--- | :--- | :--- | | Agency Warehouse Facilities | $5,390,000 | $1,639,577 | | Interim Warehouse Facilities | $404,810 | $184,835 | | Total | $5,794,810 | $1,824,412 | Credit Quality and Allowance for Risk-Sharing Obligations The at-risk servicing portfolio grew to $46.9 billion, while the allowance for risk-sharing decreased - The at-risk servicing portfolio, primarily Fannie Mae DUS loans, was $46.9 billion as of June 30, 2021, with a maximum potential loss exposure of $9.5 billion[267] - The allowance for risk-sharing as a percentage of the at-risk portfolio decreased from 0.17% to 0.13% at June 30, 2021, reflecting improved credit conditions[267][277] - The company has never been required to repurchase a loan under its risk-sharing agreements[279] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate and MSR valuation, with active management of the LIBOR transition - A 100-basis point increase in the MSR discount rate would decrease the fair value of MSRs by approximately $36.9 million as of June 30, 2021[288] Annualized Impact of a 100 Basis Point Increase in 30-day LIBOR (as of June 30, 2021) | Impacted Area | Change in Income (in thousands) | | :--- | :--- | | Escrow earnings | $30,204 | | Net warehouse interest income | $(15,928) | | Income from operations (corporate debt) | $(2,933) | - The company is preparing for the cessation of LIBOR publication, scheduled for June 30, 2023, and expects to transition legacy contracts to SOFR[287] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in internal controls - The CEO and CFO certified that disclosure controls and procedures were effective to ensure timely and accurate reporting as required by the SEC[291] - No material changes to internal control over financial reporting occurred during the quarter ended June 30, 2021[292] PART II OTHER INFORMATION Item 1. Legal Proceedings The company is not party to any material litigation and expects no material adverse financial impact from pending suits - In the ordinary course of business, the Company may be party to various claims and litigation, none of which management believes is material[294] Item 1A. Risk Factors Key risks include cybersecurity threats and new regulatory exposures from the Zelman broker-dealer acquisition - The company faces risks from increasingly sophisticated cyber-attacks that could lead to data loss, operational disruption, and reputational harm[296][300] - The acquisition of Zelman, a registered broker-dealer, subjects the company to extensive regulation by the SEC and FINRA, covering all aspects of the securities business[301][302] - Failure to comply with broker-dealer regulations or anti-money laundering (AML) requirements could result in sanctions, fines, and limitations on business activities[304][307] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company purchased shares for tax withholding but made no repurchases under its public buyback program Issuer Purchases of Equity Securities - Q2 2021 | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Publicly Announced Program | | :--- | :--- | :--- | :--- | | April 1-30, 2021 | 2,872 | $105.28 | — | | May 1-31, 2021 | 2,675 | $110.98 | — | | June 1-30, 2021 | 1,988 | $101.83 | — | | 2nd Quarter | 7,535 | $106.39 | — | - As of June 30, 2021, the company had $75.0 million of authorized share repurchase capacity remaining under its 2021 program[309] Item 6. Exhibits This section lists filed exhibits, including credit agreement amendments and required CEO/CFO certifications - Exhibits filed include amendments to warehousing credit agreements and CEO/CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[313]