Walker & Dunlop, Inc. (WD) FY 2023 MD&A

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

The following discussion should be read in conjunction with the historical financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K (“10-K”). 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 expressed or contemplated in those forward-looking statements as a result of certain factors, including those set forth under the headings “Forward-Looking Statements” and “Risk Factors” elsewhere in this 10-K.

Business

Walker & Dunlop, Inc. is a holding company, and we conduct the majority of our operations through Walker & Dunlop, LLC, our primary operating company.

We are one of the leading commercial real estate services and finance companies in the United States, with a primary focus on multifamily lending and property sales, commercial real estate debt brokerage, and investment management services. We originate, sell, and service a range of multifamily and other commercial real estate financing products to owners and developers of commercial real estate across the country, provide multifamily property sales brokerage and appraisal services in various regions throughout the United States, and engage in commercial real estate and investment management services focused on debt and equity investments on commercial real estate assets and equity investments in affordable housing. We are a leader in commercial real estate technology, developing and acquiring technology resources that (i) provide innovative solutions and a better experience for our customers and (ii) allow us to reach a broader customer base.

Multifamily Lending, Commercial Real Estate Brokerage Services and Property Sales

We originate and sell multifamily loans through the programs of Fannie Mae, Freddie Mac, Ginnie Mae, and HUD, with which we have licenses and long-established relationships. We retain servicing rights and asset management responsibilities on nearly all loans that we originate for the Agencies’ programs. We are approved as a Fannie Mae DUS lender nationally, a Freddie Mac Optigo lender nationally for Conventional, Seniors Housing, Targeted Affordable Housing and Small Balance Loans, a HUD MAP lender nationally, a HUD LEAN lender nationally, and a Ginnie Mae issuer. We broker and service loans for many life insurance companies, commercial banks, and other institutional investors, in which cases we do not fund the loan but rather act as a loan broker. Fannie Mae recently announced that we ranked as its largest DUS lender in 2023, by loan deliveries, for the fifth consecutive year, and Freddie Mac recently announced that we ranked as its 3rd largest Freddie Mac lender in 2023, by loan deliveries. Our market share with Fannie Mae and Freddie Mac was 11.3% on a combined basis, by loan deliveries in 2023, compared to 12.7% in 2022. Additionally, we were the 5th largest overall lender for HUD in 2023. In spite of the slowdown

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in our debt financing volumes from 2022 to 2023, the average number of our mortgage bankers decreased by only three bankers during 2023 as we are retaining production talent to capture the expected rebound in debt financing volumes over the coming years.

We fund loans for the Agencies’ programs, generally through warehouse facility financings, and sell them to investors in accordance with the related loan sale commitment, which we obtain at rate lock. Proceeds from the sale of the loan are used to pay off the warehouse facility. The sale of the loan is typically completed within 60 days after the loan is closed, and we retain the right to service substantially all of these loans. In cases where we do not fund the loan, we act as a loan broker and service some of the loans. Our mortgage bankers who focus on loan brokerage are engaged by borrowers to work with a variety of institutional lenders to find the most appropriate loan. These loans are then funded directly by the institutional lender, and for those brokered loans we service, we collect ongoing servicing fees while those loans remain in our servicing portfolio. The servicing fees we typically earn on brokered loan transactions are lower than the servicing fees we earn on Agency loans.

We recognize revenue when we make simultaneous commitments to originate a loan to a borrower and sell that loan to an investor. The revenues earned reflect the fair value attributable to loan origination fees, premiums on the sale of loans, net of any co-broker fees, and the fair value of the expected net cash flows associated with servicing the loans, net of any guaranty obligations retained. We also recognize revenue when we receive the origination fee from a brokered loan transaction. Other transaction-related sources of revenue include (i) net warehouse interest income we earn while the loan is held for sale, (ii) net warehouse interest income from loans held for investment while they are outstanding, (iii) sales commissions for brokering the sale of multifamily properties, and (iv) syndication and transaction-based asset management fees from our investment management activities.

