A 45% jump in loan originations to $3.5bn in Q2 compared to Q2 2014 helped Walker & Dunlop report record earnings and revenues, but the dynamic between the company’s robust agency lending business and its more recently-formed CMBS joint venture remains a double-edged sword.
The firm last year grew to become the #1 Fannie Mae Delegated Underwriting and Servicing (DUS) and #3 Freddie Mac Program Plus lender. But Walker & Dunlop Commercial Property Funding, a CMBS platform formed with a fund managed by Fortress Investment Group in 2013, is running well short of the firm’s targets.
The Fannie Mae and Freddie Mac businesses each originated $1.1bn, representing increases of 21% and 79% compared with last year’s Q2, respectively. The CMBS joint venture meanwhile originated just $275.8m in CMBS loans through the entire first half of this year.
“Our goal is to do $100m per month and we’d love to shoot for it, but we haven’t been given guidance to say we’ll do that much,” Willy Walker, CEO and Chairman of Walker & Dunlop, told Real Estate Capital.
The issue: the CMBS business relies heavily on originating multifamily loans, the same sector that the growing agency lending business targets. Like many other industry experts, Walker anticipates that both Fannie and Freddie will boost business to close out this year — now that regulators have excluded certain affordable housing categories from previously set lending caps. The agency loans are also more profitable for the firm.
On the other hand, the coming wave of legacy loan maturities, the bulk of which were conduit loans, presents an unprecedented refinancing opportunity over the next several years.
“We earn more on the originations that go through the agencies because we take more risk and get paid throughout the life of the loan, whereas on the conduit we take the risk [up front] then sell,” Walker said. “We need to continue to grow conduit, so there is a piece of me that says I want $1bn [per year] so I would prefer that deals go to conduit,” but agency originations are “worth more to us from a purely economical standpoint.”
He adds: “But we don’t control where deal flow will go, and at end of the day we take the deal where it’s the best deal for the client.”
Net income in Q2 was $20.2m, or $0.67 per diluted share, a 56% increase from Q2 2014 net income of $12.9m, or $0.40 per diluted share. Total revenues were $113.9m compared to $85.3m, a 34% increase.