# Marcus & Millichap, Inc. (MMI) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from Marcus & Millichap, Inc.'s 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1578732/000119312522060189/d232794d10k.htm Accession: 0001193125-22-060189 Filing date: 2022-03-01 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/MMI/ All MD&A years: /company/MMI/mda/ Next year: /company/MMI/mda/fy2022/ (FY 2022) 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, 2021, we had 1,994 investment sales and financing professionals that are primarily exclusive independent contractors operating in 82 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, 2021, we closed 13,255 investment sales, financing and other transactions with total sales volume of approximately $84.4 billion. During the year ended December 31, 2020, we closed 8,954 sales, financing and other transactions with total sales volume of approximately $43.4 billion. We generate revenues 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, 2021, approximately 90% of our revenues were 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. COVID-19 We are closely monitoring the continuing impact of the COVID-19 pandemic on all aspects of our business and in the regions we operate. We continue to follow the local guidelines in cities where our offices are located, and all of our offices have remained open and accessible to our sales force within health protocols. All support functions to facilitate generating, processing, and closing business have continued through remote access and/or a hybrid work model. Our business was impacted by the COVID-19 pandemic during most of 2020, with the total number of transactions and total revenues declining 7.9% and 11.1%, respectively, in the year ended December 31, 2020 compared to the same period in 2019. During the year ended December 31, 2021, total number of transactions and total revenues increased 48.0% and 80.8%, respectively compared to the same period in 2020. While our total revenues were significantly above prior years’ levels, some uncertainty exists in our ability to sustain the growth rates experienced during the year ended December 31, 2021, which was positively impacted by the closing of deals that had been delayed or cancelled and investors’ heightened motivation to transact ahead of potential changes to the tax code and rising interest rates. 38 Table of Contents Due to the continuing uncertainty around the COVID-19 pandemic, we are unable to predict its potential impact on our future financial condition, results of operations and cash flows. These uncertainties include the scope, severity and duration of the pandemic; variants in the virus, vaccination rates, vaccine mandates and the effects thereof; expectation gaps among buyers and sellers on pricing and property operation, vulnerability to economic weakness and/or slow-down in the recovery; the direct and indirect economic effects of the actions taken by state and local governments to continue to contain the pandemic or mitigate its impact; and the impact of these and other factors on our employees, independent contractors, clients and potential clients. 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 a negative impact on our business. Economic indicators and projections related to job growth, unemployment, interest rates, retail spending and confidence trends can have a positive or a negative impact on our business. Overall market conditions, including global trade, interest rate changes and job creation, can affect investor sentiment and, ultimately, the demand for our services from investors in real estate. The U.S. economy expanded at a strong pace in the fourth quarter resulting in 5.7% GDP growth in 2021, the strongest full-year gain since 1984. That growth was supported by the addition of nearly 6.5 million jobs last year, the most jobs the U.S. has ever added in a single year. Thus far, 84% of the 22.4 million jobs lost during the pandemic have been recovered, and the country appears to be heading toward backfilling the employment lost during the pandemic by the end of 2022. However, COVID-19 variants, such as Omicron together with the significant labor shortage will likely affect employment additions this year and potentially place additional upward pressure on wages. Wage pressure will join rising housing costs, supply chain bottlenecks and shortages of raw materials, manufacturing inputs, building materials and products to drive inflationary pressure. Headline inflation has surpassed 7%, its highest level since 1982, and the Federal Reserve has signaled that it plans to combat inflation through monetary policy including the wind-down of quantitative easing and by raising the Federal Funds rate. While we believe commercial real estate investment is comparatively inflation resistant, the upward pressure on interest rates has the potential to affect investor activity. Much will depend on the magnitude of the interest rate rise relative to the still elevated level of capital liquidity targeting commercial real estate. The commercial real estate sector delivered a record volume of sales in the fourth quarter as investment capital flowed to these assets. Momentum remains positive entering 2022, but a higher than expected change in interest rates or eruption of geopolitical concerns into crisis could significantly impact the investor enthusiasm. 