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This is an excerpt from our Walker & Dunlop research report. It is just the first 13 pages of our 63 page report (~16k word report).
For those that are unfamiliar with Walker & Dunlop, they offers a variety of Commercial Finance Real Estate Services, but are principally focused on arranging financing from the GSE’s (Fannie Mae and Freddie Mac). As with many financial services, there exact sources of revenue (MSRs and loan brokerage) can get a little technical, but our full report explains everything, including the accounting, very clearly. To get the full Walker & Dunlop report, in addition to access to the full Speedwell Report Archive, become a Speedwell member today!
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Business History.
Business Background.
In 1937, in the depths of the Great Depression, Oliver Walker and Laird Dunlop founded Walker & Dunlop. Their company would become one of the first to use the newly formed Federal Housing Administration’s (FHA) insurance for single-family loans. This started what would become a long history of utilizing government sponsored programs to help client secure real estate loans. The business stayed a relatively small family-run business throughout their lives, and in 1976, Oliver Walker passed the reins to the next generation with Mallory Walker being promoted to company president.
The family was generally well-connected in Washington DC, which drove a willingness to quickly adopt new government-associated financing programs. Notably, and most relevant to the future of Walker & Dunlop, in 1988, they were named as one of the first Fannie Mae “Delegated Underwriting and Servicing” lenders (also known as DUS lenders). This allows them to underwrite loans without prior review from Fannie Mae, which opened up a new source of capital for their clients that often offered the best rates on long-term fixed loans. The way it would work is that Walker & Dunlop would vet a client and then underwrite the loan. Fannie Mae would then originate that loan, but to ensure Walker & Dunlop stayed prudent with underwriting, they were on the hook for some portion of losses should the loan default. However, they did not need to raise sources of capital to fund the loans like a traditional bank, since Fannie Mae served that purpose.
In 2003, a third generation Walker, William, joined the family business. Willy, as he is known, joined as Executive Vice President. His appointment would in short order transform the company from a small family business with a few dozen employees working out of a single office in Bethesda, Maryland, to one of the largest Government Sponsored Entity (GSE) loan originators with offices plastered around the country.
Grabbing the Reins.
Having shown a “negative” interest in entering the family business, Willy originally wanted to become an investment banker after college. But that all changed when the Ambassador of Paraguay, who was a friend of the family, offered to take Willy with him to Paraguay. He ended up staying there for 3 years. After that, he would return to the US to attend Harvard Business School, only to end up back in South America, although this time, he was working for a Chilean venture capital firm. Willy would spend roughly a decade working in Latin America, where he gained many valuable experiences via a variety of endeavors that included helping set up a new airline, a stint at Texas Pacific Group, and creating the Latin American call center industry through a subsidiary of TeleTech. His work in the call center industry ultimately led him to Europe, where he would eventually be in charge of $250mn in revenues.
With experience building up an organization from scratch, Willy started to see a bigger opportunity with Walker & Dunlop when he talked with his father, who was then head of the company. He joined the Board of Directors in 2000 to learn more about the business, and eventually led an offsite with senior management to explore the company’s strategy. Realizing he no longer wanted to live in Europe and any value he created in his then-current role would be trivial relative to the wealth he could build at his family’s business, he told his dad he thought he could help run Walker & Dunlop by the end of that strategy session.
In 2003, he entered the family business as Executive Vice President. They estimated the company was worth $25mn at the time. Two years later he was promoted to President, and it wasn’t before long he started putting his own imprint on the company.
What’s a Walker & Dunlop?
Willy put in simple terms the two main businesses that Walker & Dunlop operated: the brokerage business and the lending business. The brokerage business is just connecting people who want to borrow money for a property to people that want to lend it, such as banks or insurance companies. Walker & Dunlop receives a fee for this service, but about half of that typically goes to the loan broker. Since brokerage is a relationship-based business, the closer the client is to the broker, the more they could negotiate a higher cut of the fees. At the time, the Walker & Dunlop brand was so unknown it was inconsequential to winning deals, which meant that each broker had to rely on their own network and reputation to win business. As a result, Walker & Dunlop was in a weak negotiating position and reliant on their brokers much more than the brokers were reliant on Walker & Dunlop. There were dozens of other real estate finance firms that would be happy to take on a productive loan brokerage team, many of whom had far better brand recognition.
However, Walker & Dunlop’s other business, “lending”, was more value additive. This business was when Walker & Dunlop helped a client get capital from Fannie Mae (and later Freddie Mac and HUD). While there are still dozens of other financial institutions that have access to the same capital, a broker who relied on Fannie Mae capital to close deals couldn’t leave so easily as his workflow is more enmeshed in a system where the competency of the back office and supporting services to process a loan is critical to serving clients.
A broker at Walker & Dunlop may feel comfortable that his clients would follow him if he left to a competitor, but if his new firm’s back office wasn’t as competent, he could lose business on a slow or tedious loan closing. While Walker & Dunlop was small, they were singularly focused on service and execution of Fannie Mae loans, slightly differentiating them versus competition—most of whom had much more expansive businesses.