We are currently not exposed to unhedged interest rate risk during the loan commitment, closing, and delivery process. The sale or placement of each loan to an investor is negotiated concurrently with establishing the coupon rate for the loan. We also seek to mitigate the risk of a loan not closing. We have agreements in place with the Agencies that specify the cost of a failed loan delivery in the event we fail to deliver the loan to the investor. To protect us against such fees, we require a deposit from the borrower at rate lock that is typically more than the potential fee. The deposit is returned to the borrower only once the loan is closed. Any potential loss from a catastrophic change in the property condition while the loan is held for sale using warehouse facility financing is mitigated through property insurance equal to replacement cost. We are also protected contractually from an investor’s failure to purchase the loan. We have experienced a de minimis number of failed deliveries in our history and have incurred immaterial losses on such failed deliveries.

We have risk-sharing obligations on substantially all loans we originate under the Fannie Mae DUS program. When a Fannie Mae DUS loan is subject to full risk-sharing, we absorb losses on the first 5% of the unpaid principal balance of a loan at the time of loss settlement, and above 5% we share a percentage of the loss with Fannie Mae, with our maximum loss capped at 20% of the original unpaid principal balance of the loan (subject to doubling or tripling if the loan does not meet specific underwriting criteria or if the loan defaults within 12 months of its sale to Fannie Mae). Our full risk-sharing is currently limited to loans up to $300 million, which equates to a maximum loss per loan of $60 million (such exposure would occur in the event that the underlying collateral is determined to be completely without value at the time of loss). For loans in excess of $300 million, we receive modified risk-sharing. We also may request modified risk-sharing at the time of origination on loans below $300 million, which reduces our potential risk-sharing losses from the levels described above if we do not believe that we are being fully compensated for the risks of the transactions. The full risk-sharing limit in prior years was less than $300 million. Accordingly, loans originated in those prior years were subject to risk-sharing at lower levels. Our servicing fees for risk-sharing loans include compensation for the risk-sharing obligations and are larger than the servicing fees we receive from Fannie Mae for loans with no risk-sharing obligations.

We retain servicing rights on substantially all the loans we originate and sell and generate revenues from the fees we receive for servicing the loans, from the placement fees on escrow deposits held on behalf of borrowers, and from other ancillary fees. Servicing fees set at the time an investor agrees to purchase the loan are generally paid monthly for the duration of the loan and are based on the unpaid principal balance of the loan. Our Fannie Mae servicing arrangements generally provide for prepayment protection in the event of a voluntary prepayment. For loans serviced outside of Fannie Mae, we typically do not have similar prepayment protections.

As of December 31, 2023, our servicing portfolio was $130.5 billion, up 6% from December 31, 2022, which was the 10th largest commercial/multifamily primary and master servicing portfolio in the nation according to the Mortgage Bankers’ Association’s (“MBA”) 2022 year-end survey (the “Survey”). Our servicing portfolio includes $63.7 billion of loans serviced for Fannie Mae and $39.3 billion for Freddie Mac, making us the 1st and 7th largest servicer of Fannie Mae and Freddie Mac multifamily loans in the nation, respectively, according to the Survey. Also included in our servicing portfolio is $10.5 billion of multifamily HUD loans, the 4th largest HUD primary and servicing portfolio in the nation according to the Survey.

Through WDIS, we offer property sales brokerage services to owners and developers of multifamily properties that are seeking to sell these properties. Through these property sales brokerage services, we seek to maximize proceeds and certainty of closure for our clients using our knowledge of the commercial real estate and capital markets and relying on our experienced transaction professionals. Our property sales

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services are offered in various regions throughout the United States and cover many major markets. We have added several property sales brokerage teams over the past few years and continue to seek to add other property sales brokers, with the goal of continuing to expand the depth and number of regions covered by our brokerage services.

Investment Management Services

WDIP, a wholly owned subsidiary of the Company, is part of our strategy to grow and diversify the Company by growing our investment management platform. WDIP is a registered investment advisor and general partner of private commercial real estate investment funds focused on the management of debt, preferred equity, and mezzanine equity investments through private middle-market commercial real estate funds and separately managed accounts. WDIP’s current AUM of $1.5 billion primarily consist of six sources: Fund III, Fund IV, Fund V, Fund VI, and Fund VII (collectively, the “Funds”), and separate accounts managed for life insurance companies. AUM for the Funds and for the separate accounts consists of both unfunded commitments and funded investments. Unfunded commitments are highest during the fund raising and investment phases. AUM disclosed in this 10-K may differ from regulatory assets under management disclosed on WDIP’s Form ADV.

