Marcus & Millichap, Inc. (MMI) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the accompanying notes thereto included elsewhere herein. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those factors set forth under Item 1A – “Risk Factors” and Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview – Factors Affecting Our Business” of this Annual Report on Form 10-K.

Overview

Our Business

We are a leading national brokerage firm specializing in commercial real estate investment sales, financing, research, and advisory services. We have been the top commercial real estate investment broker in the United States based on the number of investment transactions for more than 15 years. As of December 31, 2022, we had 1,904 investment sales and financing professionals that are primarily exclusive independent contractors operating in 81 offices, who provide real estate brokerage and financing services to sellers and buyers of commercial real estate. We also offer market research, consulting, and advisory services to our clients. During the year ended December 31, 2022, we closed 12,272 investment sales, financing and other transactions with total sales volume of approximately $86.3 billion. During the year ended December 31, 2021, we closed 13,255 investment sales, financing, and other transactions with total sales volume of approximately $84.4 billion.

We generate revenue by collecting real estate brokerage commissions upon the sale, and fees upon the financing of commercial properties and by providing consulting, advisory, and other real estate services. Real estate brokerage commissions are typically based upon the value of the property, and financing fees are typically based upon the size of the loan. During the year ended December 31, 2022, approximately 90% of our revenue was generated from real estate brokerage commissions, 9% from financing fees, and 1% from other real estate related services.

Acquisitions

We continue to pursue opportunities to increase our market presence through the execution of our growth strategies by targeting markets based on population, employment, level of commercial real estate sales, inventory and competitive opportunities where we believe the markets will benefit from our commercial real estate investment sales, financing, research, and advisory services.

Factors Affecting Our Business

Our business and our operating results, financial condition, and liquidity are significantly affected by the number and size of commercial real estate investment sales and financing transactions that we close in any period. The number and size of these transactions are affected by our ability to recruit and retain investment sales and financing professionals, identify and contract properties for sale, and identify those that need financing and refinancing. We principally monitor the commercial real estate market through four factors, which generally drive our business. The factors are the economy, commercial real estate supply and demand, capital markets, and investor sentiment and investment activity.

The Economy

Our business is dependent on economic conditions within the markets in which we operate. Changes in the economy on a global, national, regional, or local basis can have a positive or negative impact on our business. Economic indicators and projections related to job growth, unemployment, interest rates, retail spending, and consumer confidence trends can

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have a positive or negative impact on our business. Overall market conditions, including global trade, interest rate changes, inflation, and job creation, can affect investor sentiment and, ultimately, the demand for our services from investors in real estate.

The close of 2022 brought positive signs of receding inflationary pressure as pressure on the Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Consumption Expenditure (PCE) readings all abated. All inflation measures remain well above the Federal Reserve’s target rates, but their rate of growth has eased in recent months, supporting the Federal Reserve’s ability to moderate their rate increase regimen. Various economic indicators continue to send mixed signals about the near-term economic outlook. The two best known signals of an ensuing recession remain in contradiction. The treasury rate yield curve inverted early in the fourth quarter last year and short-term treasury rates remain higher than longer term rates signaling a possible downturn, but the unemployment rate is at a 54-year low of 3.4% as of January 2023 indicating labor market strength. Other measures are mixed as well. The manufacturing outlook index is delivering contraction readings, while job creation, inflation-adjusted personal consumption and other metrics suggest growth. This inconsistency among indicators has confounded economist forecasts for 2023, resulting in a variety of contradictory outlooks. Within that context, many commercial real estate investors stepped to the sidelines in the second half of 2022 to await clarity and a stabilization of interest rates.

Looking forward into 2023, economist forecasts of economic growth for the year range between -1.4% and +2.0% with a consensus of +0.5% per the January 10 Blue Chip economist survey. This range suggests that the economy may experience a mild recession or could achieve a soft landing. Regardless, the consensus suggests the U.S. economy will remain relatively flat in the coming year. Given the Federal Reserve’s restrictive monetary policies, it is likely that most commercial real estate investors would perceive even mild growth in 2023 positively. Sustained job creation in the coming year, together with rising wages and a deep well of cash savings have the potential to sustain demand for multifamily housing as well as industrial and retail space demand. Positive commercial real estate fundamentals will be a key ingredient supporting commercial real estate investment activity.

Commercial Real Estate Supply and Demand

Our business is dependent on the willingness of investors to invest in or sell commercial real estate, which is affected by many factors beyond our control. These factors include the supply of commercial real estate, coupled with user demand for these properties, and the performance of real estate assets, when compared with other investment alternatives, such as stocks and bonds.

