Walker & Dunlop Rides the Real Estate Market Higher

The real estate market has done extremely well in recent years, and Walker & Dunlop (NYSE: WD) has taken full advantage of the strong market to make smart investments in the multifamily and commercial real estate space. Some market commentators have been nervous about how long real estate can continue to perform so well, and coming into Wednesday's third-quarter financial report, Walker & Dunlop investors weren't sure how optimistic to be about the company's ability to boost revenue and net income. Yet Walker & Dunlop delivered far better results than even the most positive of investors truly expected. Let's take a closer look at how Walker & Dunlop did so well and whether it can keep up its momentum going forward.

Image source: Walker & Dunlop.

Walker & Dunlop has a record quarter

Walker & Dunlop's third-quarter results were surprisingly good. Revenue surged 28% to $154.8 million, hitting a new record and absolutely crushing the 7% growth that most investors were expecting to see from the company. Net income fared even better, climbing by nearly half to $29.6 million, and that produced earnings of $0.96 per share. That was far better than the consensus forecast of $0.71 per share among those following the stock.

Taking a closer look at Walker & Dunlop's results, the company appeared to be firing on all cylinders during the quarter. Financial gains from the company's mortgage business jumped by more than 40%, and much of that growth stemmed from the increase in volumes of loans from the Department of Housing and Urban Development (HUD) as well as government-sponsored enterprise Fannie Mae. HUD and Fannie Mae loans made up almost half of origination volume during the quarter. In addition to higher loan-origination fees, rising gains from mortgage-servicing rights also roughly matched the increase in overall mortgage-related profit. Overall, total transaction volume was up 2%, with 3% growth in loan origination to $4.2 billion.

In addition, servicing fees also continued to rise dramatically, posting a 27% jump in the quarter. Portfolio growth due to new loan originations as well as the acquisition of a servicing portfolio from HUD helped push fee revenue higher, but even better news was that Walker & Dunlop managed to boost its weighted average servicing fee from 0.25% to 0.26%, a tiny increase that nevertheless made a huge difference to the bottom line. Only a slight decrease in interest earned on loans held for sale and investment detracted from a strong performance from Walker & Dunlop.

Walker & Dunlop's credit quality also remains sound. Provisions for losses were just $300,000 during the quarter, while net write-offs amounted to $2.6 million as the result of defaulted loans in the Fannie Mae portfolio.

CEO and Chairman Willy Walker explained some of his company's success. "The United States continues to create over 1 million households per year," Walker said, "and increasingly those households live in rental housing." The CEO believes that the company position puts it in great shape to take full advantage of that trend as it plays out in the years to come.

Can Walker & Dunlop keep growing?

Also, Walker & Dunlop has every confidence that the year will finish strong. "With a very strong pipeline leading into the fourth quarter," the company's CEO said, "we will once again generate strong double-digit earnings-per-share growth in 2016 for the third consecutive year."

In particular, Walker & Dunlop's position in the rental industry should help drive further growth. The company said that according to Freddie Mac's latest projections about the multifamily housing market, what will likely be a financing need of $300 billion in 2017 should leave Walker & Dunlop with plenty of opportunities to pick and choose smart financing deals and grow as fast as it can comfortably build up its business.

Walker & Dunlop shares didn't immediately react to the news in pre-market trading following the announcement, but investors will have to be pleased with the company's performance during the third quarter. With ongoing efforts to keep growing, Walker & Dunlop has every opportunity to take full advantage of favorable industry conditions as long as they last.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Walker and Dunlop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.