WDIP typically receives management fees based on limited partner capital commitments, unfunded investment commitments, and funded investments. Additionally, with respect to Fund III, Fund IV, Fund V, Fund VI, and Fund VII, WDIP receives a percentage of the profits above the fund expenses and preferred return specified in the fund offering agreements.

Through WDAE, we are the 8th largest tax credit syndicator in the U.S., and an affordable housing developer through various joint venture partnerships. WDAE is part of our strategy to grow our investment management platform and to strengthen our position in the affordable housing debt, equity, and property sales sector. WDAE manages $15.1 billion of affordable AUM and has an established tax syndication and affordable housing development platform from which we earn investment management, syndication, and other LIHTC related fees.

Our Interim Program offers floating-rate, interest-only loans for terms of generally up to three years to experienced borrowers seeking to acquire or reposition multifamily properties that do not currently qualify for permanent financing. We underwrite, asset-manage, and service all loans executed through the Interim Program. The ultimate goal of the Interim Program is to provide permanent Agency financing on these transitional properties. The Interim Program has two distinct executions: the Interim Program JV and the Interim Loan Program.

The Interim Program JV assumes full risk of loss while the loans it originates are outstanding. We hold a 15% ownership interest in the Interim Program JV and are responsible for sourcing, underwriting, servicing, and asset-managing the loans originated by the joint venture. The joint venture funds its operations using a combination of equity contributions from its owners and third-party credit facilities.

During the year ended December 31, 2023, we did not originate any interim loans through the Interim Program JV or our Interim Loan Program. During the year ended December 31, 2022, $86.3 million of the $339.1 million of interim loan originations were executed through the Interim Program JV, with all the activity coming in the first half of the year. As of December 31, 2023 and 2022, we asset-managed $710.0 million and $892.8 million, respectively, of interim loans on behalf of the Interim Program JV.

We originate and hold the Interim Loan Program loans for investment, which are included on our balance sheet. During the time that these loans are outstanding, we assume the full risk of loss. As of December 31, 2023, we had two loans held for investment under the Interim Loan Program with an aggregate outstanding unpaid principal balance of $40.1 million.

Basis of Presentation

The accompanying consolidated financial statements include all of the accounts of the Company and its wholly owned subsidiaries, and all intercompany transactions have been eliminated.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with GAAP, which requires management to make estimates based on certain judgments and assumptions that are inherently uncertain and affect reported amounts. The estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions and the use of different judgments and assumptions may have a material impact on our results. The following critical accounting estimates involve significant estimation uncertainty that may have or are reasonably likely to have a material impact on our financial condition or results of operations. Additional information about our critical accounting estimates and other significant accounting policies are discussed in NOTE 2 of the consolidated financial statements.

Mortgage Servicing Rights (“MSRs”). MSRs are recorded at fair value at loan sale. The fair value at loan sale (“MSR”) is based on estimates of expected net cash flows associated with the servicing rights and takes into consideration an estimate of loan prepayment. Initially,

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the fair value amount is included as a component of the derivative asset fair value at the loan commitment date. The estimated net cash flows from servicing, which includes assumptions for discount rate, earnings on escrow accounts (placement fees), prepayment speeds, and servicing costs, are discounted using a discounted cash flow model at a rate that reflects the credit and liquidity risk of the MSR over the estimated life of the underlying loan. The discount rates used throughout the periods presented for all MSRs were between 8-14% and varied based on the loan type. The life of the underlying loan is estimated giving consideration to the prepayment provisions in the loan and assumptions about loan behaviors around those provisions. Our model for MSRs assumes no prepayment prior to the expiration of the prepayment provisions and full prepayment of the loan at or near the point when the prepayment provisions have expired. The estimated net cash flows also include cash flows related to the future earnings on the escrow accounts associated with servicing the loans. We include a servicing cost assumption to account for our expected costs to service a loan. The estimated earnings rate on escrow accounts associated with servicing the loan increases estimated cash flows, and the estimated future cost to service the loan decreases estimated future cash flows. The servicing cost assumption has had a de minimis impact on the estimate historically. We record an individual MSR asset (or liability) for each loan at loan sale.