Fourth quarter national average occupancy levels decreased in apartment, office, and industrial properties, reflecting elevated uncertainty surrounding the economy and interest rate climate. Retail space demand remained positive, pushing the occupancy rate back into alignment with pre-pandemic levels. Elevated apartment and industrial construction levels have been a significant factor weighing on overall occupancy, but concerns surrounding high inflation and a potential recession have restrained both household formation and space leasing commitments. Below-average consumer and business sentiment suggest that demand will remain below normal over the short term, but a recent uptick in sentiment and reduced rate increases by the Federal Reserve have the potential to reinvigorate space demand in 2023. Rent growth has been tempered by these same economic and monetary policy forces, moderating the aggressiveness of investment buyer underwriting. As a result, the bid-ask spread between buyers and sellers has widened and fourth quarter commercial real estate transactions activity was significantly reduced from the record heights achieved in 2021. Economic crosscurrents and continuing questions about the Federal Reserve’s rate policies have the potential to create additional hurdles for investors in 2023, but should increased evidence of an economic “soft landing” emerge, pent-up investor demand could surface.

Capital Markets

Credit and liquidity issues in the financial markets have a direct impact on the flow of capital to the commercial real estate market. Real estate purchases are often financed with debt, and as a result, credit and liquidity impact transaction activity and prices. Movements of interest rates in one direction, whether increasing or decreasing, could adversely or positively affect the operations and income potential of commercial real estate properties, as well as lender and equity underwriting for real estate investments. These changes directly influence investor demand for commercial real estate investments.

In its effort to battle inflation last year, the Federal Reserve initiated its most aggressive interest rate increase cycle since 1980. The Federal Reserve appears to have completed the heavy lifting of raising the Federal Overnight Rate by 425 basis points in 2022 and has begun to signal a potential shift to a fine-tuning strategy in 2023. On February 1, 2023, the

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Federal Reserve limited its rate increase to 25 basis points. While the Federal Reserve indicated that additional rate increases will likely occur in 2023, the smaller rate increase alleviated some pressure on commercial real estate lenders. The combination of a comparatively low 10-year treasury rate, together with an expectation of a slower pace of Federal Reserve movements in 2023 allows commercial real estate lenders to tighten their safety margins and to reduce their rates. Lending liquidity remains constrained compared to early 2022, but the lending climate is improving with rates edging lower and capital availability increasing, potentially boosting commercial real estate transactional liquidity as the year progresses.

Investor Sentiment and Investment Activity

We facilitate investors' buying, selling, and financing properties in order to generate commissions. Investors’ desires and need to engage in real estate transactions are dependent on many factors that are beyond our control. The economy, supply and demand for properly positioned properties, available credit, and market events impact investor sentiment and, therefore, transaction velocity. In addition, our private clients, who make up the largest source of revenue, are often motivated to buy, sell and/or refinance properties due to personal circumstances, such as death, divorce, partnership breakups, and estate planning.

Commercial real estate sales activity declined sharply in the fourth quarter of 2022 as the cost of debt capital rose above commercial real estate yields in many instances. The disconnect between sellers seeking prices similar to the beginning of 2022, before the Federal Reserve increased interest rates by more than 425 basis points, and buyers contending with the higher borrowing costs slowed activity. This disconnect between buyers and sellers remains a headwind to transaction activity, but as the Federal Reserve slows its rate increases, the market may recalibrate and navigate a price discovery process. In addition, as economic clarity emerges and the risk of a recession balances out against the prospect of a “soft landing,” investors may have increased comfort deploying capital. Office properties, particularly those in the urban core, face the greatest uncertainty, while more inflation-resistant properties such as apartments, self-storage and hotels, particularly in growth markets, are better positioned to sustain buyer interest. Sales of “defensive” assets such as single-tenant net lease properties backed by high credit tenants and medical office assets have also maintained buyer interest. Ultimately, the market velocity will be dictated by a combination of the economic outlook, Federal Reserve action, interest rates, and the narrowing of the buyer/seller expectation gap. If the Federal Reserve raises rates minimally throughout the year and the economy avoids a significant recession, we believe commercial real estate sales activity should return toward its historical norm in 2023.

Seasonality

Our real estate brokerage commissions and financing fees have tended to be seasonal and, combined with other factors, can affect an investor’s ability to compare our financial condition and results of operations on a quarter-by-quarter basis. Historically, this seasonality has generally caused our revenue, operating income, net income, and cash flows from operating activities to be lower in the first half of the year and higher in the second half of the year, particularly in the fourth quarter. The concentration of earnings and cash flows in the last six months of the year, particularly in the fourth quarter, is due to an industry-wide focus of clients to complete transactions towards the end of the calendar year. This historical trend can be disrupted both positively and negatively by major economic events, political events, natural disasters or pandemics such as the COVID-19 pandemic, which may impact, among other things, investor sentiment for a particular property type or location, volatility in financial markets, current and future projections of interest rates, attractiveness of other asset classes, market liquidity and the extent of limitations or availability of capital allocations for larger property buyers, among others. Private client investors may accelerate or delay transactions due to personal or business-related reasons unrelated to economic events. In addition, our operating margins are typically lower during the second half of each year due to our commission structure for some of our senior investment sales and financing professionals. These senior investment sales and financing professionals are on a graduated commission schedule that resets annually, pursuant to which higher commissions are paid for higher sales volumes. During the year ended December 31, 2022, seasonal fluctuations were disrupted by changes in overall market conditions and rising interest rates, and going forward our historical pattern of seasonality may or may not continue to the same degree experienced in prior years.

