Walker & Dunlop Keeps Fighting Rate Hikes

For more than a decade, the real estate market has rebounded from the housing bust in the mid-2000s that led to the financial crisis. Since then, demand for both residential and commercial properties has been strong, and Walker & Dunlop (NYSE: WD) has capitalized by offering multiple methods of financing to real estate developers. Yet at long last, rising interest rates have started to raise concerns among real estate investors that the long bull market in the asset class could finally come to an end.

Coming into Wednesday's second-quarter financial report, investors were trying to come to grips with the idea that the financier could find ways to make money even in a rising-rate environment. Walker & Dunlop's results were mixed, but there's reason for long-term investors to take solace in the fact that the company is working hard to fight back and find opportunities even as conditions in the industry turn less favorable.

Five different commercial and multifamily properties over the Walker & Dunlop logo.

Image source: Walker & Dunlop.

How Walker & Dunlop kept up its battle

Walker & Dunlop's second-quarter results showed improvement from the declines that the company suffered in the first quarter. Total revenue climbed 7% to $178.2 million, recovering from a similar decline three months ago. Net income jumped 19% to $41.1 million, and that produced $1.28 in earnings. Unfortunately, that was below the consensus forecast among investors for $1.36 per share on the bottom line.

Walker & Dunlop's fundamentals tell the story of how the industry is adapting to higher rates. Total transaction volume was up 3% to $6.19 billion, with most of the gain coming from an impressive 37% jump in investment-related sales. In particular, strength in multifamily housing demand led to higher loan origination volumes through Fannie Mae and Freddie Mac , and the fact that the yield curve flattened due to short-term interest rate hikes led many borrowers to move toward fixed-rate mortgage financing provided through the two government-sponsored entities. Freddie Mac in particular priced its mortgages attractively, contributing to a bump in volume. However, substantial declines in originations through Ginnie Mae and via brokered financing sources ate into the gains elsewhere. Despite the rise in volume, loan origination fees were down 4% year over year.

Mortgage servicing fees played in important role in promoting Walker & Dunlop's overall growth, climbing 14%. Acquisitions helped the financier increase the size of its managed portfolio by 19% to $78.8 billion, and the sharpest gains came from the Fannie Mae and Freddie Mac servicing portfolios. Because of higher rates, fewer borrowers are paying off their mortgages early, and that has helped Walker & Dunlop grow the size of its servicing business without dealing with runoff from extensive prepayments.

CEO Willy Walker was happy with the quarter's numbers. "Q2 was another strong quarter of financial performance for Walker & Dunlop," Walker said, and the CEO attributed the gains largely to "the acquisition and integration of JCR Capital, strong growth in interim loan originations, the addition of 13 talented mortgage bankers and brokers, and the expansion of our investment sales footprint into New England and Southern California."

What's ahead for Walker & Dunlop?

Walker & Dunlop remains optimistic about the future. In Walker's words, "We feel extremely well positioned to deliver an even stronger second half of 2018, given the levels of activity we're seeing in the market and the healthy pipeline we're carrying into the third quarter."

Yet costs remain a concern. Walker & Dunlop said that expenses overall were up 14% from year-ago levels, with personnel, travel, and legal expenses having seen considerable gains over the period. The impact of those higher expenses has largely been masked by favorable decreases in income tax liability due to the tax reform law passed at the end of 2017.

For the most part, though, Walker & Dunlop is staying prudent with its loan portfolio. The company saw a loan enter 60-day delinquency status in its at-risk servicing portfolio during the period, but it only amounts to 0.02% of its overall exposure, and risk-sharing provisions should lessen the potential impact even further even if problems persist.

Investors stayed laser-focused on the earnings shortfall, and Walker & Dunlop stock dropped 5% on Wednesday following the announcement. In the long run, though, the steps that the real estate financing specialist has taken to insulate it from further risk should pay off with stable, reliable performance that shareholders will appreciate.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of Walker & Dunlop. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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