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. Space demand for most commercial property types gained momentum in 2021. At year-end, apartment and industrial vacancy rates were at record-low levels. Retail demand was positive in each quarter of the year and 39 Table of Contents office properties, still restrained by work-from-home protocols, delivered above average absorption through the second half of the year. Hotel properties, hard-hit in the early stages of the pandemic, have nearly returned to pre-pandemic occupancy levels while the average daily rate in December stood nearly 7% above the same month in 2019. At the same time, materials shortages and elevated building costs have restrained construction levels for all property types except apartments and industrial space, the two property types that could possibly see record deliveries in 2022. The mitigated supply risk for most property types is a positive factor supporting the commercial real estate outlook. Demand drivers continue to favor suburban areas and metros across the southeast and southwest that are benefiting from elevated in-migration. Although vacancy rates in major urban gateway markets like New York and San Francisco were disproportionately impacted by the health crisis, they generated positive commercial real estate space demand through the second half of 2021, supporting the belief that core urban areas could sustain a gradual recovery. The positive momentum of commercial real estate fundamentals has attracted increased capital to the sector, creating a particularly active bid climate for many marketed assets, especially those in markets demonstrating favorable growth metrics. The rising demand for assets has supported increased transaction flow and has placed upward pressure on prices at a macro level. 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. Changes in interest rates, as well as steady and protracted movements of interest rates in one direction, whether increases or decreases, 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 generally influence the demand of investors for commercial real estate investments. Both equity and debt capital remain very liquid, with financing broadly available for most property types in most markets. Lending institutions continue to compete to place capital, keeping borrowing rates low, but the recently accelerated taper of quantitative easing together with more hawkish messaging from the Federal Reserve have placed upward pressure on interest rates. With inflation at a 40-year high, we believe the Federal Reserve will remain committed to raising both short- and long-term interest rates. If rates rise nominally this year, we believe investors will stay aggressive in their bidding for assets, but if the Federal Reserve boosts rates significantly it could force investors to recalibrate their underwriting. That could potentially widen the expectation gap between buyers and sellers in 2022. The volume of capital competing for commercial real estate assets has been substantial as demonstrated by the record fourth quarter 2021 sales activity. Barring a major interest rate increase or another severe COVID-19 outbreak, we believe the pool of capital seeking placement in commercial real estate could sustain strong transaction activity well into 2022. Investor Sentiment and Investment Activity We rely on investors to buy and sell properties in order to generate commissions. Investors’ desires 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. Dollar volumes for commercial real estate investments reached record levels in 2021, outpacing the previous record set in 2019 by approximately 35%. The market activity reflects the elevated market liquidity, still low interest rates, strong commercial real estate performance trends in most property types, positive economic and demographic drivers and the perception in the market that commercial real estate has greater inflation resistance than most other investment classes. The demand for commercial real estate is especially acute in markets with strong growth trends. Buyers have aggressively competed for assets, driving record pricing for 40 Table of Contents some property types in select markets. Most property types have either fully recovered from the pandemic recession or are demonstrating positive recovery characteristics. Apartments and necessity retail including single-tenant, and industrial properties (e.g. fast food restaurants and drug stores), have performed well throughout the pandemic and therefore remain most favored by investors. Apartments and retail make up the majority of MMI’s revenue, and industrial is one of the fastest growing segments for the Company. The office property type faces the greatest uncertainty due to questions about corporate strategies for returning to the offices, particularly following the recent Omicron wave. Office pricing has become increasingly stable, but investors still favor suburban assets with long-term leases in place. Senior housing has also faced headwinds due to the disproportionate COVID-19 health risks faced by the elderly. Despite the uncertainty surrounding these two property segments, we believe the overall enthusiasm for commercial real estate investment as demonstrated by increasing transaction activity remains positive. 