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Walker and Dunlop‘s (NYSE: WD) The core business may be misunderstood, but it continues to do well. In this clip from “The Rank” on Motley Full LifeAnd the Recorded July 27Fool.com contributors Matt Frankel and Jason Hall examine the enormous growth potential of the commercial real estate financial services company and its stock.

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Matt Frank: I mentioned it Walgreens (NASDAQ: WBA)Investors are in show mode, like Prove It, Prove You Can Do It. Walker Dunlop has proven it. They’ve been 10 Biggers since their IPO, which was only in 2010.

Jason Hall: Nearly a hundred years of business and an IPO just under Willie, right?
Frankel: yes. Just going public in 2010, he took office, I would say as it was two years ago. Amazing work. They have gained a huge stake in creating commercial loans, servicing commercial mortgages, and they are real estate brokers. They have just started an investment banking division.
I guess kinda like how you said live oak (NASDAQ: LOB) Small business focus. Because of that, it’s a misunderstood bank. I feel Walker & Dunlop has been misunderstood because a lot of investors associate commercial real estate with residential real estate. It’s really not the same.
Hall: The multiplicity of families is like a hunk. This is a big part of what they do.
Frankel: The multiplicity of families is their great focus.
Hall: the correct. People hear multiple families, they think it’s residential, and they think interest rates go up and it’s only going to be bad from here. This is a misunderstanding of their business.
Frankel: Commercial loans don’t really follow the residential mortgage market very much. The demand for commercial real estate does not necessarily follow housing. We’ve talked a few times about the short supply of homes on the market, and things like that. There is no shortage of demand for commercial real estate, and there is no shortage of development. It’s a different market.

I feel like the stock has been misunderstood. I feel 32% don’t deserve a haircut I’ve had recently. This is still a small VC company, and I don’t think many people realize that. I think it has the potential to dominate the field of commercial real estate finance. Because I can’t name another pure play that has the same potential and success so far.
Hall: Yes, and that’s interesting to me because as much as it has grown, it still has a high single-digit market share for what it does. I think there is still plenty of room to continue consolidation and engagement, even in reasonably low-growth businesses. This is not a high-growth business, but its ability to be involved in the things it already does while continuing to expand.
I think the asset management business can get really big. Investment banking, I don’t think they want to make that too big, but I think it could be a really good business and a really profitable business for them. I think I bought less than or about 12 times the earnings. It’s about 12.7 times the gain now, but that’s just a great valuation.
I think it’s all thrown in there with all the elements of residential real estate. I just think that’s a misunderstanding, that people think of it like a single family home lender. it’s not. All the rhythm and cycles that the industry in which you operate is exposed are completely unrelated.
Frankel: To put a number with what I just said, they have a 9% stake in multi-family lending and they are #1, so it’s a very fragmented market. They have less than 2% of the rest of the commercial loan market, which they are entering. I would say don’t sleep on this investment bank because it is focused on affordable housing, which is a huge need right now. They specialize in distributing tax breaks, with an acquisition they just made.
We have a minute left, so I can’t really explain precisely what this is. [laughs] But it’s an affordable housing game and I can see that getting bigger. I love these five, and I love these investments. They get my stamp of approval if that matters to you at all.

Jason Hall holds positions at Live Oak Bancshares, Walgreens Boots Alliance, and Walker & Dunlop. Matthew Frankel, CFP® has no position in any of the listed stocks. Motley Fool has positions in and recommends Live Oak Bancshares and Walker & Dunlop. The Motley Fool recommends Walker & Dunlop, Inc. Motley Fool has a disclosure policy.

The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.

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