This apartment lender is a “money making machine”. And the stock is cheap.


Trends in the residential mortgage market seem worrying. The rise in interest rates is fueling fears of a slowdown in lending activity, affecting refinancing activities particularly hard.

Rocket companies

(ticker: RKT), a residential lender, has become a battleground between mortgage bulls and bearers.

Another facet of the mortgage market, commercial loans for the acquisition and refinancing of apartment buildings, appears to be on the rise. While rising interest rates remain a concern, investment in multi-family buildings has increased, fueled by demand from private equity pools and abundant funding from US mortgage agencies,

Fannie Mae

and

Freddie mac.

A rising star of multi-family market financing is

Walker & Dunlop

(DEO). Its revenue rose 33% last year, to $ 1.1 billion, from 2019, while its net profit jumped 42%, to $ 246 million. Wall Street expects profits to rise 13% this year. Longer term, the company is looking to almost double its earnings per share by 2025. If it can deliver, the stock should be a winner.

“We have a lot of growth initiatives,” says CEO Willy Walker, whose grandfather co-founded the company during the Great Depression. When Walker took over from his father in 2007, the company was privately held, had around 100 employees and was worth $ 25 million. Today, it has more than 1,000 employees, $ 4.7 billion in assets and a market capitalization of $ 3.2 billion. Revenue has grown at an annualized rate of 18% since 2015.

E = Estimate

Source: FactSet

In the same way

JPMorgan Chase

(JPM),

Wells fargo

(WFC),

CBRE Group

(CBRE) and Berkadia, W&D is among the top five in multi-family loans, funding $ 24 billion last year. And at 12 times the earnings of 2021, W&D stock is cheaper than its biggest rivals. JPMorgan and Wells Fargo are trading around 15 times, while CBRE is targeting 20 times 2021 profits.

“They’re trading at a discount for a company that is growing 15%, and they’re small enough that it’s easier for them to grow than a large commercial lender,” says Bill Hench, Royce Opportunity Fund Manager. . He sees the stock hit $ 150 over the next several years, fueled by earnings growth, while its multiple remains stable.

W&D makes money from loans funded largely by Fannie and Freddie. It charges fees and a profit margin on the interest rate, and sells the loans to mortgage agencies or private investors, keeping its balance sheet light. Revenue also comes from brokerage sales, structured finance, and loan servicing fees. W & D’s management asset base reached $ 107 billion last year, up 15% from 2019, with management fees rising to 22% of total revenue.

The service, that is, processing loan repayments and managing administrative tasks, generates stable cash flow and a pool of new loans, which tend to mature every 10 years. “We can take another bite of apple since we know who the borrower is,” says Walker. W&D also aims to capitalize on brokerage sales and structure new debt transactions as loans mature.

Wedbush Securities analyst Henry Coffey calls W&D a “money making machine with a lot of arrows in its quiver.”

The company now wants to become the largest multi-family lender and broker. W&D has set a goal of nearly tripling annual loan volume to $ 60 billion and quadruple brokerage volume to $ 25 billion by 2025. It targets growing markets like Houston, Denver and Phoenix.

The company’s average loan size is around $ 20 million, but it aims to get more loans of around $ 5 million, the sweet spot for lenders like JPMorgan. In total, W & D’s goal is to reach $ 13 to $ 15 per share by 2025, up from an estimated $ 8.67 this year.

The company and its actions face threats. Rising interest rates lower acquisition activity and lower asset values ​​as capital costs rise. Refinancing could slow down. Lenders have some protection because commercial loans usually come with prepayment penalties that make refinancing expensive. Nevertheless, says Walker, “we are in no man’s land” with the tariffs.

W&D also needs Fannie and Freddie to stay tuned to the market. Mortgage agencies imposed ceilings on multi-family financing in 2013 and plan to limit lending to a combined $ 140 billion this year. Any hint of pullback, along with more stringent loan requirements, would likely affect the stock. “It’s a risk for Walker if Fannie and Freddie shrink,” said Matt Howlett, an analyst at Wolfe Research, who likes the title nonetheless.

CEO Walker says he’s not concerned about Fannie and Freddie, noting that they provide sufficient capital to the market. And the company has other sources of funding. “Agreements that will not be made by agencies, we will do with insurers, banks, our own balance sheet or securitized debt,” he said.

With an digestible size for a large bank or financial company, W&D could become an acquisition target. Walker says if a buyer offered $ 150 a share, he would be obligated to receive it. Yet he has no intention of selling or resigning. “Working for your own capital is better than working for someone else’s,” he says. “I am 53 years old and I am not planning on going anywhere.”

Write to Daren Fonda at [email protected]

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