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. 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. 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 Revenues Our revenues are primarily generated from our real estate investment sales business. In addition to real estate brokerage commissions, we generate revenues from financing fees and from other revenues, 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 41 Table of Contents transaction, particularly clients transacting in the $1-$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-$10 million private client market segment. These factors may result in period-to-period variations in our revenues 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. Revenues from real estate brokerage commissions are 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 revenues at the time the loan closes, and we have no remaining significant obligations for performance in connection with the transaction. To a lesser extent, we also earn mortgage servicing revenue, mortgage servicing fees, equity advisory services, loan sales and ancillary fees associated with financing activities. We recognize mortgage servicing revenues upon the acquisition of a servicing obligation. We generate mortgage servicing fees through the provision of collection, remittance, recordkeeping, reporting and other related mortgage servicing functions, activities and services. Other Revenues Other revenues include 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. Revenues from these services are recognized as they 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. 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 42 Table of Contents 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 costs (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 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, fixture and equipment. Depreciation is provided 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, notes payable to former stockholders (through the second quarter of 2020 when fully repaid) 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. 43 Table of Contents Results of Operations Following is a discussion of our results of operations for the years ended December 31, 2021 and 2020. 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, 2021, 2020 and 2019, we closed more than 13,200, 8,900 and 9,700 investment sales, financing and other transactions, respectively, with total sales volume of approximately $84.4 billion, $43.4 billion and $49.7 billion, respectively. Such key metrics for real estate brokerage and financing activities (excluding other transactions) are as follows: [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["","","2021","","","2020","","","2019"],["Real Estate Brokerage:"],["Average Number of Investment Sales Professionals","","","1,925","","","","1,920","","","","1,843"],["Average Number of Transactions per Investment Sales Professional","","","5.01","","","","3.28","","","","3.82"],["Average Commission per Transaction","","$","121,319","","","$","100,694","","","$","103,572"],["Average Commission Rate","","","1.73","%","","","1.98","%","","","1.98","%"],["Average Transaction Size (in thousands)","","$","6,994","","","$","5,097","","","$","5,234"],["Total Number of Transactions","","","9,652","","","","6,288","","","","7,042"],["Total Sales Volume (in millions)","","$","67,507","","","$","32,052","","","$","36,858"],["","","Years Ended December 31,"],["","","2021","","","2020","","","2019"],["Financing (1):"],["Average Number of Financing Professionals","","","85","","","","86","","","","102"],["Average Number of Transactions per Financing Professional","","","29.11","","","","22.59","","","","19.06"],["Average Fee per Transaction","","$","37,959","","","$","33,747","","","$","32,680"],["Average Fee Rate","","","0.81","%","","","0.85","%","","","0.88","%"],["Average Transaction Size (in thousands)","","$","4,691","","","$","3,948","","","$","3,693"],["Total Number of Transactions","","","2,474","","","","1,943","","","","1,944"],["Total Financing Volume (in millions)","","$","11,605","","","$","7,672","","","$","7,180"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Operating metrics calculated excluding certain financing fees not directly associated to transactions."]] [[/GREPCENT_TABLE]] 44 Table of Contents Comparison of Years Ended December 31, 2021 and 2020 Below are key operating results for the year ended December 31, 2021 compared to the results for the year ended December 31, 2020 (dollars in thousands): [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2021","","","Percentage of Revenue","","","Year Ended December 31, 2020","","","Percentage of Revenue","","","Change"],["","","Dollar","","","Percentage"],["Revenues:"],["Real estate brokerage commissions","","$","1,170,969","","","","90.3","%","","$","633,164","","","","88.3","%","","$","537,805","","","","84.9","%"],["Financing