The novel coronavirus pandemic sent shockwaves through the global economy — including real estate. Between the recession and shutdown mandates, it got so bad for homeowners that Congress included mortgage forbearance as part of the CARES Act package passed in March. This presented a challenge to mortgage finance companies, which saw forbearance rates peak to nearly 9% of all mortgages at one point in early June.
Walker & Dunlop (NYSE:WD) weathered the pandemic better than many other mortgage finance companies. The reason? The company’s laser focus on providing loans for multifamily units only. These loans were more stable than other real estate loans during the year.
This strategic positioning, coupled with mortgage rates hitting historically low levels, has helped Walker & Dunlop see stellar bottom-line growth in 2020 — and the prospects for the company look good going into 2021.
A narrow focus on multifamily financing
Walker & Dunlop has long focused on providing only multifamily loans. This focus was an advantage for the lender amid the pandemic, as multifamily loans were one of best-performing categories in the real estate sector this year, according to a CBRE Group report.
According to Jamie Woodwell, vice president for commercial real estate research at the Mortgage Bankers Association, the pandemic produced vastly different outcomes within the commercial and multifamily spaces. Multifamily properties have been spared from the worst of the fallout, as the share of renters making payments only fell a percentage point or two from last year. Woodwell credits this to stimulus checks and rent supports buoying apartments.
Data from the National Multifamily Housing Council shows that October rent payments were current for 94.6% of renters, which down only 1.3% from the same period last year. Additionally, Walker & Dunlop revealed during its most recent earnings call that only nine loans in its entire agency portfolio were in forbearance as of Sept. 30 — that is 0.2% of its total loans.
Walker & Dunlop and the entire mortgage industry in general were boosted by the Federal Reserve cutting interest rate to historical lows in March. This has caused mortgage rates to plummet, leading to a big pickup in lending and refinancing activity.
For Walker & Dunlop, the developments of 2020 led to stellar growth. In the most recent quarter, revenue rose to $247 million, an increase of 16% compared to the same quarter last year. For the first nine months of the year, revenue is up to $734 million, an increase of 22% from the same period last year. This top-line growth trickled down, as diluted earnings per share (EPS) for the third quarter grew 19% compared to the same quarter last year, and up 24% compared to first nine months last year.
Looking forward to 2021 and beyond
Going into 2021, CBRE projects that multifamily investment volume will increase to $148 billion as “the economic rebound will lead to rising multifamily demand, largely from ‘unbundling’ — certain renters moving out of their parents’ homes or those of friends as job opportunities provide more financial flexibility to live independently.” This increase represents a 33% increase over 2020, which is estimated to see multifamily investment volume of $111 billion. Additionally, it expects multifamily to return to pre-pandemic occupancy levels in 2021, with rents fully recovering by 2022.
On Dec. 11, Walker & Dunlop held a presentation for investors discussing its progress made toward its prior five-year goals, as well as laying out its goals for the coming five years. Its primary goal is to become the biggest multifamily lender in the U.S. As of 2019, the company was the fifth-largest, with $16.7 billion in lending volume. The biggest lender in this space is JPMorgan Chase, which provided $22.7 billion in financing that year.
For Walker & Dunlop, reaching this goal means investing in technology to scale small loan origination business, building investment banking capabilities to expanding services to clients, and recruiting the best investment sale brokers.
The efforts of the company have been paying off. This year the company saw its market share of business with government-sponsored enterprises grow to 13%, up from 10% last year. The company was also encouraged to see that new clients provided 25% of financing volume in the third quarter. Additionally, another bright spot for the company was securing a $2.4 billion deal with Southern Management — the largest multifamily financing deal done in 2020.
What to watch for
The prospects for Walker & Dunlop look bright for next year. However, any time you invest in a mortgage finance company you must keep an eye on interest rates. If conditions take a turn and the Federal Reserve suddenly needs to raise rates, then the mortgage industry and Walker & Dunlop could take a big hit.
However, the Fed recently reconfirmed that it does not foresee raising interest rates until 2023. This can serve as a tailwind for the mortgage finance industry. With continued low rates coupled with the likelihood that multifamily homes will be in high demand next year, 2021 could shape up to be another solid year for Walker & Dunlop.