While Walker & Dunlop has benefited from positive market fundamentals and a growing financial market, we have grown far faster than the market.
William M. Walker, Chairman & CEO
DEAR FELLOW SHAREHOLDERS
2017 was a record year across the board for Walker & Dunlop. The investments we have made to grow our company resulted in expansion of our geographic footprint, broadening of our client base, record revenues, and the most profitable year in the company's 80-year history. We delivered double digit growth in diluted earnings per share for the fourth consecutive year, while dramatically increasing our market share of total multifamily lending in the United States from 5.2% in 2016 to 7.3% at the end of 20171. These incredible accomplishments reflect the talent of our team, the strength of our brand, and the broad reputation we have built in the marketplace as one of the very best commercial real estate finance companies in the country.
As we have scaled the company, we have become increasingly profitable. Operating margin has steadily increased from 21% in 2013 to 33% in 2017, reflecting our consistent growth in revenues and disciplined approach to expense management. Return on equity ("ROE") for 2017 was 31%. Excluding the positive fourth quarter impact of the Tax Cuts and Jobs Act, 2017 ROE was 23%, compared to 21% in 2016. ROE above 20% reflects the capital-light nature of our core lending business, and year-on-year growth from 21% to 23% is even more noteworthy given our stockholders' equity swelled by almost $200 million during the year. The final financial metric to note is adjusted EBITDA2, which has grown tenfold (from $21 million to $201 million) since our IPO seven years ago. The cash generating power of Walker & Dunlop's $75 billion3 servicing portfolio has contributed to the dramatic growth in adjusted EBITDA. With 87% of the loans in our portfolio prepayment protected, and the average life of those loans at 10 years, this annuity stream will continue for many years to come. Due to the combination of our positive outlook for the industry going forward, and Walker & Dunlop's servicing-rich business model, we increased our target operating margin for 2018 to a range of 30% to 35%, and increased our target ROE to a range of 20% to 25%. We have also set a goal to deliver double digit growth in both income from operations and adjusted EBITDA in 2018, which will build on our well-established track record of double digit growth and profitability on an annual basis.
While Walker & Dunlop has benefited from positive market fundamentals and a growing financing market, we have grown far faster than the market. In 2017, the overall commercial real estate financing market grew by 15%, while W&D grew loan originations by 49%. Similarly, the multifamily financing market grew by 3% in 2016, while W&D grew multifamily originations by 43%1. This dramatic outperformance is due to the team of outstanding financing professionals we have at W&D, the brand we have built, and the client base we have cultivated by consistently exceeding expectations.
We continue to see strong fundamentals supporting the commercial real estate market, and multifamily specifically, that will benefit our core financing business. The United States has increasingly become a renter nation, with 35.8% of households renting at the end of 2017, as a desire for convenience and flexibility has increased the propensity to rent across all generations. At the same time, rising home prices—from a median price of $221,800 in 2010 to $323,200 in 20174—along with rising interest rates, makes affording a new home more difficult for most Americans. Finally, due to a limited supply of starter homes, low wage growth, and growing student debt burdens, many Americans are renters out of necessity, not choice. It is our view that these demographic trends will persist, and that barring any dramatic change to immigration or housing policy, the fundamentals of multifamily housing will remain extremely strong.
We have established a growth plan for the next three years called Vision 2020, and it is very simple: increase our volume of financings and investment sales transactions by recruiting highly talented bankers and brokers to Walker & Dunlop, and then giving them more products and services to sell. The first part of the strategy involves growing the number of bankers and brokers at W&D by at least 10% per year, which we expect will grow our annual financing volume to $30-to-$35 billion by 2020, and our investment sales volume to $8-to-$10 billion per year. If we are successful growing our annual transaction volumes to these levels, our servicing portfolio will grow to over $100 billion, generating even more annuity-like cashflows. To add products and services that our bankers and brokers can sell, we have established a goal of building an $8-to-$10 billion asset management business. With capital under management, we will be able to provide our bankers and brokers with the types of capital solutions that their customers need and want. This type of business perfectly leverages Walker & Dunlop's current distribution network of 28 offices and 143 bankers and brokers across the country. If we are successful growing transaction volumes and raising capital to feed into our distribution network, Walker & Dunlop will generate over $1 billion in annual revenues by year-end 2020 while maintaining the strong financial metrics I mentioned previously.
I am truly amazed at what the Walker & Dunlop team has accomplished since we went public in 2010. We have a demonstrable track record of establishing ambitious financial, operational, and strategic objectives and executing on them year after year. This is due to the people at Walker & Dunlop and our culture of exceeding expectations and outperforming. I want to congratulate everyone at Walker & Dunlop on a fantastic 2017 and thank our shareholders for their trust and confidence in our company and team.
William M. Walker, Chairman & CEO
(1) Mortgage Bankers Association Commercial/Multifamily Real Estate Finance Forecast (February 2018)
(2) Adjusted EBITDA is not calculated in accordance with GAAP. For a reconciliation of adjusted EBITDA to GAAP net income, refer to the appendix of the shareholder letter
(3) As of February 1, 2018
(4) U.S. Census Bureau
This shareholder letter contains forward-looking statements within the meaning of federal securities law. Please see page 3 of our 2017 Form 10-K filed with the Securities and Exchange Commission for additional information regarding forward-looking statements.
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