fees","","","109,690","","","","8.5","","","","70,538","","","","9.8","","","","39,152","","","","55.5","%"],["Other revenues","","","15,781","","","","1.2","","","","13,204","","","","1.9","","","","2,577","","","","19.5","%"],["Total revenues","","","1,296,440","","","","100.0","","","","716,906","","","","100.0","","","","579,534","","","","80.8","%"],["Operating expenses:"],["Cost of services","","","840,209","","","","64.8","","","","447,879","","","","62.5","","","","392,330","","","","87.6","%"],["Selling, general and administrative","","","255,154","","","","19.7","","","","204,514","","","","28.5","","","","50,640","","","","24.8","%"],["Depreciation and amortization","","","11,721","","","","0.9","","","","10,899","","","","1.5","","","","822","","","","7.5","%"],["Total operating expenses","","","1,107,084","","","","85.4","","","","663,292","","","","92.5","","","","443,792","","","","66.9","%"],["Operating income","","","189,356","","","","14.6","","","","53,614","","","","7.5","","","","135,742","","","","253.2","%"],["Other income (expense), net","","","4,527","","","","0.3","","","","6,650","","","","0.9","","","","(2,123",")","","","(31.9",")%"],["Interest expense","","","(580",")","","","(0.0",")","","","(900",")","","","(0.1",")","","","320","","","","(35.6",")%"],["Income before provision for income taxes","","","193,303","","","","14.9","","","","59,364","","","","8.3","","","","133,939","","","","225.6","%"],["Provision for income taxes","","","50,833","","","","3.9","","","","16,526","","","","2.3","","","","34,307","","","","207.6","%"],["Net income","","$","142,470","","","","11.0","%","","$","42,838","","","","6.0","%","","$","99,632","","","","232.6","%"],["Adjusted EBITDA (1)","","$","213,002","","","","16.4","%","","$","75,699","","","","10.6","%","","$","137,303","","","","181.4","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Adjusted EBITDA is not a measurement of our financial performance under U.S. generally accepted accounting principles (\u201cU.S. GAAP\u201d) 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 \u201cNon-GAAP Financial Measure.\u201d"]] [[/GREPCENT_TABLE]] Revenues Our total revenues were $1.3 billion in 2021 compared to $716.9 million in 2020, an increase of $579.5 million, or 80.8%. Total revenues increased as a result of increases in real estate brokerage commissions, financing fees and other revenues, as described below. Real estate brokerage commissions. Revenues from real estate brokerage commissions increased to $1.2 billion in 2021 from $633.2 million in 2020, an increase of $537.8 million, or 84.9%. The increase was driven by a 110.6% increase in sales volume generated by a 53.5% increase in the number of investment sales transactions and a 37.2% increase in the average transaction size. The increases were partially offset by a 25 basis points reduction in the average commission rates due to a larger proportion of transactions closed from the Larger Transaction Market segment. Financing fees. Revenues from financing fees increased to $109.7 million in 2021 from $70.5 million in 2020, an increase of $39.2 million, or 55.5%, in part spurred by growth from acquisitions in 2020 and other 45 Table of Contents ancillary financing fees. The increase was driven by a 51.3% increase in financing volume, partially offset by a four basis points reduction in average commission rates due in part to fees from certain larger loan transactions. Financing volume was impacted by a 18.8% increase in the average transaction size and a 27.3% increase in the number of financing transactions. Other revenues. Other revenues increased to $15.8 million in 2021 from $13.2 million in 2020, an increase of $2.6 million, or 19.5%. The increase was primarily driven by increases in consulting and advisory services during 2021, compared to 2020. Operating expenses Our total operating expenses were $1.1 billion in 2021 compared to $663.3 million in 2020, an increase of $443.8 million, or 66.9%. The increase was primarily 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 in 2021 increased to $840.2 million from $447.9 million in 2020, an increase of $392.3 million, or 87.6%. The increase was primarily due to increased commission expenses driven by the related increased revenues noted above. Cost of services as a percent of total revenues increased to 64.8% compared to 62.5% for 2020 primarily due to our senior investment sales and financing professionals who earn additional commissions after meeting certain annual financial thresholds, reaching their thresholds earlier than prior years and a higher proportion of transactions closed by our more senior investment sales and financing professionals. Selling, general and administrative expense. Selling, general and administrative expense in 2021 increased $50.6 million, or 24.8%, to $255.2 million from $204.5 million in 2020. The increase was primarily due to increases in (i) compensation related costs, primarily driven by increases in management performance compensation due to a significant year-over-year increase in operating results; (ii) facilities expenses due to expansion of existing offices; (iii) business development, marketing and other