Countercyclical Capital & Recurring Revenues Drive Walker & Dunlop Q3 Performance.

BETHESDA, Md: Walker & Dunlop, Inc. (NYSE: WD) (the "Company" or "W&D") reported total revenues of $315.6 million for the third quarter of 2022, a decrease of 9% year over year. Third quarter total transaction volume was $16.9 billion, down 8% year over year. Net income for the third quarter of 2022 was $46.8 million or $1.40 per diluted share, down 35% and 37%, respectively, from the third quarter of 2021. Total revenues, net income, and diluted earnings per share were significantly impacted by a year-over-year decrease in non-cash MSR income due to spread compression on our Fannie Mae lending. Third quarter 2022 adjusted EBITDA1 was $75.0 million, up 4% over the same period in 2021, driven by the growth in cash revenues from our services businesses. The Company's Board of Directors declared a dividend of $0.60 per share for the fourth quarter of 2022.

"W&D delivered exceptional service to our clients during a very challenging third quarter, and in the process, closed $17 billion of total transaction volume, down only 8% from last year," commented Walker & Dunlop Chairman and CEO Willy Walker. "Our deep lending partnerships with Fannie Mae, Freddie Mac, and HUD provide counter-cyclical capital to the markets, and our year-to-date market share with Fannie Mae is 17%, up from 14% last year. Similar to the Great Financial Crisis and 2020 Pandemic, Walker & Dunlop's focus on the multifamily market, exceptional credit track-record, access to counter-cyclical capital, and overall size and cost efficiency position us extremely well to gain share and grow in 2023."

Mr. Walker continued, "Our business generates strong cash flows in up and down markets thanks to our Agency lending and the recurring revenues from our $138 billion servicing and asset management businesses. As a result, while total revenues and earnings were down on the quarter due to lower non-cash mortgage servicing rights, adjusted EBITDA was up 4% to $75 million."

"The current economic outlook is uncertain. Yet we are confident in achieving our five-year, Drive to '25 business plan. Our people, brand and technology lead the market, and our recent investments in Alliant, Zelman, small balance lending, and appraisals add fast growing, technologically-enabled businesses to W&D. We are well positioned to adjust to current market disruptions, and come out faster and better than the competition - like we have done before."

CONSOLIDATED THIRD QUARTER 2022 OPERATING RESULTS

TRANSACTION VOLUMES

(dollars in thousands)

Q3 2022

Q3 2021

$ Variance

% Variance

Fannie Mae

$

3,038,788

$

3,271,765

$

(232,977)

(7)

%

Freddie Mac

1,885,492

2,591,906

(706,414)

(27)

Ginnie Mae - HUD

338,054

522,093

(184,039)

(35)

Brokered (2)

6,601,244

6,402,862

198,382

3

Principal Lending and Investing (3)

62,015

472,142

(410,127)

(87)

Debt financing volume

$

11,925,593

$

13,260,768

$

(1,335,175)

(10)

%

Property sales volume

4,993,615

5,230,093

(236,478)

(5)

Total transaction volume

$

16,919,208

$

18,490,861

$

(1,571,653)

(8)

%

Discussion of Results:

Total debt financing volume remained strong at $11.9 billion in the third quarter of 2022, despite a 10% decline from the third quarter of 2021. The decrease was driven by a 16% decline in GSE financing volume, primarily with Freddie Mac, whose overall market volumes also decreased 17% in the third quarter of 2022 from the prior year period. Fannie Mae volume decreased 7% in the third quarter of 2022; however, our Fannie Mae year-to-date market share remained strong at 17%, which reflects our leadership position in the multifamily financing market.

The decrease in HUD debt financing volumes was due to continued high levels of inflation and a dramatically increasing interest-rate environment during the quarter, which made HUD's construction and streamlined refinancing products less favorable sources of financing for our multifamily properties.

The increase in brokered volume in the third quarter of 2022 reflects our team's ability to meet our clients' broad range of capital needs and the impact of our investments in people, brand and technology during challenging market conditions.

The decrease in principal lending and investing volume, which includes interim loans, originations for WDIP separate accounts, and interim lending for our joint venture, was a result of the shifting credit market outlook in a volatile interest rate environment that led to a more conservative approach to bridge lending during the quarter.

Property sales volume decreased only 5% in the third quarter of 2022, despite a 17% year-over-year decline in market-wide multifamily property sales volume according to Real Capital Analytics. The strength of our brand and platform allowed our team to retain market share in the third quarter of 2022.