Willy’s first priority after joining was going “all-in” on the lending business since it was more differentiated and also had recurring revenue from “MSRs”. MSRs, or Mortgage Servicing Rights, are a contractual right to “service” a loan. Servicing entails sending statements, collecting monthly payments, and remitting them, among other back-office tasks. While it is not exciting, the right to service is contractually guaranteed income over the life of the loan, while also being a high margin activity. For Walker & Dunlop, MSRs are a significant source of earnings that helps even out the vicissitudes of their other deal-driven earnings.
In 2006, Walker & Dunlop bought out AIG, who was a partner with them in their Fannie Mae DUS business. A year later, Willy Walker became the undisputed leader of the company when he became both CEO and Chairman of the Board. While the financial world was crumbling, Walker & Dunlop’s years of conservative originations and limited balance sheet exposure allowed them to not only weather the banking crisis but take advantage of it.
In the midst of all of this, in November 2007 Walker & Dunlop turned 70 years old and Willy set a 5-year plan, which he called the “Drive to 75”. This was an ambitious goal to increase revenue and operating income 5x in 5 years.
In January 2009 they acquired Column Guaranteed LLC, or “Column”, as it was known, from Credit Suisse. This acquisition gave them licenses to originate and service loans for Freddie Mac and HUD. While competitors were getting defensive and reeling from the consequences of unscrupulous loan originations (which often had risk-sharing agreements), Walker & Dunlop was profitable throughout the entire financial crisis and even gained market share. In 2007 they were the 45th largest commercial real estate lender, but by 2009 they were the ninth.
The acquisition helped give them the minimum scale they needed to go public, with their loan servicing portfolio increasing to $13bn of loans from $7bn and operating income doubling to $29mn for 2009. Even so, they were still a very small company when they went public in 2010, and the timing was less than ideal for a real estate finance company. This was made apparent when they had to lower their offering price to $10 from a range of $14-16. After banking fees, they raised around ~$90mn, which they would use to grow the company with a particular focus on adding teams and acquiring complementary businesses. The $25mn business value Willy Walker and his father estimated when he joined had now grown to ~$220mn at their offering price. The loan servicing portfolio he was focused on building grew from $2.8bn when Willy first joined to over $14bn at the time of IPO.
But despite helping the company grow significantly since taking over and guiding it through the worst financial crisis since the Great Depression, Willy Walker knew the business was not in a strong a position. Their service level might have been high, but they didn’t enjoy the same synergies other larger real estate finance firms did by grouping together different real estate services, and they lacked the ability to lend on a short-term basis with bridge loans to close a deal. The number of loan originators they had was also a fraction of the of the much larger real estate focused finance firms like CBRE, JLL, and Berkadia.
As Willy would later say, there were no “grand slams”, just hitting a lot of “singles”. They slowly added team after team to Walker & Dunlop to grow their brokerage network and loan originations. However, there were several partnerships and acquisitions along the way that helped them jump ahead.
On the smaller side, in 1Q11 they entered into a partnership with Real Estate sales-focused firm, Cushman & Wakefield. This allowed Cushman & Wakefield to offer clients trying to close deals a new potential source of capital in Fannie Mae, Freddie Mac, and HUD. This in turn essentially acted as a customer acquisition funnel for Walker & Dunlop. The impact was relatively minor initially, as deal flow would need to pick up for this to become a meaningful source of businesses. From 2010 to 2011, originations grew from $3.2bn to $4bn.
In June 2012 Walker & Dunlop announced the acquisition of CW Capital for $220mn, financed by 63% equity. This acquisition doubled the size of their servings portfolio to $35bn by the end of 2012 from $17bn the year prior. It also added ~180 employees, and by the end of 2012, they were at 420.
As people and their relationships were at the core of their business, Willy was careful to foster a strong culture. He tried to have a “no jerks” policy, but their small size led to him tolerate the behavior of one star broker who at one point was 70% of their deal flow. He needed to scale the business up so they weren’t so reliant on one person, and he could fire people who weren’t good cultural fits, even if they were big producers. Thus, he relished the moment when their scale allowed them to let him go with de minimis volume impact. The culture and unwillingness to accept common-place industry behaviors like stealing clients from peers helped attract quality talent, which was only helped by their reputation for being quick and competent.
Incredibly, by the middle of 2011 it was becoming clear they would meet the ambitious 5-year targets they set in 2007 to grow the businesses revenue and operating income 5x. But rather than rest on their laurels, Willy would make clear that was but one step towards their goal of making Walker & Dunlop the premier commercial real estate finance company in the US. To keep growing, they started experimenting with adding different proprietary sources of capital. They set up a CMBS (commercial mortgage-backed security) conduit, created a bridge loan program that would allow balance sheet lending for the first time, and explored starting a Mortgage REIT. While only the bridge loan program was ultimately successful (the mortgage REIT never materialized and the CMBS conduit never had significant volume, so they shuttered a few years later), it shows their willingness to experiment and take risks when there is limited downside to failure.
