Pioneering POWER

Walker & Dunlop just turned 75 years old, but the company is more nimble than ever after shattering its plan to grow revenues, operating and net income five-fold in five years Walker & Dunlop has been an industry pioneer for nearly eight decades. And with its recent market moves, the Bethesda, MD-based firm is now one of the largest such organizations in the commercial real estate finance industry.

When Walker & Dunlop opened its doors in 1937, it was one of the first companies to use Federal Housing Administration insurance to make single-family loans. By the end of World War II, the firm was pioneering the use of Taft-Hartley funds—a trust fund established through collective bargaining between unions and companies to offer health and other benefits for employees—for mortgage and real estate investment.

Decades later, in 1971, Walker & Dunlop arranged the first off-balance sheet financing for the US government at the US Geological headquarters in Reston, VA. And in 1988, the firm was one of the first in the industry to join Fannie Mane's Delegated Underwriting and Servicing program. By the 1990s, Walker & Dunlop was a major lender to the REIT industry, leveraging cross collateral and substitution of assets in revolving credit structures for major REITs like Charles E. Smith Residential, Walden Residential Properties and United Dominion Realty Trust.

As of the beginning of this year's fourth quarter, the company is one of the largest DUS lenders in the nation. But industry watchers get the feeling they haven't seen anything yet from Walker & Dunlop. The company has seen exponential growth on all fronts in the past five years, moving from being the 45th largest commercial real estate lender in the US to one of the top 10—and turning the heads of competitors large and small in the process.

Willy Walker, who took the president and CEO reigns from his father, Mallory, in 2003, set the rapid growth in motion with his "Drive to 75" plan in 2007. With the company still private at the time, Walker launched a vision to grow its revenues, operating income and net income five-fold in the five years leading up to the firm's 75th anniversary in 2012. As commercial real estate cycles would have it, months after he launched the plan, Walker & Dunlop would find itself facing the unpleasant realities of one of the worst economic markets in decades.

Despite the Great Recession, Walker & Dunlop somehow shattered the expectations its CEO set. Third-quarter earnings show the firm far exceeded five-fold growth in revenues, operating income and net income. Walker, for one, is not surprised.

"We made some good bets at times when others weren't willing to gamble," says Walker, the third generation of leadership. "When the economic downturn started— and Fannie and Freddie had just gone into conservatorship—we decided to buy the Fannie, Freddie and HUD operations of Column Guaranteed from Credit Suisse. It wasn't easy to get the approval from banks—or from my board—but it turned out to be exactly the right move."

The Column Guaranteed merger created a powerhouse in the apartment and commercial lending arena at a time when Fannie Mae, Freddie Mac and HUD are dominating their respective lending markets. But that was just the first of Walker's big, bold moves in a down market.

After moving deeper into the Fannie/ Freddie space, Walker decided to take the once-small, family company public—and he did it at a time when real estate and finance companies were not going the IPO route. Despite conventional wisdom, Walker & Dunlop debuted on the New York Stock Exchange in late 2010 and raised about $100 million on its first day. The stock was up 24% in the first year.

Walker's third big move came more recently in the form of the $234-million CWCapital acquisition, which closed in September. How big is the deal? In 2011, the two firms originated $7.7 billion of commercial real estate loans combined. Based on the 2011 Mortgage Bankers Association rankings, that production would position Walker & Dunlop as the second-largest multifamily lender and the eighth-largest commercial real estate lender in the country.

"We couldn't have done the CW deal if we hadn't gone public. We used our stock as 65% of the consideration," says Walker, explaining the progression of his Drive to 75 plan. "We can now go head to head with the largest insurance companies and commercial banks in the country—and in the world, for that matter—in the commercial real estate finance space."

Now, Walker & Dunlop is working to integrate CW into its fold so it can tap into expected synergies that should allow the firm to broaden its lending operations beyond multifamily to tackle office, retail, hospitality and industrial. The keyword is diversity. In 2011, multifamily accounted for $3.2 billion of its deals and other sectors made up about 25% of the business. That could dramatically change in years ahead, if Walker's bets keep paying off.

The blueprint is clear. Aaron Perlis, senior vice president at Walker & Dunlop, describes three legs of the firm's development stool. The first depends on the firm becoming a top five Fannie, Freddie and HUD lender. The CW acquisition is expected to accomplish that goal.

The second initiative is to grow the capital markets group and life insurance correspondent relationships. To that end, Walker & Dunlop has added new offices in Wisconsin and Florida and is looking to make new hires to cover the West and Southwest. These moves could triple the $1-billion annual capacity of this division.

The third leg is proprietary capital. Walker & Dunlop's public status gives it an advantage over most of its private competitors while its non-bank status gives it an advantage over its bank competitors to create proprietary capital for lending.

Currently, Walker & Dunlop is growing the proprietary capital side of the business through balance sheet lending for multifamily properties that aren't ready for Fannie, Freddie or HUD loans today, but will be in six to 24 months. Perlis says the firm is offering what many would call bridge loans and holding that paper until it can transition them to one of the GSEs.