The assumptions used to estimate the fair value of capitalized MSRs are developed internally and are periodically compared to assumptions used by other market participants. Due to the relatively few transactions in the multifamily MSR market and the lack of significant changes in assumptions by market participants, we have observed limited variation or change in the assumptions historically and do not expect to observe significant changes in the foreseeable future, including the assumption that most significantly impacts the estimate: the discount rate. We actively monitor the assumptions used and make adjustments when market conditions change, or other factors indicate such adjustments are warranted. Over the past three years, we have adjusted the earnings on escrow accounts assumption several times to reflect the current and expected future earnings rate projected for the life of the MSR as the interest rate environment has experienced significant volatility over the past several years. Additionally, we adjusted the discount rate at the beginning of 2021 to mirror changes observed from market participants. A 100-basis point change in the discount rate would increase or decrease the capitalized MSRs for the year ended December 31, 2023 by 3%. A 200-basis point change in the discount rate would increase or decrease the capitalized MSRs for the year ended December 31, 2023 by 6%. These sensitivities are hypothetical and should be used with caution as they do not include interplay among assumptions.

Subsequent to loan origination, the carrying value of the MSR is amortized over the expected life of the loan. We engage a third party to assist in determining an estimated fair value of our existing and outstanding MSRs on at least a semi-annual basis, primarily for financial statement disclosure purposes. Changes in our discount rate assumptions on existing and outstanding MSRs may materially impact the fair value of the MSRs disclosure (NOTE 3 of the consolidated financial statements details the portfolio-level impact of a change in the discount rate).

Allowance for Risk-Sharing Obligations. This reserve liability (referred to as “allowance”) for risk-sharing obligations relates to our Fannie Mae at-risk servicing portfolio and is presented as a separate liability on our balance sheets. We record an estimate of the loss reserve for the current expected credit losses (“CECL”) for all loans in our Fannie Mae at-risk servicing portfolio using the weighted-average remaining maturity method (“WARM”). WARM uses an average annual loss rate that contains loss content over multiple vintages and loan terms and is used as a foundation for estimating the CECL reserve. The average annual loss rate is applied to the estimated unpaid principal balance over the contractual term, adjusted for estimated prepayments and amortization to arrive at the CECL reserve for the entire current portfolio as described further below. We currently use one year for our reasonable and supportable forecast period (“forecast period”) as we believe forecasts beyond one year are inherently less reliable. During the forecast period we apply an adjusted loss factor based on generally available economic and unemployment forecasts and a blended loss rate from historical periods that we believe reflect the forecasts. We revert to the historical loss rate over a one-year period on a straight-line basis. Over the past couple of years, the loss rate used in the forecast period has been updated to reflect our expectations of the economic conditions over the coming year in relation to the historical period. For example, in the first quarter of 2023, we updated the loss rate used in the forecast period from 2.1 basis points to 2.3 basis points, and from 2.3 basis points to 2.4 basis points in the fourth quarter of 2023. These changes resulted in our forecast-period loss rate increasing from 1.8 times to 4.0 times the historical loss rate factor to reflect our current expectations of the evolving and uncertain macroeconomic conditions facing the multifamily sector. We made multiple revisions to the loss rate used in the forecast period in the past, and those changes have significantly impacted the CECL reserve.

One of the key components of a WARM calculation is the runoff rate, which is the expected rate at which loans in the current portfolio will amortize and prepay in the future based on our historical prepayment and amortization experience. We group loans by similar origination dates (vintage) and contractual maturity terms for purposes of calculating the runoff rate. We originate loans under the DUS program with various terms generally ranging from several years to 15 years; each of these various loan terms has a different runoff rate. The runoff rates applied to each vintage and contractual maturity term is determined using historical data; however, changes in prepayment and amortization behavior may significantly impact the estimate. We have not experienced significant changes in the runoff rate since we implemented CECL in 2020.

