Throughout much of 2018, investors were nervous about the prospects for the real estate market. After years of strong gains, the industry suddenly found itself under pressure from rising interest rates. That posed a big potential problem for Walker & Dunlop (NYSE: WD) and its business of providing financing for major development projects. The conditions had even started to show up in some of the company's numbers, raising new concerns.
Coming into Wednesday's fourth-quarter financial report, Walker & Dunlop investors were prepared for a potential revenue decline but wanted to see better bottom-line results. Instead, the real estate financing specialist did better than expected, and changing conditions could bode well for the company's future in 2019.
Image source: Walker & Dunlop.
How Walker & Dunlop turned things around
Walker & Dunlop's fourth-quarter results stood in marked contrast to what the company reported a few months ago. Total revenue climbed 4% to $214.9 million, easily outpacing the 1% drop in sales that most of those following the stock were expecting to see. Net income plunged due to the big one-time benefit that Walker & Dunlop recorded in the year-earlier quarter due to tax reform, but the $45.8 million figure worked out to earnings of $1.44 per share. That was better than the consensus forecast among investors for $1.36 per share on the bottom line.
The quarter's true success showed most clearly in Walker & Dunlop's fundamental business metrics. Total transaction volume for the quarter weighed in at $9.35 billion, which was a new record for the company and up 13% from year-ago levels. Loan originations were up 22% due in large part to strength in the company's portfolio of Freddie Mac and Fannie Mae loans. Brokered loan volume also soared, and interest in interim loans picked up considerably, offsetting weakness in the Ginnie Mae and HUD realm. Even a drop of more than 30% in investment-related sales wasn't enough to hurt Walker & Dunlop's overall performance. The company said that commercial and multifamily real estate remained strong, and the turn lower in interest rates during the quarter helped keep loan demand high.
Servicing remained an additional growth driver for Walker & Dunlop. Total managed assets picked up more than $12.6 billion to $87.1 billion, with sizable increases coming from Freddie Mac, Fannie Mae, and the brokered loan arena. The fourth quarter alone brought in more than $5 billion in net loans for the servicing portfolio, with a combination of acquisitions and Fannie/Freddie business providing the uptick.
In terms of revenue, though, results were more mixed. Declines in loan origination fees weighed on overall mortgage banking-related revenue, and it took a nice bump higher in servicing fees to offset that downward pressure. A nice jump in escrow earnings also helped keep overall sales moving higher.
What's ahead for Walker & Dunlop?
CEO Willy Walker was quite happy with how his company did. "Walker & Dunlop closed out 2018 with an exceptional fourth quarter," Walker said, "finishing the year with top-line growth and strong profitability." The CEO noted that strong internal execution and a well-recognized brand contributed to record transaction volume and revenue figures for the period.
Walker & Dunlop sees good times lasting into 2019. Due in large part to its favorable outlook for the coming year, the company decided to give its shareholders a boost in the quarterly dividend that they receive. From here on, Walker & Dunlop investors can expect to get $0.30 per share every three months, up 20% from its previous quarterly payout. In particular, the real estate financier expects continued strong cash generation, and its balance sheet easily supports this higher dividend for the foreseeable future.
Investors seemed happy about the results, and Walker & Dunlop stock moved higher by almost 2% in morning trading following the announcement. The real estate market isn't entirely out of the woods just yet, but with interest rates apparently having found a new range, it's more likely that real estate investors will find ways to keep transaction volumes high, and that in turn should give Walker & Dunlop plenty of opportunities to provide the financing that buyers need in order to move forward with projects in 2019 and beyond.
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