This small capitalization stock aims to dominate commercial real estate financing

There is significant momentum and opportunities ahead for leading commercial real estate lenders, Walker & Dunlop (WD -0.08% ). In this clip from “Real Talk” at Motley Fool Live, was recorded on March 18Motley Fool partners Jason Hall and Matt Frankel discuss Walker & Dunlop’s growth strategy and analyze why it is a worthwhile choice in the long run.

Jason Hall: This is Walker & Dunlop. This is a real estate trading company. I will share a slide from their most recent investor presentation showing all the different things they do, Matt. I will read most of them. It is the largest provider of funds in the commercial real estate market. When it comes to things like debt consolidation, loan financing, things like that, these guys are very involved in it for commercial real estate. Matt, you have to remind me here, what is the big agency for commercial lending?

Matt Frankel: You put me on the spot here.

Room: I can not remember. It’s like that Fani (FNMA -1.13% ) and Freddie (FMCC -0.63% ) of commercial agencies. They are very attached to it. However, it was as if we were talking to cow (VCSA -3.05% ), it’s everywhere. The opportunity to continue consolidating this market share is huge. Large real estate company, real estate sales for many families, appraisal services, do a lot of research that sells to their clients. One of the things that is really interesting to me is something that is a little new to them after an acquisition they made last year, investment management services. They have started the main acquisition of a company that manages investments mainly for affordable housing, but they want to repeat it. I hope I do not stun anyone here, but I want to find this transparency.

Frankel: While you’re looking for it, the big ones are Fannie and Freddie in an apartment building and then there are HUD loans that I think you’ve been thinking about.

Room: I think so. Drive until ’25, I wanted to talk about it. This was their development strategy. Their goals they had set by 2025, where they want to be. This is an aggressive development business right now in commercial real estate. One of the things 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 company. I think the company went public under Willy Walker.

Frankel: Yes, 2010.

Room: He drove it in public. I think he was in the company for less, maybe exactly ten years when he brought the company audience. It has been a wonderful investment ever since. We talked about that yesterday. Matt, we have a question. I think we were talking about raising interest rates on “Future of FinTech”. This is a company that is able to take advantage of the interest rate increase due to the guarantee services it offers. He has a significant amount of money in guarantee accounts and every 25 basis points, that is, a quarter of a percentage point, that interest rates go up, is worth about $ 9 million in pre-tax revenue for the company. We will have many increases by 25 basis points in the next two years. They are small levers like this, which will increase its profitability as it continues to consolidate the market. As we continue to see the commercial real estate industry streamlining all the real estate out there and the opportunities. You are thinking of multi-family, which is a big business for Walker & Dunlop. We talked a lot about REITs for multiple families. Walker & Dunlop is very well placed for this multi-family financial side, which is such a big player. Matt, something to add?

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

Room: You have it?

Frankel: Yes.

Room: I got it.

Frankel: Jason beat me. This is the market opportunity. You can see that Walker & Dunlop, this is their service portfolio.

Room: The small blue circle. The little one.

Frankel: Correctly. It is a mortgage service and it is worth mentioning that they make commercial mortgages, which have more floating rate or floating rate loans, so that you do not have the same prepayment risks that you have with home mortgages. People do not refinance so often with commercial loans. If you scroll down to the next slide, this indicates how fragmented the market is. This is the loan market for many families. This is their bread and butter. Walker & Dunlop is No. 1 in this market. They have 9% of the market.

Room: 9%.

Frankel: They do not just lend to many families, they have many hotel loans that I know of in books, for example. In the next slide are the non-family loans, 1.6% of the market they have.

Room: Microscopic.

Frankel: They want to integrate into the commercial real estate financing company. Yes, the dynamics are moving in that direction. I think there is still a lot of room for growth for Walker & Dunlop. They are still small-cap, even as the market leader right now in the production of many families. They have surpassed 10 brands since the IPO, but are still undercapitalized.

Room: Honestly, Matt, I tend to stick the phone in the valuation right now. I do not think it is insanely expensive. It’s a little over the average valuation of three or five years, but I think it’s in such a good spot and it’s so small that this one is, given the opportunity, honestly probably worth paying a little too much if you have that long term horizon.

This article represents the opinion of the author, who may disagree with the “official” position of setting up a Premium Motley Fool consulting service. We are motley! Challenging an investment dissertation – even our own – helps us all think critically about investing and make decisions that help us become smarter, happier and richer.

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