support related to the long-term retention of our sales and financing professionals; and (iv) net change in value of contingent and deferred consideration in connection with our acquisition activities. These increases were partially offset by decreases in (i) sales operations support and promotional marketing expenses primarily due to the cancellation of the Company’s annual sales recognition event typically held during the first quarter of 2021 due to ongoing concerns about the pandemic; and (ii) legal costs. Depreciation and amortization expense. Depreciation and amortization expense increased to $11.7 million in 2021 from $10.9 million in 2020, an increase of $0.8 million, or 7.5%. The increase was primarily driven by capital expenditures due to our growth and investments in technology. Other income (expense), net Other income (expense), net decreased to $4.5 million in 2021 from $6.7 million in 2020. The decrease was primarily driven by a $2.6 million decrease in interest income on our investments in marketable debt securities, available-for-sale due to replacement of maturing marketable debt securities, available-for-sale with debt securities at lower interest rates. This decrease was partially offset by a favorable change in the value of our deferred compensation plan assets that are held in a rabbi trust. Interest expense Interest expense decreased to $0.6 million in 2021 from $0.9 million in 2020. The decrease was primarily due to a decrease in interest expense on the SARs liability due to lower interest rates and lower average principal outstanding and no interest expense related to notes payable to former stockholders, which were fully repaid during the second quarter of 2020. 46 Table of Contents Provision for income taxes The provision for income taxes was $50.8 million for 2021 compared to $16.5 million in 2020, an increase of $34.3 million, or 207.6%. The effective tax rate for 2021 was 26.3%, compared with 27.8% in 2020. The decrease in the effective tax rate was primarily due to an increase in windfall tax benefits, net related to the settlement of stock-based awards and a decrease in Canadian losses which are subject to a full valuation allowance. Comparison of Years Ended December 31, 2020 and 2019 A discussion regarding our results of operations for the year ended December 31, 2020 compared to the results for the year ended December 31, 2019 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, 2020, filed with the SEC on March 1, 2021, 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 and cash equivalents, (ii) interest 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. Because Adjusted EBITDA is not calculated in the same manner by all companies, it 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): [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["","","2021","","","2020","","","2019"],["Net income","","$","142,470","","","$","42,838","","","$","76,930"],["Adjustments:"],["Interest income and other (1)","","","(2,496",")","","","(5,048",")","","","(10,322",")"],["Interest expense","","","580","","","","900","","","","1,388"],["Provision for income taxes","","","50,833","","","","16,526","","","","30,582"],["Depreciation and amortization","","","11,721","","","","10,899","","","","8,017"],["Stock-based compensation","","","10,361","","","","9,905","","","","9,278"],["Non-cash MSR activity (2)","","","(467",")","","","(321",")","","","(322",")"],["Adjusted EBITDA(3)","","$","213,002","","","$","75,699","","","$","115,551"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Other includes net realized gains (losses) on marketable debt securities, available-for-sale."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Non-cash MSR activity includes the assumption of servicing obligations."]] [[/GREPCENT_TABLE]] 47 Table of Contents [[GREPCENT_TABLE]] [["(3)","The increase in Adjusted EBITDA for the year ended December 31, 2021 compared to the same period in 2020 is primarily due to an increase in total revenues and a lower proportion of operating expenses compared to total revenues."]] [[/GREPCENT_TABLE]] Liquidity and Capital Resources Our primary sources of liquidity are cash and cash equivalents, 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 and cash equivalents, proceeds from the sale of marketable debt securities, available-for-sale or availability under our credit agreement. Cash Flows Our total cash and cash equivalents balance increased by $139.0 million to $382.1 million at December 31, 2021, compared to $243.2 million at December 31, 2020. The following table sets forth our summary cash flows for the years ended December 31, 2021, 2020 and 2019 (in thousands): [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["","","2021","","","2020","","","2019"],["Net cash provided by operating activities","","$","255,903","","","$","38,088","","","$","25,287"],["Net cash used in investing activities","","","(108,356",")","","","(17,228",")","","","(3,422",")"],["Net cash used in financing activities","","","(5,919",")","","","(10,330",")","","","(3,878",")"],["Effect of currency exchange rate changes on cash and cash equivalents","","","(2,640",")","","","(48",")","","","\u2014"],["Net