Operating Segments

We follow the guidance for segment reporting, which requires reporting information on operating segments in interim and annual financial statements. Substantially all of our operations involve the delivery of commercial real estate services to our customers including real estate investment sales, financing and consulting and advisory services.

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Management makes operating decisions, assesses performance and allocates resources based on an ongoing review of these integrated operations, which constitute only one operating segment for financial reporting purposes.

Key Financial Measures and Indicators

Revenue

Our revenue is primarily generated from our real estate investment sales business. In addition to real estate brokerage commissions, we generate revenue from financing fees and from other revenue, which are primarily comprised of consulting and advisory fees.

Because our business is transaction oriented, we rely on investment sales and financing professionals to continually develop leads, identify properties to sell and finance, market those properties, and close the sale timely to generate a consistent flow of revenue. While our sales volume is impacted by seasonality factors, the timing of closings is also dependent on many market and personal factors unique to a particular client or transaction, particularly clients transacting in the $1 million to $10 million private client market segment. These factors can cause transactions to be accelerated or delayed beyond our control. Further, commission rates earned are generally inversely related to the value of the property sold. As a result of our expansion into the middle and larger transaction market segments, we have seen our overall commission rates fluctuate from period-to-period as a result of changes in the relative mix of the number and volume of investment sales transactions closed in the middle and larger transaction market segments as compared to the $1 million to $10 million private client market segment. These factors may result in period-to-period variations in our revenue that differ from historical patterns.

A small percentage of our transactions include retainer fees and/or breakage fees. Retainer fees are credited against a success-based fee paid upon the closing of a transaction or a breakage fee. Transactions that are terminated before completion will sometimes generate breakage fees, which are usually calculated as a set amount or a percentage of the fee we would have received had the transaction closed.

Real Estate Brokerage Commissions

We earn real estate brokerage commissions by acting as a broker for commercial real estate owners seeking to sell or investors seeking to buy properties. Revenue from real estate brokerage commissions is typically recognized at the close of escrow.

Financing Fees

We earn financing fees by securing financing on purchase transactions or by securing refinancing of our clients’ existing mortgage debt. We recognize financing fee revenue when the loan closes and we have no remaining significant obligations for performance in connection with the transaction.

To a lesser extent, we also earn equity advisory services, loan sales, and ancillary fees associated with financing activities. We no longer hold any mortgage servicing rights, but prior to the third quarter of 2022, recognized mortgage servicing revenue upon the acquisition of a servicing obligation. We generated mortgage servicing fees through the provision of collection, remittance, recordkeeping, reporting, and other related mortgage servicing functions, activities, and services.

Other Revenue

Other revenue includes fees generated from consulting, advisory, and other real estate services performed by our investment sales professionals, as well as referral fees from other real estate brokers. Revenue from these services is recognized as the services are performed and completed.

Operating Expenses

Our operating expenses consist of cost of services, selling, general and administrative expenses and depreciation and amortization. The significant components of our expenses are further described below.

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Cost of Services

The majority of our cost of services expense is variable commissions paid to our investment sales professionals and compensation-related costs related to our financing activities. Commission expenses are directly attributable to providing services to our clients for investment sales and financing services. Most of our investment sales and financing professionals are independent contractors and are paid commissions; however, because there are some who are initially paid a salary and certain of our financing professionals are employees, costs of services also include employee-related compensation, employer taxes, and benefits for those employees. The commission rates we pay to our investment sales and financing professionals vary based on individual contracts negotiated and are generally higher for the more experienced professionals. Some of our most senior investment sales and financing professionals also have the ability to earn additional commissions after meeting certain annual financial thresholds. These additional commissions are recognized as cost of services in the period in which they are earned. Payment of a portion of these additional commissions are generally deferred for a period of one to three years, at our election, and paid at the beginning of the second and fourth calendar year. Cost of services also includes referral fees paid to other real estate brokers where we are the principal service provider. Cost of services, therefore, can vary based on the commission structure of the independent contractors that closed transactions in any particular period.

Selling, General and Administrative Expenses

The largest expense component within selling, general and administrative expenses is personnel expenses for our management team and sales and support staff. In addition, these costs include facilities expenses (excluding depreciation and amortization), staff related expenses, sales, marketing, legal, telecommunication, network, data sources, transaction costs related to acquisitions, changes in fair value for contingent and deferred consideration, forgiveness of advances and loans issued to investment sales and financing professionals and other administrative expenses. Also included in selling, general and administrative are expenses for stock-based compensation to non-employee directors, employees, and independent contractors (i.e. investment sales and financing professionals) under the Amended and Restated 2013 Omnibus Equity Incentive Plan (“2013 Plan”) and the 2013 Employee Stock Purchase Plan (“ESPP”).