In 2013, the Federal Housing Finance Agency (FHFA), directed Fannie Mae and Freddie Mac to cut their loan origination volume by 10%, which caught Walker & Dunlop off guard. This, combined with interest rates climbing, led to the first headwind since the financial crisis ended: 3Q13 origination volumes fell 19%. Changes to Fannie Mae and Freddie Mac had always been a risk for Walker & Dunlop, but most proposals at the time either had little political backing or contradictory aims (more on Fannie and Freddie later), but this decrease seemed arbitrary with an unclear purpose.
Willy Walker acknowledged at the time that the most unsettling thing for Walker & Dunlop investors was all of the noise coming out of Capital Hill on the future of Fannie and Freddie, with some believing the institutions should be totally eliminated. However, despite the noise, Willy was an adamant believer that “Fannie and Freddie aren’t going anywhere anytime soon”, and their acquisition of CW Capital, which increased their reliance on the institutions, was indicative of that opinion.
Nevertheless, Walker & Dunlop proactively slashed expenses, shuttering both a small loan lending business acquired from the CW Capital transaction and closing a small office. Still though, despite the unexpected shake up with Fannie and Freddie originations, Willy Walker was clear that their strategy is to continue to emphasize these proprietary sources of capital (Fannie, Freddie, and HUD) and grow their brokerage network in conjunction with those capital solutions. (Fannie and Freddie are both GSEs and considered “agency”, but HUD is only considered an “agency” and not a GSE since it is not quasi-privatized. The HUD business is a fraction of the size as the GSE business).
The reason they continue to highlight the proprietary capital solutions is simple: they would need to do 5 to 6 times the aggregate origination volume to produce the same amount of revenues without the GSEs (or what Willy called their “lending business”). And even if they could achieve that through a larger brokerage network, these revenues would be at a lower margin and at a higher risk of disappearing to a competitor. Despite the hiccups with the GSEs, Walker & Dunlop would not change their strategy, which turned out to be the right decision as GSE volumes increased again in short order.
Despite their confidence in the GSEs, they tried to diversify their sources of capital the best they could. The more differentiated sources of capital they could offer, the easier it would be for Walker & Dunlop to sell themselves to brokers, which in turn allowed brokers to better service clients.
A year later, there was evidence that their strategy was working. On a 2Q14 earnings call, they noted that they quoted a three-property multifamily deal for execution with the GSEs, but the borrower required more proceeds than the agency loan parameters allowed. Instead of losing that business as they would have in the past, they were able to quote the borrower for a deal with their conduit and closed that deal. In another case, their balance sheet lending operation allowed them to offer bridge financing for three other properties that were not stabilized yet (stabilized refers to having the building at least 80% rented). Then, when the building gets rented out, the owner will refinance it through Walker & Dunlop to get a GSE loan with better terms. These were both deals they would have lost without these new sources of capital.
These new capabilities were changing the way Willy would talk about their business and their ability to attract talent. They would not need to pursue “star brokers” and could go after second and third tier teams because the Walker & Dunlop platform could help support them and boost their business (versus relying on the star brokers to boost Walker & Dunlop’s business).
Over the next several years, Willy Walker would extend their platform and business lines with several partnerships and acquisitions: a Blackstone JV in 2017 to create a Mortgage Trust that unlocks a new source of capital for Walker & Dunlop, a 2018 acquisition of JCR Capital which would seed their asset management platform, a multifamily property appraisal business called Apprise in partnership with GeoPhy in 2019 (which they would later acquire in 2022), the acquisition of 75% of real estate-focused research firm Zelman & Associates in 2021, and alternative asset manager Alliant Capital that materially increased their AUM to $16bn.
At the end of 2017, Walker & Dunlop posted their next set of long-term goals, called 2020 vision. It called for revenue growth of ~13% annually to get them to $1bn (from $700mn), increased loan originations to $30-35bn (from $25bn), and the addition of $25bn to the loan servicing portfolio. More ambitiously, they wanted to grow investment sales volume ($3bn in 2017) and Asset Management AUM to $8-10bn.
This concludes the free excerpt of our report. In the full report, we finish the business history and then move onto an in-depth discussion of the business, how the make money, explain the accounting in simple terms, and talk about competitive threats, as well as their long-term opportunity.
See below for the full table of contents, and subscribe to get access to the full >60 page Walker & Dunlop research report in PDF! Members can also access our Constellation Software, Floor and Decor, Meta, Copart, and Etsy reports, as well as the DJY Research archives.
Table of Contents
Business History.
Business Background.
Grabbing the Reins.
What’s a Walker & Dunlop?
Business.
Industry.
GSEs.
Competition.
Expanding the Business.
Walker & Dunlop Model.
Revenue Build.
Valuation.
Risks.
Summary Model.
Historical Model.
Conclusion.
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