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W&D Poised To Become a Bigger Small-Balance Lender with IPO

September 08, 2010

One of the nation's most successful and fastest growing apartment-specialty loan originators and servicers appears poised to become a larger and broader resource for small-balance investors. The owners and management team of the Bethesda, Md.-based operation now known as Walker & Dunlop LLC are looking to raise as much as $150 million through a proposed initial public offering of common stock.

W&D has been an increasingly active originator under Fannie Mae's delegated underwriting and servicing (DUS) network, and logically also taps borrower clients into Freddie Mac (including Program Plus) and HUD/FHA multifamily lending programs. The firm is likewise active in health care facility financing (including seniors housing), along with originations for conduit executions in the various CRE categories.

W&D has a relatively small investment management operation, composed mostly of commingled multifamily equity and CRE debt funds. It's also an asset manager of 1,600-some apartment properties. And its loan servicing business has become pretty hefty, with the portfolio approaching $17 billion.

The Mortgage Bankers Association's recent survey designated W&D as the nation's ninth-largest CRE lender - but it may well climb higher on the list if the IPO goes forward. The additional equity capital would presumably help it expand its roster of loan offerings, bring in even more originations pros, and continue expanding its geographic footprint.

The timing of the potential offering appears to be advantageous, according to a research report from JMP Securities on one of W&D's few publicly traded peer companies (Holliday Fenoglio Fowler parent, HFF Inc.). Mortgage banking outfits and other property services specialists can expect better deal flow ahead under ever-improving CRE market fundamentals and a stronger general economy, the report by CRE stock analyst Will Marks concludes.

Marks couldn't discuss W&D's prospects under public ownership, as JMP may be involved in underwriting some of the company's securities issues.

The Great Recession notwithstanding, W&D has been a particularly busy and profitable outfit since acquiring key servicing rights and regional Fannie DUS licences early last year from Column Financial, which is international financial giant Credit Suisse Group's mostly inactive US CRE finance arm.

According to the registraton statement filed with the Securities & Exchange Commission, W&D's revenue jumped more than 80 percent last year - then another 50-plus percent during this year's first half.

The W&D team originated about $1.4 billion in Fannie loans last year, along with $256 million in Freddie loans, $217 million in HUD loans and $343 million in other loans. Citing SEC "quiet period" regulation, a company representative declined to specify the number of small-balance loans W&D originated.

Loan origination fees last year factored to 1.24 percent of combined principal amounts. Net income more than doubled for the year, to nearly $40 million, boosted by a one-time gain of nearly $11 million recorded in connection with the Column transaction.

For this year's first six months, net income was a solid $22.5 million - but was actually down some 12 percent as stronger operations didn't outpace that big one-time gain. The firm expects originations fees alone for full-year 2010 to approach $50 million.

W&D's current capitalization is at just under $120 million, including a bit more than $30 million in debt. Current owners of the private company would exchange their holdings for common stock in a new public company to be known as Walker & Dunlop Inc.

This includes Credit Suisse, which holds a 35 percent stake in the firm in connection with the acquisition of assets (including $5 billion in loan servicing contracts) from a Column Financial entity known as Column Guaranteed.

Other current owners are executives of the firm and/or members of the founding Walker family. They most notably include W&D's president/CEO: triathlete and Harvard MBA William "Willy" Walker, grandson of the firms' co-founder and son of a longtime CEO.

Again, it's difficult to compare W&D's financial picture with any similarly structured publicly held companies, as nearly all its primary competitors are privately held. In recent years some of W&D's major multifamily origination peers have been acquired by large publicly traded financial institutions - such as ARCS Commercial (PNC Financial), Reilly Mortgage Group (Wells Fargo) and Red Capital (Orix Corp.).

Meanwhile CWCapital is being acquired by publicly traded investment manager Fortress Investment Group.

As for the price W&D might expect for its stock, JMP's Marks reports that shares of property services companies tend to trade at around 16 or 17 times projected annual earnings.

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