Depreciation and Amortization Expense

Depreciation expense consists of depreciation recorded on our computer software and hardware and furniture, fixtures, and equipment. Depreciation is recorded over estimated useful lives ranging from three to seven years for assets. Amortization expense consists of (i) amortization recorded on our mortgage servicing rights (“MSRs”) using the interest method over the period that servicing income is expected to be received and (ii) amortization recorded on intangible assets amortized on a straight-line basis using a useful life between one and seven years.

Other Income (Expense), Net

Other income (expense), net primarily consists of interest income, net gains or losses on our deferred compensation plan assets, realized gains and losses on our marketable debt securities, available-for-sale, foreign currency gains and losses, and other non-operating income and expenses.

Interest Expense

Interest expense primarily consists of interest expense associated with the stock appreciation rights (“SARs”) liability and our credit agreement.

Provision for Income Taxes

We are subject to U.S. and Canadian federal taxes and individual state and local taxes based on the income generated in the jurisdictions in which we operate. Our effective tax rate fluctuates as a result of the change in the mix of our activities in the jurisdictions we operate due to differing tax rates in those jurisdictions and the impact of permanent items, including principally compensation charges, qualified transportation fringe benefits, uncertain tax positions, meals and entertainment, and tax-exempt deferred compensation plan assets. Our provision for income taxes includes the windfall tax benefits and shortfall expenses, net, from shares issued in connection with our 2013 Plan and ESPP.

We record deferred taxes, net based on the tax rate expected to be in effect at the time those items are expected to be recognized for tax purposes.

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Results of Operations

Following is a discussion of our results of operations for the years ended December 31, 2022 and 2021. The tables included in the period comparisons below provide summaries of our results of operations. The period-to-period comparisons of financial results are not necessarily indicative of future results.

Key Operating Metrics

We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make strategic decisions. We also believe these metrics are relevant to investors’ and others’ assessment of our financial condition and results of operations. During the years ended December 31, 2022, 2021, and 2020, we closed more than 12,000, 13,200, and 8,900 investment sales, financing, and other transactions, respectively, with total sales volume of approximately $86.3 billion, $84.4 billion, and $43.4 billion, respectively. Such key metrics for real estate brokerage and financing activities (excluding other transactions) are as follows:

(1)Operating metrics calculated excluding certain financing fees not directly associated to transactions.

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Comparison of Years Ended December 31, 2022 and 2021

Below are key operating results for the year ended December 31, 2022 compared to the results for the year ended December 31, 2021 (dollars in thousands):

(1)Adjusted EBITDA is not a measurement of our financial performance under U.S. generally accepted accounting principles (“U.S. GAAP”) and should not be considered as an alternative to net income, operating income, or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non-GAAP Financial Measure.”

Revenue

Our total revenue was $1,301.7 million in 2022 compared to $1,296.4 million in 2021, an increase of $5.3 million, or 0.4%. Total revenue increased as a result of increases in financing fees and other revenue, as described below.

Real estate brokerage commissions. Revenue from real estate brokerage commissions decreased to $1,170.3 million in 2022 from $1,171.0 million in 2021, a decrease of $0.7 million, or 0.1%. While total sales volume increased by 0.9%, the average transaction size increased by 6.8% due to a larger proportion of transactions closed from the Middle Transaction Market segment. The total number of investment sales transactions decreased 5.6%.

Financing fees. Revenue from financing fees increased to $113.0 million in 2022 from $109.7 million in 2021, an increase of $3.3 million, or 3.0%. The increase was driven by a 10.5% increase in financing volume, partially offset by a seven basis points reduction in average commission rates due in part to fees from certain larger loan transactions. Financing volume increase was driven by a 27.6% increase in the average transaction size that was partially offset by a 13.4% decrease in the number of financing transactions.

Other revenue. Other revenue increased to $18.4 million in 2022 from $15.8 million in 2021, an increase of $2.6 million, or 16.7%. The increase was primarily driven by increases in consulting and advisory services during 2022, compared to 2021.

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Operating expenses

Our total operating expenses were $1,164.3 million in 2022 compared to $1,107.1 million in 2021, an increase of $57.2 million, or 5.2%. The increase was due to increases in cost of services, which are variable commissions paid to our investment sales professionals, and compensation-related costs in connection with our financing activities, selling, general and administrative costs and depreciation and amortization expense, as described below.

Cost of services. Cost of services increased to $850.9 million in 2022 from $840.2 million in 2021, an increase of $10.7 million, or 1.3%. Cost of services as a percent of total revenue increased to 65.4% for 2022 compared to 64.8% for 2021. These increases were primarily due to a higher proportion of transactions closed by our more senior investment sales and financing professionals, who earned additional commissions after meeting certain annual financial thresholds earlier in the year.

Selling, general and administrative expense. Selling, general and administrative expense in 2022 increased $44.9 million, to $300.0 million from $255.2 million in 2021. The increase was primarily due to increases in (i) compensation related costs, primarily driven by increases in staff salaries and stock-based compensation; (ii) business development, marketing, and other support related to the long-term retention of our sales and financing professionals; and (iii) net change in value of contingent and deferred consideration in connection with our acquisition activities. These increases were partially offset by decreases in (i) bonus accruals and (ii) legal costs.

