This Small-Cap Stock Aims to Dominate Commercial Real Estate Finance

There’s significant momentum and opportunity ahead for leading commercial real estate lender, Walker & Dunlop ( WD 1.85% ). In this clip from “Real Talk” on Motley Fool Live, recorded on March 18, Motley Fool contributors Jason Hall and Matt Frankel discuss the strategic growth strategy of Walker & Dunlop and analyze why it’s a worthwhile pick for the long-term.

Jason Hall: This is Walker & Dunlop. This is the commercial real estate company. I’m going to share a slide from their most recent investor presentation that lays out all of the different things that they do, Matt. I’m going to read most of this. It’s the largest capital provider to the commercial real estate market. In terms of things like originating debt, funding loans, that sort of thing, these guys are very much involved in that for commercial real estate. Matt, you are going to have to remind me here, which is the big agency for commercial lending?

Matt Frankel: You put me on the spot here.

Hall: I can’t remember. It’s like the Fannie ( FNMA 5.35% ) and Freddie ( FMCC 4.46% ) of agencies for commercial. They’re very tied in that. Yet, like we were just talking about with Vacasa ( VCSA -2.06% ), it’s everywhere. The opportunity to continue to consolidate that market share is enormous. Big brokerage business, multi-family property sales, appraisal services, they do a lot of research that they sell to their clients. One of the things that’s really interesting to me is something that’s a little newer for them after an acquisition they made last year, investment management services. They started the main acquisition of a company that does investment management mainly for affordable housing but they are looking to iterate that up. I hope I don’t make anybody dizzy here but I want to find this slide.

Frankel: While you’re looking for it, the big ones are Fannie and Freddie in multi-family and then there’s HUD loans that I think that’s what you were thinking of.

Hall: I think so. Drive to ’25, I wanted to talk about this. This was their growth strategy. Their targets that they had set by 2025 of where they’re looking to be. This is an aggressive growth business right now in commercial real estate. One of the things that Willy Walker has done so well, I think Willy Walker is the CEO of the company. He is the grandson of one of the original founders of the business. I think the company went public under Willy Walker.

Frankel: Yeah, 2010.

Hall: He led it public. I think he had been at the company for less, maybe right around ten years when he brought the company public. It has been a wonderful investment since then. We talked about this yesterday. Matt, we’ve got a question. I think we were talking about rising interest rates on the “Future of FinTech” show. This is a company that is positioned to benefit from rising interest rates because of the escrow services that it does. It has a substantial amount of money in escrow accounts and every 25 basis points, so that’s a quarter of a percentage point, that interest rates move higher is worth about $9 million in pre-tax income for the company. We’re going to get a lot of 25-basis-point increases over the next two years. They’re little levers like that, that are going to increase its profitability as it continues to consolidate the market. As we continue to see the commercial real estate industry rationalize all of the properties out there and the opportunities. You think about multi-family, which is a big business for Walker & Dunlop. We talked a lot about multi-family REITs. Walker & Dunlop is really well-positioned for that multi-family finance side, which is such a big player. Matt, anything to add?

Frankel: I think this is from the same presentation you had. One second. I totally lost my slide but I wanted to show the market opportunity here. Here it is.

Hall: You got it?

Frankel: Yeah.

Hall: I got it.

Frankel: Jason beat me to it. That’s the market opportunity. You can see that Walker & Dunlop, this is their servicing portfolio.

Hall: The little pale blue circle. The small one.

Frankel: Right. They are a mortgage servicer and it’s worth mentioning that they do commercial mortgages, which have more floating rate or variable rate loans so you don’t have the same prepayment risks that you do with residential mortgages. People don’t refinance quite as frequently with commercial loans. If you scroll down to the next slide, this just shows how fragmented the market is. This is the multi-family loan origination market. This is their bread and butter. Walker & Dunlop is No. 1 in this market. They have 9% of the market.

Hall: 9%.

Frankel: They don’t just loan multi-family, they’ve a lot of hotel loans I know on the books, for example. On the next slide is the non-multi-family loans, 1.6% of the market that they have.

Hall: Tiny.

Frankel: They want to build themselves into the commercial real estate finance company. Yes, the momentum is heading in that direction. I think there’s still a lot of room to grow for Walker & Dunlop. They’re still a small-cap even as the market leader right now in multi-family origination. They’ve been more than a 10-bagger since the IPO, but they’re still a small-cap.

Hall: Honestly, Matt, I tend to get hung up on valuation right now. I don’t think that it’s crazy pricey. It’s a little bit above the three-year or five-year average valuation but I do think it is just in such a sweet spot and it’s so small that this is one, considering the opportunity, honestly is probably worth overpaying a little bit for if you have that long-term time horizon.

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