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The weighted-average annual loss rate is currently calculated using a 10-year look-back period, utilizing the average portfolio balance and settled losses for each year. The 10-year lookback period is intended to capture sufficiently different economic conditions to generate a reasonable estimate of expected results in the future, given the relatively long-term nature of the current portfolio. As the weighted-average annual loss rate utilizes a rolling 10-year look-back period, the loss rate used in the estimate will change as loss data from earlier periods in the look-back period continue to fall off and as new loss data are added. For example, in the first quarter of 2023, loss data from earlier periods in the look-back period with significantly higher losses fell off and were replaced with more recent loss data, resulting in the weighted-average historical annual loss rate changing from 1.2 basis points to 0.6 basis points. Based on our historical loss data, our historical loss rate will decrease again in 2024, which may result in lower CECL reserves.

NOTE 4 of the consolidated financial statements outlines adjustments made in the loss rates used to account for the expected economic conditions as of a given period and the related impact on the CECL reserve.

We evaluate our risk-sharing loans on a quarterly basis to determine whether there are loans that are probable of default. Specifically, we assess a loan’s qualitative and quantitative risk factors, such as payment status, property financial performance, local real estate market conditions, loan-to-value ratio, debt-service-coverage ratio, and property condition. When a loan is determined to be probable of default based on these factors, we remove the loan from the WARM calculation and individually assess the loan for potential credit loss. This assessment requires certain judgments and assumptions to be made regarding the property values and other factors, that may differ significantly from actual results. Loss settlement with Fannie Mae has historically concluded within 18 to 36 months after foreclosure. Historically, the initial collateral-based reserves have not varied significantly from the final settlement.

We actively monitor the judgments and assumptions used in our Allowance for Risk-Sharing Obligation estimate and make adjustments to those assumptions when market conditions change, or when other factors indicate such adjustments are warranted. We believe the level of Allowance for Risk-Sharing Obligation is appropriate based on our expectations of future market conditions; however, changes in one or more of the judgments or assumptions used above could have a significant impact on the reserve. For example, a 10% change in the forecasted loss rate as of December 31, 2023 would have increased or decreased the allowance for risk-sharing obligations by 6%. A 20% change in the forecasted loss rate as of December 31, 2023 would have increased or decreased the allowance for risk-sharing obligations by 13%. These sensitivities are hypothetical and should be used with caution as they do not include interplay among assumptions.

Contingent Consideration Liabilities. The Company typically includes an earnout as part of the consideration paid for acquisitions to align the long-term interests of the acquiree with the Company. These earnouts contain milestones for achievement, which typically are revenue, revenue-like, or productivity measurements. If the milestone is achieved, the acquiree is paid the additional consideration. Upon acquisition, the Company is required to estimate the fair value of the earnout and include that fair value measurement as a component of the total consideration paid in the calculation of goodwill. The fair value of the earnout is recorded as a contingent consideration liability and included within Other liabilities in the Consolidated Balance Sheet and adjusted to the estimated fair value at the end of each reporting period.

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The determination of the fair value of contingent consideration liabilities requires significant management judgment and unobservable inputs to (i) determine forecasts and scenarios of future revenues, net cash flows and certain other performance metrics, (ii) assign a probability of achievement for the forecasts and scenarios, and (iii) select a discount rate. A Monte Carlo simulation analysis is used to determine many iterations of potential fair values. The average of these iterations is then used to determine the estimated fair value. We typically obtain the assistance of third-party valuation specialists to assist with the fair value estimation. The probability of the earnout achievement is based on management’s estimate of the expected future performance and other financial metrics of each of the acquired entities, which are subject to significant uncertainty. Changes to the aforementioned inputs impact the estimate; for example, in the fourth quarter of 2022, we recorded a net $13.5 million reduction to the fair value of our contingent consideration liabilities based primarily on revised management forecasts of the financial performance of the entities over the remaining earnout period. During 2023, we recorded a reduction of $62.5 million to the fair value of our contingent consideration liabilities based on revised management forecasts, scenarios, and other valuation inputs (NOTE 7 of the consolidated financial statements details changes in the estimate over the past two years). The $62.5 million reduction related to the contingent consideration liability for the GeoPhy assessment acquisition. A change of 10% in the cash flows used for the GeoPhy contingent consideration liability assessment as of December 31, 2023 would have increased or decreased the expected payout by 6%. An increase of 20% in the cash flows used for the GeoPhy contingent consideration liability assessment as of December 31, 2023 would have increased the expected payout by 38%. A decrease of 20% in the cash flows used for the GeoPhy contingent consideration liability assessment as of December 31, 2023 would have decreased the expected payout by 13%. The difference between the percent increase and the percent decrease for a 20% change in the cash flows is due to the structure of and the thresholds in the earnout. Changes in the cash flows for the contingent consideration liabilities associated with other acquisitions would have resulted in immaterial changes in the fair values of those contingent consideration liabilities. These sensitivities are hypothetical and should be used with caution as they do not include interplay among assumptions.