Depreciation and amortization expense. Depreciation and amortization expense increased to $13.4 million in 2022 from $11.7 million in 2021, an increase of $1.7 million, or 14.4%, principally related to additional amortization of intangible assets related to recent acquisitions and additional amortization of mortgage servicing rights due to the cancellation notices received on certain servicing contracts.

Other income, net

Other income, net increased to $5.3 million in 2022 from $4.5 million in 2021. The increase was primarily driven by a $5.6 million increase in interest income on our investments in marketable debt securities at higher interest rates. This increase was partially offset by an unfavorable change in the carrying value of the assets held in the rabbi trust for $3.2 million and an unfavorable change in foreign currency losses of $1.1 million.

Interest expense

Interest expense increased to $0.7 million in 2022 from $0.6 million in 2021. The increase was primarily due to an increase in interest expense on the SARs liability due to higher interest rates partially offset by lower average principal outstanding.

Provision for income taxes

The provision for income taxes was $37.8 million for 2022 compared to $50.8 million in 2021, a decrease of $13.0 million, or (25.6)%. The effective tax rate for 2022 was 26.6%, compared with 26.3% in 2021. The increase in the effective tax rate was primarily due to the change in the relationship of permanent nondeductible items and other adjustments relative to income before provision for income taxes, partially offset by an increase in windfall tax benefits, net related to the settlement of stock-based awards.

Comparison of Years Ended December 31, 2021 and 2020

A discussion regarding our results of operations for the year ended December 31, 2021 compared to the results for the year ended December 31, 2020 can be found under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 1, 2022, which is available on the SEC’s website at www.sec.gov.

Non-GAAP Financial Measure

In this Annual Report on Form 10-K, we include a non-GAAP financial measure, adjusted earnings before interest income/expense, taxes, depreciation and amortization, stock-based compensation and other non-cash items, or Adjusted EBITDA. We define Adjusted EBITDA as net income before (i) interest income and other, including net realized gains (losses) on marketable debt securities, available-for-sale and cash, cash equivalents, and restricted cash, (ii) interest

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expense, (iii) provision for income taxes, (iv) depreciation and amortization, (v) stock-based compensation, and (vi) non-cash MSR activity. We use Adjusted EBITDA in our business operations to evaluate the performance of our business, develop budgets, and measure our performance against those budgets, among other things. We also believe that analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate our overall operating performance. However, Adjusted EBITDA has material limitations as a supplemental metric and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. We find Adjusted EBITDA to be a useful management metric to assist in evaluating performance, because Adjusted EBITDA eliminates items related to capital structure, taxes and non-cash items. In light of the foregoing limitations, we do not rely solely on Adjusted EBITDA as a performance measure and also consider our U.S. GAAP results. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income, or any other measures calculated in accordance with U.S. GAAP. Adjusted EBITDA is not calculated in the same manner by all companies and may not be comparable to other similarly titled measures used by other companies. A reconciliation of the most directly comparable U.S. GAAP financial measure, net income, to Adjusted EBITDA is as follows (in thousands):

(1)Other includes net realized gains (losses) on marketable debt securities, available-for-sale.

(2)Non-cash MSR activity includes the assumption of servicing obligations.

(3)The decrease in Adjusted EBITDA for the year ended December 31, 2022 compared to the same period in 2021 is primarily due to a higher proportion of selling, general and administrative expenses compared to total revenue.

Liquidity and Capital Resources

Our primary sources of liquidity are cash, cash equivalents, and restricted cash cash flows from operations, marketable debt securities, available-for-sale, and, if necessary, borrowings under our credit agreement. In order to enhance yield to us, we have invested a portion of our cash in money market funds and fixed and variable income debt securities in accordance with our investment policy approved by the Board of Directors. Certain of our investments in money market funds may not maintain a stable net asset value and may impose fees on redemptions and/or gating fees. To date, the Company has not experienced any restrictions or gating fees on its ability to redeem funds from money market funds. Although we have historically funded our operations through operating cash flows, there can be no assurance that we can continue to meet our cash requirements entirely through our operations, cash, cash equivalents, and restricted cash, proceeds from the sale of marketable debt securities, available-for-sale, or availability under our credit agreement.

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Cash Flows

Our total cash, cash equivalents, and restricted cash balance decreased by $146.3 million to $235.9 million at December 31, 2022, compared to $382.1 million at December 31, 2021. The following table sets forth our summary cash flows for the years ended December 31, 2022, 2021, and 2020 (in thousands):

Operating Activities

2022 Compared to 2021. Cash flows provided by operating activities were $13.6 million in 2022 compared to $255.9 million in 2021. The $242.3 million decrease in cash flows from operating activities during 2022 compared to 2021 was primarily due to increased operating expenses as discussed above, an increase in advances and loans to our investment sales and financing professionals, a higher amount of bonuses and deferred compensation and commissions paid in 2022 related to outperformance in 2021, and an increase in estimated income tax payments.