increase in cash and cash equivalents","","","138,988","","","","10,482","","","","17,987"],["Cash and cash equivalents at beginning of year","","","243,152","","","","232,670","","","","214,683"],["Cash and cash equivalents at end of year","","$","382,140","","","$","243,152","","","$","232,670"]] [[/GREPCENT_TABLE]] Operating Activities 2021 Compared to 2020 . Cash flows provided by operating activities were $255.9 million in 2021 compared to $38.1 million in 2020. Net cash provided by operating activities is driven by our net income adjusted for non-cash items and changes in operating assets and liabilities. The $217.8 million improvement in operating cash flows for 2021 compared to 2020 was primarily due to higher total revenues and a lower proportion of operating expenses compared to total revenues, an increase in deferral of certain discretionary commissions and commission payable, lower bonus payments paid during the first quarter of 2021 compared to the same period in 2020 due to the significant decline in operating results for the year ended December 31, 2020, differences in timing of certain payments and receipts and a reduction in advances to our investment sales and financing professionals. Investing Activities 2021 Compared to 2020 . Cash flows used in investing activities were $108.4 million in 2021 compared to $17.2 million in 2020. The $91.1 million increase in cash flows used in investing activities for 2021 compared to 2020 was primarily due to a $98.5 million increase in net purchase of marketable debt securities, available-for-sale, and a $9.5 million purchase of a held-to-maturity security, with no such comparable outflow for 2020. The increased usage in investing cash flows was partially offset by a $16.5 million reduction in cash used in acquisitions of businesses, net of cash received during 2021 compared to 2020. 48 Table of Contents Financing Activities 2021 Compared to 2020 . Cash flows used in financing activities were $5.9 million in 2021 compared to $10.3 million in 2020. The $4.4 million decrease in cash flows used in financing activities for 2021 compared to 2020 was primarily impacted by principal payments on notes payable to former stockholders, which were fully repaid during the second quarter of 2020, partially offset by increases in taxes paid related to net share settlement of stock-based awards and principal payments on contingent and deferred consideration in connection with acquisitions. 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 and cash equivalents, 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, 2021, cash and cash equivalents and marketable debt securities, available-for-sale, aggregated $678.6 million, and we had $59.5 million of borrowing capacity under our credit agreement. Credit Agreement We have a Credit Agreement with Wells Fargo Bank, National Association for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of our domestic subsidiaries and matures on June 1, 2022 (the “Credit Agreement”). See Note 15 – “Commitments and Contingencies” of our Notes to Consolidated Financial Statements for additional information on the Credit Agreement. Off Balance Sheet Arrangements The Company, in connection with the strategic alliance with M&T Realty Capital Corporation (“M&T Realty Capital”), has agreed to provide loan opportunities that may be funded through M&T Realty Capital’s DUS Selling and Servicing Agreement with Fannie Mae. M&T Realty Capital’s agreement with Fannie Mae requires M&T Realty Capital to guarantee a portion of each funded loan. On a loan-by-loan basis, the Company, at its option, can agree to assume a portion of M&T Realty’s guarantee obligation of loan opportunities presented to and closed by M&T Realty Capital. As of December 31, 2021, the Company has not agreed to any guarantee obligations for loan opportunities presented to M&T Realty Capital. 49 Table of Contents Material Cash Requirements The following table summarizes current and long-term material cash requirements as of December 31, 2021, which we expect to fund primarily with operating cash flows (in thousands): [[GREPCENT_TABLE]] [["","","Total","","","Less than 1 Year","","","1-3 Years","","","3-5 Years","","","More Than 5 Years","","","Other (7)"],["Operating lease liabilities, including imputed interest (1)","","$","82,740","","","$","20,901","","","$","32,952","","","$","22,149","","","$","6,738","","","$","\u2014"],["SARs liability (principal and interest) (2)","","","21,019","","","","2,241","","","","4,752","","","","5,266","","","","8,760","","","","\u2014"],["Deferred commissions payable (3)","","","69,256","","","","37,559","","","","31,697","","","","\u2014","","","","\u2014","","","","\u2014"],["Deferred compensation liability (4)","","","8,001","","","","1,080","","","","316","","","","259","","","","119","","","","6,227"],["Contingent consideration (5)","","","9,312","","","","2,681","","","","2,923","","","","3,473","","","","235","","","","\u2014"],["Deferred consideration (5)","","","9,801","","","","5,112","","","","4,290","","","","399","","","","\u2014","","","","\u2014"],["Other (6)","","","18,489","","","","10,193","","","","2,089","","","","550","","","","350","","","","5,307"],["","","$","218,618","","","$","79,767","","","$","79,019","","","$","32,096","","","$","16,202","","","$","11,534"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","See Note 4 \u2013 \u201cOperating Leases\u201d of our Notes to the Consolidated Financial Statements."