MANAGED PORTFOLIO

(dollars in thousands, unless otherwise noted)

Q3 2022

Q3 2021

$ Variance

% Variance

Fannie Mae

$

58,426,446

$

52,317,953

$

6,108,493

12

%

Freddie Mac

37,241,471

38,039,014

(797,543)

(2)

Ginnie Mae - HUD

9,634,111

9,894,893

(260,782)

(3)

Brokered

15,224,581

13,429,801

1,794,780

13

Principal Lending and Investing

251,815

238,713

13,102

5

Total Servicing Portfolio

$

120,778,424

$

113,920,374

$

6,858,050

6

%

Assets under management

17,017,355

2,309,332

14,708,023

637

Total Managed Portfolio

$

137,795,779

$

116,229,706

$

21,566,073

19

%

Custodial escrow account balance at period end (in billions)

$

3.1

$

3.0

Weighted-average servicing fee rate (basis points)

24.7

24.6

Weighted-average remaining servicing portfolio term (years)

8.9

9.2

Discussion of Results:

Our servicing portfolio continues to expand as a result of the strong Fannie Mae and brokered debt financing volumes over the past 12 months, partially offset by payoffs of loans.

During the third quarter of 2022, we added $1.8 billion of net loans to our servicing portfolio, and over the past 12 months, we added $6.9 billion of net loans to our servicing portfolio, 89% of which were Fannie Mae loans.

$6.2 billion of Agency loans in our servicing portfolio are scheduled to mature over the next two years. These loans, with a relatively low weighted-average servicing fee of 17.1 basis points, represent only 5% of the total portfolio.

The mortgage servicing rights ("MSRs") associated with our servicing portfolio had a fair value of $1.3 billion as of September 30, 2022, compared to $1.2 billion as of September 30, 2021. We added net MSRs from originations of $37.9 million over the past 12 months, despite a decline of $11.0 million from the last quarter.

Assets under management ("AUM") as of September 30, 2022 consisted of $14.7 billion of Affordable funds, $1.4 billion of commercial real estate loans and funds, and $0.9 billion of loans in our interim lending joint venture. The year-over-year increase in AUM is driven by the acquisition of Alliant in the fourth quarter of 2021 that added $14.3 billion of Affordable assets under management upon closing.

KEY PERFORMANCE METRICS

(dollars in thousands, except per share amounts)

Q3 2022

Q3 2021

$ Variance

% Variance

Walker & Dunlop net income

$

46,833

$

71,721

$

(24,888)

(35)

%

Adjusted EBITDA

74,990

72,430

2,560

4

Diluted EPS

$

1.40

$

2.21

$

(0.81)

(37)

%

Operating margin

17

%

27

%

Return on equity

11

22

Key Expense Metrics (as a percentage of total revenues):

Personnel expenses

50

%

49

%

Other operating expenses

11

7

Discussion of Results:

The decrease in Walker & Dunlop net income was the result of a 43% decrease in income from operations, primarily due to compressed servicing fees on new debt financing volume and an associated decline in non-cash revenues. This decrease was partially offset by a 67% decrease in income tax expense primarily due to (i) the decrease in income from operations and (ii) a one-time benefit to tax expense related to our corporate restructuring and repatriation of intellectual property acquired from GeoPhy earlier this year, which reduced our tax expense by $6.3 million, partially offset by lower realizable excess tax benefits in the current year due to a lower vesting price.

The increase in adjusted EBITDA was the result of Alliant asset management fees and other revenues due to the acquisition of Alliant in the fourth quarter of 2021, a substantial increase in escrow earnings, higher servicing fees, and lower variable compensation expense. These benefits to adjusted EBITDA were partially offset by decreases in loan origination fees and property sales broker fees and an increase in other operating expenses.

Operating margin decreased due to the aforementioned decrease in income from operations.

Return on equity declined due to a 22% increase in stockholders' equity over the past year combined with the 35% decrease in net income.

Other operating expenses as a percentage of total revenues increased due to (i) our overall growth in the past year, which included additional expenses from acquired subsidiaries and increases in travel and entertainment costs year over year, as those costs have resumed to pre-pandemic levels in 2022 and (ii) the decrease in total revenues.

KEY CREDIT METRICS

(dollars in thousands)

Q3 2022

Q3 2021

$ Variance

% Variance

At-risk servicing portfolio (7)

$

53,430,615

$

48,209,532

$

5,221,083

11

%

Maximum exposure to at-risk portfolio (8)

10,826,654

9,784,054

1,042,600

11

Defaulted loans

$

78,203

$

48,481

$

29,722

61

%

Key credit metrics (as a percentage of the at-risk portfolio):

Defaulted loans

0.15

%

0.10

%

Allowance for risk-sharing

0.09

0.13

Key credit metrics (as a percentage of maximum exposure):

Allowance for risk-sharing

0.46

%

0.63

%

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 loans added to the portfolio during the past 12 months. As of September 30, 2022, there were two defaulted loans that were provisioned for in 2019 and one loan that was provisioned for in 2021. The two properties that defaulted in 2019 have been...