Investing Activities

2022 Compared to 2021. Cash flows used in investing activities were $54.0 million in 2022 compared to $108.4 million in 2021. The $54.4 million decrease in cash flows used in investing activities for 2022 compared to 2021 was primarily due to a net decrease of $72.2 million in net cash used to purchase securities in 2022 compared to the same period in 2021, partially offset by $12.5 million paid in 2022 for the acquisition of a business that did not occur in 2021, and an increase of $4.8 million in purchases of property and equipment in 2022 compared to 2021.

Financing Activities

2022 Compared to 2021. Cash flows used in financing activities were $105.6 million in 2022 compared to $5.9 million in 2021. The $99.7 million additional cash flow used in financing activities for 2022 was primarily due to the payment of $60.4 million of dividends and $29.0 million in stock repurchases in 2022, which did not occur in 2021 and an increase of $6.4 million of taxes paid related to net share settlement of stock-based awards due to settlement of Deferred Stock Units. See Note 11 – “Stock-Based Compensation Plans” of our Notes to Consolidated Financial Statements for additional information.

Liquidity

We believe that our existing balances of cash, cash equivalents, and restricted cash, cash flows expected to be generated from our operations, proceeds from the sale of marketable debt securities, available-for-sale, and borrowings available under the Credit Agreement (defined below) will be sufficient to satisfy our operating requirements for at least the next 12 months. If we need to raise additional capital through public or private debt or equity financings, strategic relationships, or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could prevent us from funding acquisitions or otherwise financing our growth or operations. In addition, our SARs agreements have provisions which could accelerate repayment of outstanding principal and accrued interest and impact our liquidity. As of December 31, 2022, cash, cash equivalents, and restricted cash and marketable debt securities, available-for-sale, aggregated $557.9 million, and we had $59.5 million of borrowing capacity under our credit agreement.

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Credit Agreement

We have a Credit Agreement with Wells Fargo Bank, National Association for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of our domestic subsidiaries and matures on June 1, 2025 (the “Credit Agreement”). See Note 15 – “Commitments and Contingencies” of our Notes to Consolidated Financial Statements for additional information on the Credit Agreement.

Off Balance Sheet Arrangements

The Company, in connection with the Strategic Alliance with MTRCC,, has agreed to provide loan opportunities that may be funded through MTRCC’s agreement with Fannie Mae, which requires MTRCC to guarantee a portion of each funded loan. On a loan-by-loan basis, the Company, at its option, can agree to assume a portion of MTRCC guarantee obligation of loan opportunities presented to and closed by MTRCC. As of December 31, 2022, the Company has agreed to a maximum aggregate guarantee obligation of $55.7 million relating to loans with an unpaid balance of $334.0 million. The maximum guarantee obligation is not representative of the actual loss we would incur. The Company would be liable for this amount only if all of the loans for which it is providing a guarantee to MTRCC were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement. The Company records a loan-loss obligation and is required to provide cash collateral to MTRCC for this obligation.

Material Cash Requirements

The following table summarizes current and long-term material cash requirements as of December 31, 2022, which we expect to fund primarily with operating cash flows (in thousands):

(1)See Note 4 – “Operating Leases” of our Notes to the Consolidated Financial Statements.

(2)Forecasted principal payments are based on each participant’s estimated retirement age and current contractual interest rate of 3.630% as of January 1, 2022 and reflect required payments that resulted from the retirement of certain executives. See Note 7 – “Selected Balance Sheet Data” of our Notes to the Consolidated Financial Statements.

(3)Includes short-term and long-term deferred commissions payable. See Note 7 – “Selected Balance Sheet Data” of our Notes to the Consolidated Financial Statements.

(4)Represents current estimated payouts for participants currently receiving payments based on their elections at the time of deferral. We hold assets in a rabbi trust of $9.6 million to settle outstanding amounts when they become due. Amounts assume no increase or decrease in the liability due to future returns or losses. See Note 7 – “Selected Balance Sheet Data” of our Notes to the Consolidated Financial Statements.

(5)Relates to contingent and deferred consideration in connection with our business acquisitions. See Note 6 – “Acquisitions, Goodwill and Other Intangible Assets” and Note 9 – “Fair Value Measurements” of our Notes to the Consolidated Financial Statements.

(6)Relates to amounts that may be advanced to sales and financing professionals and uncertain tax positions. See Note 12 – “Income Taxes” and Note 15 – “Commitments and Contingencies” of our Notes to the Consolidated Financial Statements.

(7)Amounts in Other represent amounts where payments are dependent on future events, which may occur at any time from less than 1 year to more than 5 years and relates to our deferred compensation liability and uncertain tax positions. Payments for deferred compensation liability are based on the participants’ elections at the time of deferral

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and may not begin before separation from service. The net liability for uncertain tax positions may be payable by us in the future. The ultimate resolution depends on many factors and assumptions; accordingly, we are not able to reasonably estimate the timing of such payments, if any.