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The aggregate fair value of our contingent consideration liabilities as of December 31, 2023 was $113.5 million. This fair value represents management’s best estimate of the discounted cash payments that will be made in the future for all of our contingent consideration arrangements. The maximum remaining undiscounted earnout payments as of December 31, 2023 was $292.9 million. In 2022 and 2021, we made two large acquisitions that included significant amounts of contingent consideration to maximize alignment of the key principals and management teams. The earnouts completed prior to 2021 involved businesses that operated in our core debt financing business and involved substantially smaller amounts of contingent consideration as compared to the two aforementioned acquisitions.

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Goodwill. As of December 31, 2023 and 2022, goodwill was $901.7 million and $959.7 million, respectively. Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is assigned to the reporting unit to which the acquisition relates. Goodwill is recognized as an asset and is reviewed for impairment annually on October 1. Between the annual evaluation time, we will perform an evaluation of recoverability, when events and circumstances indicate that it is more-likely-than not that the fair value of a reporting unit is below its carrying value. Impairment testing requires an assessment of qualitative factors to determine if there are indicators of potential impairment, followed by, if necessary, an assessment of quantitative factors. These factors include, but are not limited to, whether there has been a significant or adverse change in the business climate that could affect the value of an asset and/or significant or adverse changes in cash flow projections or earnings forecasts. These assessments require management to make judgments, assumptions, and estimates about projected cash flows, discount rates and other factors. A 10% change in the cash flows used for the goodwill assessment over these two reporting units would have increased or decreased the goodwill impairment recognized by 29%. A 20% change in the cash flows used for the goodwill assessment over these two reporting units would have increased or decreased the goodwill impairment recognized by 58%. A 100 basis-point change in the discount rate used for the goodwill assessment over these two reporting units would have increased or decreased the goodwill impairment recognized by 21%. A 200 basis-point change in the discount rate used for the goodwill assessment over these two reporting units would have increased or decreased the goodwill impairment recognized by 39%. These sensitivities are hypothetical and should be used with caution as they do not include interplay among assumptions.

Due to the sustained challenging macroeconomic conditions resulting from the rapidly increasing interest rate environment that has impacted the multifamily market, our projected cash flows for two reporting units declined, resulting in goodwill impairment during 2023 of $62.0 million or 6.4% of the goodwill balance outstanding at the time. We attributed this goodwill impairment to the two reporting units to which the GeoPhy operations and goodwill are assigned, both of which are components of the Capital Markets segment. The remaining goodwill assigned to these two reporting units as of December 31, 2023 was $156.0 million. As of December 31, 2023, our assessment of the remaining goodwill at each of our other reporting units, totaling $745.7 million, indicates they are not impaired (NOTE 7 of the consolidated financial statements details changes the in goodwill balance).

Overview of Current Business Environment

Higher and volatile interest rates continue to disrupt many sectors of the capital markets, causing significant volatility and uncertainty, including: (a) disruption in the commercial real estate lending and transactions market, (b) volatility in pricing of commercial real estate assets, (c) challenges in the banking sector which are significantly constraining the supply of capital, and (d) uncertainty amongst owners, operators, and developers of commercial real estate assets. Due to the disruption and uncertainties, our total transaction volumes decreased 48% from the year ended December 31, 2023, with the largest decreases in our debt brokerage (55%) and multifamily property sales (55%) executions. The decrease in total transaction volumes also included a decrease in our GSE lending (29%) and HUD originations (39%).