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Forecasted principal payments are based on each participant\u2019s 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 \u2013 \u201cSelected Balance Sheet Data\u201d of our Notes to the Consolidated Financial Statements."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(3)","Includes short-term and long-term deferred commissions payable. See Note 7 \u2013 \u201cSelected Balance Sheet Data\u201d of our Notes to the Consolidated Financial Statements."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(4)","Represents current estimated payouts for participants currently receiving payments based on their elections at the time of deferral. We hold assets in rabbi trust of $11.5 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 \u2013 \u201cSelected Balance Sheet Data\u201d of our Notes to the Consolidated Financial Statements."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(5)","Relates to contingent and deferred consideration in connection with our business acquisitions. See Note 6 \u2013 \u201cAcquisitions, Goodwill and Other Intangible Assets\u201d and Note 9 \u2013 \u201cFair Value Measurements\u201d of our Notes to the Consolidated Financial Statements."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(6)","Relates to amounts that may be advanced to sales and financing professionals and uncertain tax positions. See Note 12 \u2013 \u201cIncome Taxes\u201d and Note 15 \u2013 \u201cCommitments and Contingencies\u201d of our Notes to the Consolidated Financial Statements."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(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\u2019 elections at the time of deferral. 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."]] [[/GREPCENT_TABLE]] Other than operating expenses, cash requirements for 2022 are expected to consist primarily of capital expenditures for the future acquisitions, if any, payment of dividends, 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, including the effects of the COVID-19 pandemic on the broader economy. 50 Table of Contents The Federal Reserve has signaled its plans to combat inflation through monetary policy including the wind-down of quantitative easing and by raising the Federal Funds rate. While commercial real estate investment is comparatively inflation resistant, the upward pressure on interest rates has the potential to affect investor activity. The investor activity will depend on the magnitude of changes in interest rates relative to the elevated level of capital liquidity targeting commercial real estate. The actual economic impact from inflation/deflation to our business remains unknown at this time. 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, revenues 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. These factors have caused our effective tax rate to range from 26.3% to 28.4% over the past three years. Because of 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 involves a high degree of judgment. Our state taxes, net of federal benefit, has ranged from 4.8% to 5.3% over the past three 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 51 Table of Contents 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. 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 incremental borrowing rate was 2.9% and 3.1% in 2021 and 2020, respectively. 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 net and comprehensive income. 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 rate of most of the securities. Unrealized losses aggregated $511,000 and $50,000 as of December 31, 2021 and 2020, respectively. We review quarterly our investment portfolio for all 52 Table of Contents 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, 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 net and comprehensive income. In its determination of fair value for contingent and deferred consideration, the Company uses judgment in the 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 29.0% to 100.0% based on each acquisition’s historical and estimated future performance and risk adjusted discount rates of between 2.2% to 3.5%, which resulted in a recorded fair value for the contingent consideration of $9.3 million and $5.6 million as of December 31, 2021, and 2020, 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 $9.8 million and $15.3 million as of December 31, 2021, and 2020, respectively. The maximum undiscounted future settlements of contingent and deferred consideration was $28.6 million at December 31, 2021, 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 53 Table of Contents this Annual Report on Form 10-K. Although we do not believe any of the other accounting pronouncements listed in that note will have a significant impact on our business, we are still in the process of determining the impact of the new pronouncements may have on our consolidated financial statements.