Executive Says $220M Transaction Will Help Position Combined Companies To Compete; Deal With Regulatory Reform
With the mounting competitive and regulatory pressures facing the
commercial real estate lending industry, it’s no surprise that Walker & Dunlop Inc. CEO Willy Walker uses the term "scale" frequently in expounding on the benefits of his firm’s acquisition of lender CWCapital LLC for $220 million in cash and stock.
The acquisition of CWCapital by Walker & Dunlop, a Bethesda, MD-based commercial mortgage company, from an affiliate of Fortress Investment Group is expected to create one of the largest commercial real estate lenders in the U.S., with a combined $7.7 billion of commercial real estate loan originations in 2011 and an aggregate servicing portfolio that exceeds $33.7 billion.
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The combined firms, if the transaction closes in September as expected, will become the second-largest multifamily lender and eighth-largest CRE lender in the U. S., based on the Mortgage Bankers Association 2011 mortgage origination volumes. CWCapital is active in multifamily, health care and CRE lending with in-house origination capabilities for Fannie Mae, Freddie Mac, HUD, life insurance companies and conduits.
CoStar caught up with CEO Willy Walker in a quest for detail on the benefits of the combination and the acquisition’s impact in an increasingly competitive CRE mortgage lending arena.
CoStar: Why is CWCapital a good fit for Walker & Dunlop at this point in the market cycle?
Walker: The two companies’ cultures are very, very similar, from the way we approach our business to the way we approach our clients and customers and our similar approach and philosophy to credit and underwriting. There is very little overlap between the two companies as it relates to both the origination platforms and clients, and geographies where the two companies have a lot of originators. In a deal of this nature where you’re bringing together two companies of our size and scale, what you don’t want to do is skip a beat on the origination side. Having that lack of conflict, if you will, between the two platforms is one of the very attractive pieces to the CW business.
Has expansion been Walker & Dunlop’s goal since your IPO in 2010?
We raised capital in our IPO because we were capital constrained and saw lots of opportunities for growth. We were straight forward about the fact that we would go out and look for potential acquisitions. I wouldn’t say we targeted CW when we did our IPO; this transaction just came about in the last couple months.
What are some the challenges that CRE lenders face in the current market environment, and how does the CW transaction fit into that picture?
If you’re inside a bank, lending is a pretty confusing regulatory environment right now. With increased regulation, both in the U.S. and through the Basel Accords, clearly, many of our bank competitors have greater scale and a cheaper cost of funds than we do. But they’re also dealing with a regulatory landscape that’s far more complex and challenging.
The private companies that are our competitors do not have the access to capital that we do. They are often smaller companies that don’t have the scale that we do, as far as market share that this combination will bring about.
It’s been said that this transaction will make lending more competitive in the major financial markets. How so?
In some metros such as Atlanta, Los Angeles, San Francisco, Chicago, the added scale will bring increased brand awareness. Put CW and Walker & Dunlop origination teams in those markets on the same platform and you have a major presence in those markets. In New York and L.A., the two largest multifamily markets, the combination gives us the opportunity to add scale and origination talent, and relatively speaking, we have a pretty small presence in both of them.
What effect will financial regulatory reform and the future of Fannie Mae, Freddie Mac and other GSEs have on your business?
If Fannie/Freddie reform gets kicked down the road, we’re in a very good position as a market leader. We’ve got real scale as the largest Fannie Mae DUS lender, the number 3 Freddie Mac seller-servicer., and the number 6 HUD/FHA originator, based in 2011 numbers on a combined basis.
If GSE reform legislation is actually passed, having the scale that [the CW acquisition] will create positions Walker & Dunlop very, very well to deal with what the future might look like. Some of our smaller competitors will have a real challenge in creating new sources of financing, should anything happen to Fannie and Freddie.
The banks will step in and do significantly more lending, so having a more scaled platform -- the two companies last year did $7.7 billion of originations -- provides an access to deal flow that many of the capital providers might want. That positions us very well to continue to be a significant capital provider to the multifamily marketplace -- almost regardless of what happens to Fannie and Freddie.
Will this transaction help address the market's concerns about Walker & Dunlop’s large percentage of business with the agencies?
I wouldn’t say the deal by itself gets us there. By doing this deal, we have additional scale with the GSEs. Clearly, if there was significant reform to Fannie and Freddie, we would adapt to that. But our scale gives us a much bigger seat at the table. We have a major voice in that discussion if something were to happen to the multifamily lending operations of Fannie and Freddie. If I’m an investor, I believe this deal de-risks the Fannie and Freddie reform significantly for Walker & Dunlop. But we still need to go out and create the capital.
Are there any plans to expand the platform, or will you focus on integration in the short to mid term?
We have a lot on our plate to integrate the two firms. We can’t really begin until we actually close on the transaction [in September]. Between now and the closing, there will be a lot of work on integration planning, and how to bring these two firms together.