To combat the high rate of inflation over the past two years the Federal Reserve increased its target Federal Funds Rate by 5.25% since March 2022, with its last rate increase following its July 2023 meeting, establishing a target range of 5.25% to 5.50% as of December 31, 2023. Following its December 2023 meeting, the Federal Reserve signaled the end of rate increases in its policy statement, while also stating rates could remain at elevated levels for the foreseeable future as it evaluates the impact of these rates on the inflation rate and on changing economic conditions. The actions of the Federal Reserve resulted in an increase in medium to long-term mortgage interest rates, which form the basis of most of our lending. The increase in the Federal Funds Rate has increased our placement fee revenue on escrow deposits and cash and cash equivalents but also increased our borrowing costs for both our warehouse lines and corporate debt.

During 2023, and partially due to the higher interest rate environment, Silicon Valley Bank, Signature Bank, and First Republic Bank failed. These represented three of the largest bank failures in U.S. history. This caused a significant disruption to the regional banking sector, which typically supplies capital at the local level to developers and owner-operators of commercial real estate—amid concerns of broader weakness and the potential for future failures within the regional banking sector. In addition, larger systemically important financial institutions increased reserves for expected losses in their commercial real estate portfolios while simultaneously preserving capital to pass more stringent stress test regulations. While the banking system remains sound and resilient, the net effect of these changes in the banking sector was a significant reduction in liquidity available to the commercial real estate sector for much of 2023, which adversely impacted overall transaction activity.

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The rapid and sustained rise in medium to long-term interest rates, coupled with the turmoil in the banking sector, negatively impacted certain of our products and offerings more than others, with property sales volumes and debt brokerage executions in non-multifamily asset classes being impacted the most during the year, as banks and other third-party capital sources reduced their lending activities significantly and increased capital reserves. The non-bank multifamily lending market is forecasted by the Mortgage Bankers Association (“MBA”) to have decreased from $480 billion in 2022 to $271 billion in 2023, a decrease of 44%. While the GSEs remained the predominant source of capital to the multifamily sector, lending $101 billion of capital in 2023, that represented a decline of 29% compared to 2022, as overall demand for new loans was down sharply as the market adjusted to the challenging macroeconomic environment. We expect the GSEs’ lending terms to remain competitive and supply much needed countercyclical capital to the multifamily sector going into 2024, but the demand for that capital remains uncertain as the broader macroeconomic environment continues to adjust. As the second largest GSE multifamily lender by volume in 2023, we remain well positioned to originate loans for the GSEs. In addition to lower transaction volumes, as interest rates increased rapidly, and liquidity in the capital markets tightened, we have experienced declines in credit spreads on GSE loans we originate to offset a portion of the interest rate increases on the total cost of borrowing. This has resulted in lower average servicing fees on our new GSE lending over the past year, and we do not anticipate that changing in the near term.

The FHFA establishes loan origination caps for both Fannie Mae and Freddie Mac each year. In November 2023, the FHFA established Fannie Mae’s and Freddie Mac’s 2024 loan origination caps at $70 billion each for all multifamily business, a 7% decrease from the 2023 caps, but a 39% increase over actual combined 2023 lending volumes for the GSEs. During 2023, Fannie Mae and Freddie Mac had multifamily originations volume of $53 billion and $48 billion, respectively, down 24% and 34%, respectively, from 2022. The decline in the GSEs’ origination volumes was primarily driven by the aforementioned challenging macroeconomic conditions in 2023. The MBA is forecasting the multifamily lending market to increase to $339 billion in 2024, so the decrease to the GSEs’ lending caps in 2024 is not expected to have a material impact on the competitiveness of either Fannie Mae or Freddie Mac, as they are expected to have sufficient capital to meet market demand under that forecasted scenario.