Other than operating expenses, including those accrued and payable as December 31, 2022, cash requirements for 2023 are expected to consist primarily of capital expenditures for the future acquisitions, if any, payment of dividends, payments for stock repurchases, and advances to our investment sales and financing professionals.

Inflation

Our commissions and other variable costs related to revenue are primarily affected by real estate market supply and demand, which may be affected by uncertain or changing economic and market conditions, including inflation/deflation arising in connection with and in response to various macroeconomic factors and impact of rising interest rates on the broader economy.

The annual inflation rate in the U.S. increased to 9.1% in June 2022, the highest annual inflation rate since November 1981, but decreased to 6.5% in December 2022. As a result, during 2022, the Federal Reserve increased the federal funds rate by 425 basis points and indicated its intention to continue to increase interest rates in an effort to combat inflation, which had an adverse impact on commercial real estate transactions in the second half of 2022. Inflation has increased the wages paid to our employees and independent contractors. Furthermore, our clients are also affected by inflation and rising interest rates. A significant and continued increase in interest rates and inflation would be expected to have a negative impact on client demand for commercial real estate.

Critical Accounting Policies; Use of Estimates

We prepare our financial statements in accordance with U.S. GAAP. In applying many of these accounting principles, we make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenue, and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and our actual results may change based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.

We believe that the critical accounting policies discussed below involve a greater degree of judgment or complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. See the notes to our consolidated financial statements for a summary of our significant accounting policies.

Income Taxes

We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to (i) differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and (ii) operating losses and tax credit carryforwards. We measure existing deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to have temporary differences realized or settled. We recognize in the provision for income taxes, the effect on deferred tax assets and liabilities of a change in tax rates in the period that includes the enactment date. We periodically evaluate deferred tax assets to assess whether it is likely that the deferred tax assets will be realized. In determining whether a valuation allowance is required, we consider the timing of deferred tax reversals, current year taxable income, and historical performance. Valuation allowances are provided against deferred tax assets when it is more-likely-than-not that some portion or all of the deferred tax asset will not be realized. Our valuation allowance is related principally to losses incurred in our Canadian operations. Future results of operations of the Canadian business will impact valuation allowances in the future.

Due to the nature of our business, which includes activity in the U.S. and Canada, incorporating numerous states and provinces as well as local jurisdictions, our tax position can be complex. As such, our effective tax rate is subject to changes as a result of fluctuations in the mix of our activity in the various jurisdictions in which we operate including changes in tax rates, state apportionment, tax related interest and penalties, valuation allowances and other permanent items, including net windfalls and shortfalls related to stock-based compensation. Calculating some of the amounts

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involves a high degree of judgment. Our state taxes, net of federal benefit, has ranged from 4.3% to 5.0% over the past 3 years.

We evaluate our tax positions quarterly. The threshold for recognizing the benefits of tax return positions in the financial statements is “more likely than not” to be sustained by the taxing authority and requires measurement of a tax position meeting the more-likely-than-not criterion, based on the largest benefit that is more than 50% likely to be realized. We assess our inventory of tax positions with respect to all applicable income tax issues for all open tax years (in each respective jurisdiction) and determine whether uncertain tax positions are required to be recognized in our consolidated financial statements.

The above factors create volatility in our effective tax rate from quarter to quarter and have caused our effective tax rates to range from 26.3% to 27.8% over the past three years.

We recognize interest and penalties incurred as income tax expense. See Note 12 – “Income Taxes” of our Notes to the Consolidated Financial Statements for additional information.

Leases

Our leases consist of purpose built-out office space, which reverts to the lessor upon termination of the lease and operating leases for autos. We determine if an arrangement is a lease at inception. Right-of-use assets (“ROU assets”) represent our right to use an underlying asset for the lease term and lease liabilities represent our contractual obligation to make lease payments under the lease. Operating leases are included in operating lease ROU assets, non-current, and operating lease liabilities current and non-current captions in the consolidated balance sheets.

Operating lease ROU assets and liabilities are recognized on the commencement date based on the present value of lease payments over the lease term. Lease agreements may contain periods of free rent or reduced rent, predetermined fixed increases in the minimum rent and renewal or termination options, all of which add complexity and impact the determination of the lease term and lease payments to be used in calculating the lease liability. Certain facility leases provide for rental escalations related to increases in the lessors’ direct operating expenses. We use the implicit rate in the lease when determinable. As most of our leases do not have a determinable implicit rate, determining the rate to be used in our calculations is judgmental. We use an estimated incremental borrowing rate based on borrowing options under our credit agreement and apply a spread over treasury rates for the indicated term of the lease based on the information available on the commencement date of the lease. As a result, the incremental borrowing rate has and will continue to be impacted by market interest rates. The weighted average incremental borrowing rate was 3.9% in 2022 and 2.9% in 2021. Any payments for completed improvements, determined to be owed by the lessor, net of incentives received, are recorded as an increase to the ROU asset and considered in the determination of the lease cost.

