Walker & Dunlop Inc (WD), the real estate services company, has carved itself a highly profitable and rapidly growing niche. Yet despite reporting annual earnings growth over 20% for the past 5 years it still trades on a lowly PE of 10.9.
The company reported an even stronger first quarter last week with revenues up 68% and EPS up a remarkable 180% to $1.35. The sharp increase was driven by a 92% increase in total transaction volumes across all lending products and follows a year that saw WD recruit a large number of mortgage bankers and brokers. Chairman and CEO Willy Walker was bullish for the rest of the year saying; “our outlook is very strong as the economy expands, interest rates remain relatively low, and the demand for commercial real estate, particularly rental housing, continues forward.”
WD has focussed on multifamily real estate which has seen vigorous growth in recent years while WD has expanded at an even faster rate, growing its market share from 1% in 2010 to 5% in 2016. The company relies on strong demand from investors to drive the growth that has been seen recently. Still, the economics of multifamily real estate remain compelling. In a recent Business Insider article Grant Cardone, American entrepreneur and best selling author, explains how to achieve a return on investment of 13.8% buying multifamilliy real estate.
WD’s cheap valuation is partly due to fears that a construction boom for multifamily units across the United States after years of growth and strong rental demand could soften future rent growth.
However, while vacancy rates are projected to increase slightly, these forecasts remain lower than historic averages and significantly lower than other asset classes. The national vacancy rate for multifamily property is projected to peak at 5.7% in 2018 compared to the 15 year average vacancy rate of 6.1%. Similarly the rental rate growth is expected to moderate over the next couple of years to 2.2% compared to the 15 year average of 1.9%. Consequently stability is likely to remain and investor interest in multifamily is expected to remain strong.
Longer term, there are many reasons to believe that the multifamily market has many years of continued growth ahead as more and more American households choose to rent rather than buy. With over $1 trillion of student debt nationally, stagnant wages, increasing interest rates, and a limited supply of entry-level single family housing, rental housing is expected to remain the preferred option for newly formed American households. Many Millennials are just not buying homes and 75 million baby boomers are approaching retirement with the prospect that many of today’s apartment complexes may be turned into retirement communities. The industry is still not building enough units to keep up with demand and the cost of building is going up.
Last month, Freddie Mac published a positive outlook for the industry even in a higher interest rate scenario. “The multifamily market is poised for growth and record origination volumes in 2017 under either interest rate scenario. This fact underscores the underlying strength of the multifamily sector thanks to a strong labor market, demand from new households, and steady absorption rates,” Freddie Mac Multifamily Vice President of Research and Modelling Steve Guggenmos said in April. “Consequently, a moderate rise in interest rates alone will not be enough to cause any significant disruption to the multifamily investment market.”
WD has delivered exceptional growth in recent years and with a healthy economy and secular tail winds growth looks set to continue. The stock price has trebled since 2013 but so have earnings and with a PE of 10.9 it looks remarkably good value.
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Disclosure: The author holds no positions in any of the stocks mentioned nor has any intentions to initiate any in the next 72 hours.