A Public Debut.....without the pop

By Danielle Douglas
Monday, December 20, 2010

Commercial mortgage lender Walker & Dunlop made an inauspicious debut on the New York Stock Exchange last week as its shares closed below the initial-public-offering price, but the showing may say more of the tempering IPO market than the strength of the offering.

The Bethesda firm's stock, with an initial per-share price of $10, hovered around $9.80 for much of the day and closed at $9.90. Shares were priced well below the $14 to $16 range that Walker & Dunlop anticipated in its Securities and Exchange Commission filing on Dec. 13. The offering, the first IPO for a mortgage lender in several years, raised $100 million for the 73-year-old, family-run company.

Walker & Dunlop chief executive William Walker said he is "thrilled" with the results of the offering considering that the capital will be used for growth opportunities, as opposed to paying down debt.

"Did we raise a little less capital than we originally anticipated? Yes, but at the same time we have a great investor base and the stock is trading very well," he said.

Of the six IPOs issued last week, three, including Walker & Dunlop's, cut their prices and struggled coming out of the gate. David Menlow, president of research firm IPO Financial, said there has been uncertainty about whether domestic stocks have developed enough muscle to compete with IPOs in China.

With the proceeds raised from the offering, Walker & Dunlop will pursue a growth strategy that includes bulking up the staff at its eight offices nationwide and tucking smaller origination shops into the portfolio. As it stands, the company is already the ninth-largest commercial real estate lending firm in the country, as ranked by the Mortgage Bankers Association.

Much of Walker & Dunlop's business is concentrated on financing apartment buildings and then selling the loans through government-sponsored entities, or GSEs, such as Fannie Mae and Freddie Mac. Indeed, the company was listed as a top 10 lender working with the agencies last year.

For the first nine months of this year, Walker & Dunlop originated $2.1 billion in loans, a 25 percent increase from 12 months earlier. Fees from those originations jumped 51 percent to $29.9 million year over year, attributable in part to higher origination volumes from Freddie Mac and Housing and Urban Development product offerings, according to a regulatory filing.

Given the cloudy future of the GSEs, some observers have questioned whether Walker & Dunlop's close ties to the agencies would impact the performance of the offering. "They are sharing some risk on some of their loans with Fannie, but they have a good track record of managing that risk," said Matt Therian, a research analyst at Renaissance Capital. "Long term, it's a political risk and maybe down the road that could be an issue."

As the ocean of commercial mortgage-backed securities and life insurance financing dried to a stream, Walker says the company's volume of multifamily originations through the GSEs grew from 60 percent in 2007 to 90 percent this year. He expects that mix to change as past financiers regain their footing.

The scrappy mortgage origination market has certainly fought its way back in the past year, logging a 32 percent rise in loans in the third quarter, compared to a year earlier, according to the MBA. Multifamily loans witnessed a 37 percent upswing during that same period.

A part of Walker's motivation for going public was to be in position for future refinancing opportunities. About $850 billion in non-bank multifamily debt is coming due in the next five years.

"There is a 10- to 15-times opportunity of what our annual origination volume is every single year for the next five years in just our core multifamily market as far as refinancings [go]," Walker said. "So lay on top of that office, hotel and retail, and the market is just a huge opportunity from a refinancing standpoint."

Taking the family business public caps off Walker's efforts to elevate his grandfather's company to national prominence. Under his leadership, the company not only weathered the downturn, but logged several quarters of more than 50 percent revenue growth. Revenues, for instance, were $85.8 million in the third quarter, a 66 percent increase from the prior year.

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