We have lease agreements with lease and non-lease components, which are accounted for as a single lease component. Lease cost is recognized on a straight-line basis over the lease term. Variable lease payments consist of common area costs, insurance, taxes, utilities, parking, and other lease related costs, which are determined principally based on billings from landlords.

Investments in Marketable Debt Securities, Available-for-Sale

We maintain a portfolio of investments in a variety of fixed and variable rate debt securities, including U.S. treasuries, U.S. government sponsored entities, corporate debt, asset-backed securities, and other. We consider our investments in marketable debt securities to be available-for-sale, and accordingly, are recorded at their fair values. We determine the appropriate classification of investments in marketable debt securities at the time of purchase. Interest along with amortization of purchase premiums and accretion of discounts from the purchase date through the estimated maturity date, including consideration of variable maturities and contractual call provisions, are included in other income (expense), net in the consolidated statements of operations. See Note 5 – “Investments in Marketable Debt Securities, Available-for-Sale” of our Notes to the Consolidated Financial Statements for additional information. We typically invest in highly rated debt securities, and our investment policy generally limits the amount of credit exposure to any one issuer. The policy requires substantially all investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss and matching long-term liabilities.

Unrealized losses on our marketable securities, available-for-sale, fluctuate based on changes in market interest rates due the fixed interest rates of most of the securities. Unrealized losses aggregated $5,508,000 and $511,000 as of

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December 31, 2022 and 2021, respectively. We review our investment portfolio quarterly for all securities in an unrealized loss position to determine if an impairment charge or credit reserve is required. We exclude accrued interest from both the fair value and the amortized cost basis of marketable debt securities, available-for-sale, for the purposes of identifying and measuring an impairment. An investment is impaired if the fair value is less than its amortized cost basis. Impairment relating to credit losses is recorded through a reduction in the amortized cost of the security or an allowance for credit losses and credit loss expense (included in selling, general and administrative expense), limited by the amount that the fair value is less than the amortized cost basis. Impairment that has not been recorded as a credit loss is recorded through other comprehensive income (loss), net of applicable taxes. We made an accounting policy election to not measure an allowance for credit losses for accrued interest receivable. We evaluate write-off of accrued interest receivable by the major security-type level at the time credit loss exists for the underlying security.

Determining whether a credit loss exists requires a high degree of judgment, and we consider both qualitative and quantitative factors in making our determination. We evaluate our intent to sell, or whether we will more likely than not be required to sell, the security before recovery of its amortized cost basis. For all securities in an unrealized loss position, we evaluate, among other items, the extent and length of time the fair market value of a security is less than its amortized cost, time to maturity, duration, seniority, the financial condition of the issuer including credit ratings, any changes thereto and relative default rates and loss severity, leverage ratios, availability of liquidity to make principle and interest payments, performance indicators of the underlying assets, analyst reports and recommendations, and changes in base and market interest rates. If the qualitative and quantitative analysis is sufficient to conclude that an impairment related to credit losses does not exist, we typically do not perform further quantitative analysis to estimate the present value of cash flows expected to be collected from the debt security. Estimates of expected future cash flows are our best estimate based on past events, current conditions, and reasonable and supportable economic forecasts. To date, the Company has not recorded any credit losses or impairments on its portfolio of marketable securities, available for sale.

Contingent and Deferred Consideration

In connection with certain business acquisitions, the Company may enter into agreements to pay additional cash or other consideration based on the achievement of certain performance measures and/or service and time requirements. Contingent and deferred consideration in connection with the acquisition of a business is measured at fair value on the acquisition date and remeasured at fair value each reporting period thereafter until the consideration is settled, with changes in fair value recorded in selling, general and administrative expense in the consolidated statements of operations.

In its determination of fair value for contingent and deferred consideration, the Company uses judgment in determining the probability of achieving contractual EBITDA and other performance targets and the time frame in which the settlements will occur. Further, judgment is used in determining the appropriate current and future interest rates to apply in each situation. The Company estimated the probability of achievement of contractual EBITDA and other performance targets was between 0% to 100.0% based on each acquisition’s historical and estimated future performance and risk adjusted discount rates of between 6.0% to 7.0%, which resulted in a recorded fair value for the contingent consideration of $7.1 million and $9.3 million as of December 31, 2022, and 2021, respectively. The Company estimated the fair value of the deferred consideration using a discounted cash flow estimate using market rates, with the only remaining condition on such payments being the passage of time which resulted in a recorded fair value of $5.1 million and $9.8 million as of December 31, 2022, and 2021, respectively. The maximum undiscounted future settlements of contingent and deferred consideration was $21.3 million at December 31, 2022, and the Company is uncertain as to the extent of the volatility in the judgments and unobservable inputs will have on the ultimate settlement of these amounts in the foreseeable future.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 2 – “Accounting Policies and Recent Accounting Pronouncements” of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K. We do not believe any of the other accounting pronouncements listed in that note will have a significant impact on our business.