"There's a refinance boom coming and we think there are a lot of hot deals in multifamily on the CMBS front," Perlis says. "Some deals were 80% loan to value when they were originated. Now, they're 85% loan to value and need time to stabilize. They may need a mezzanine loan to get to 85%. We're looking at a fund model to potentially offer" that product.

The firm's also considering a mortgage REIT that would originate loans. If formed, an affiliate would manage the REIT and make loans that don't fit its typical GSE or other capital market executions.

"We're not trying to become a mortgage banking broker with tons of offices all over the country doing intermediary work," Perlis clarifies. "Our idea is to grow a strong, stable network and then develop proprietary products on the fund or REIT side. This will help us expand beyond multifamily originations."

The three-pronged strategy to continue growing as a public company is not without its challenges, the most pressing of which is integrating CWCapital—and its 197 employees— into the Walker & Dunlop fold.

Yet the acquisition is the latest example of a capital markets industry that has undergone massive restructuring in the wake of the financial crisis. Beyond bank failures and government nationalization, mergers and acquisitions have changed the face of the financial services industry. And most mergers and acquisitions fail. According to a PricewaterhouseCoopers study, only 44% of deals are considered to be a "financial success." Even fewer, just 385, were considered an operational success. PwC says not executing the strategy in a timely fashion is one of the largest failure points.

"Our goal right now is to integrate these two companies into a major force and create proprietary products to help customers when the products that we currently offer don't fill the need," says Howard Smith, executive vice president and COO of Walker & Dunlop. "Integration is the biggest challenge we face right now and we're working on it morning, noon and night. We will not accomplish that goal by merely combining the best operational practices of CW with the best operational practices of Walker & Dunlop. We have an opportunity here to find a way to do things better."

Doing things better while preserving the corporate culture has helped Walker & Dunlop attract and retain top talent. Indeed, a Booz Allen Hamilton study shows 53% of mergers had not met expectations two years after the deal closed. Culture clashes and turf wars are a major part of the problem. Walker, who worked outside the family business at larger companies for 15 years before taking the helm, says the firm has a unique culture that's helped spur rapid growth.

"If you don't have a strong culture, you can't keep people no matter how much you pay them," Walker says. "My name is on the front door, and we'll go bankrupt long before I ever allow us to do anything unethical. We won't cut corners, nor make moves that could negatively impact the brand."

From a macroeconomic perspective, the fact that Walker rolled out his Drive to 75 road map just before the economy crashed should signal that he's not fearful of broader trends. Although some may view that as a foolish perspective, Walker's experience tells him he can thrive in a downturn and continue growing through a slow recovery. If he has any macroeconomic concerns, it's the opposite trend: breakneck market growth.

"My only real fear is explosive GDP growth, which would cause Wall Street to come flying back in to originate hundreds of billions of dollars of CMBS loans, banks to start doing silly construction loans again, commercial real estate to get overheated, and another bubble-turned-bust that turns into the collateral damage," he says.

As Walker sees it, a distorted market would make it difficult—at least in the nearterm— for his company, which is committed "not to do bad business." But recent history has proven that in the long-term, companies that take Walker & Dunlop's approach benefit from the fallout of the commercial real estate financing crash-and-burn.

Perlis says the company has weathered— and even grown—through storms that have put others out of business because its leadership has the discipline to stick to its core principles. Walker & Dunlop had opportunities to get involved in the CMBS business in a big way in 2005-2007, for example, but chose not to take that path.

"Willy wants buy-in from his team," Perlis says. "It comes back to culture. Walker & Dunlop doesn't just run with a strategy; we want to make sure people are happy in their jobs."

Shekar Narasimhan, managing partner at Beekman Advisors in McLean, VA, is confident that Walker & Dunlop will navigate the integration challenges—and any possible GSE fallout—successfully because of the strength of its leadership. Narasimhan consulted on Walker & Dunlop's Column Guaranteed acquisition and IPO process. He says Walker has a clear vision of where he wants to go, and how. Of course, the firm also had good timing: 2008 to 2012 has been prime time for multifamily lending.

"There was a lot of uncertainty when Willy started the Drive to 75 campaign and there's a lot of uncertainty today," Narasimhan says. "Willy has said, 'This is my space. I know it well. And I'm going to grow with the challenge as the opportunities present themselves.' As long as he continues to do that, there's no question that no matter what happens in the market, Walker & Dunlop can be successful."

Walker would have it no other way. Beyond scale and financial performance, he has transformed Walker & Dunlop from a small, capital-constrained private company into a scaled, publicly held finance company that is now one of the largest commercial real estate lenders in the US. That accomplishment has brought strong returns for his shareholders and new growth opportunities for his employees.

"This leaves the company far more capable to take advantage of the everevolving regulatory and macroeconomic landscape it competes in every day," Walker says. "We have a great business with exceptional people and our growth over the past five years, and particularly the past four months, position us extremely well to take advantage of opportunities over the coming five years."