Despite the higher interest rate environment and declines in commercial real estate lending and property sales, macroeconomic conditions impacting multifamily property fundamentals remained healthy throughout 2023, with the national unemployment rate remaining low at 3.7% as of December 2023. According to RealPage, a provider of commercial real estate data and analytics, vacancies have risen from their historical low of 2.4% in February 2022 and stabilized at 5.8% as of December 2023. The recent historically low vacancy rates were largely considered to be unsustainable from a long-term perspective, and the current vacancy rate represents a return to normal that matches the pre-pandemic decade-long average. A record number of new multifamily properties were completed in 2023, with the majority of those completions concentrated in sunbelt markets, with an even greater number expected to be completed in 2024. However, completions are expected to decrease significantly thereafter, as new starts have stalled in 2023 as a result of the liquidity and macroeconomic challenges. In the short-term, rent growth is expected to face downward pressure, while occupancy rates are also expected to face upward pressure as new supply is absorbed. Despite the increase in vacancies and the short-term increase in supply of multifamily units, national rent growth remains flat to slightly positive indicating continued healthy demand for multifamily units. Meanwhile in certain sunbelt markets, rent growth is beginning to trend negative in the low single-digits as the new supply in those markets is being absorbed.

Our multifamily property sales volumes decreased 55% for the year ended December 31, 2023. We continue to compete for market share in the multifamily property sales sector, as customers increasingly look to experienced brokers to maximize value in this uncertain environment. Long term, we believe the market fundamentals will continue to be positive for multifamily properties, and we saw an increase in assets brought to market in the second half of the year, as evidenced by the 70% decline for the six months ended June 30, 2023 compared to the 55% decline for the year. Over the last several years, household formation and a dearth of supply of entry-level single-family homes led to strong demand for rental housing in many geographical areas. Consequently, the fundamentals of multifamily assets remain healthy, and we expect that market demand for multifamily assets in the long-term will return as this asset class remains an attractive investment option.

Our debt brokerage platform had lower volumes in 2023 compared to 2022 due to the volatile interest rate environment and constrained supply of capital from banks, securitization markets, and other specialty finance lenders. As the interest rate environment and banking sector begin to stabilize, we expect and have seen capital slowly return to the market, as evidenced by the 62% decline in year-to-date volumes for the six months ended June 30, 2023 compared to a 55% decline for the year ended December 30, 2023.

As noted above, our debt financing operations with HUD declined compared to 2022. The decline in HUD volumes was due to the ongoing high interest-rate environment discussed above more acutely impacted the HUD product given the longer lead times associated with HUD executions.

We entered into the Interim Program JV to expand our capacity to originate Interim Program loans beyond the use of our own balance sheet. Demand for transitional lending was strong prior to 2023, and drove increased competition from lenders, specifically banks, private debt funds, mortgage real estate investment trusts, and life insurance companies. Many transitional loans were originated and leveraged through collateralized loan obligations (“CLOs”), in 2021 and 2022, particularly in the sunbelt region, and a substantial amount of CLO loans originated

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during 2021 and 2022 are scheduled to mature in 2024 and 2025. Since the Federal Reserve began increasing interest rates, the supply of capital to transitional lending decreased substantially due to constraints in lending from banks, as well as tightening credit standards for transitional assets, and our lending activity through both our balance sheet and the Interim Program JV also slowed. In light of challenging macroeconomic conditions, higher interest rates and declining fundamentals within parts of the sunbelt region, many of the maturing CLO loans are delinquent.

Over the past year, we reduced our reliance on our balance sheet and Interim Program JV as we shift our strategy for transitional lending toward our investment management platform and our registered investment advisor, WDIP. Given the increased distress in the transitional lending market, particularly within CLOs, we have been actively raising capital to meet the potential market demand as those loans mature in 2024 and 2025. We launched our first credit fund through WDIP in the fourth quarter of 2023, raising $150 million of capital from a large life insurance company, that when levered will allow WDIP to supply over half a billion dollars to the transitional multifamily lending market. The credit fund focuses on the same core product as the Interim Loan Program and Interim Program JV. WDIP underwrites, services and asset manages all loans originated for the credit fund, and the Company has only a 5% co-investment obligation.

We provide alternative investment management services focused on the affordable housing sector through LIHTC syndication, joint venture development, and community preservation fund management through our subsidiary, WDAE. We are the eighth largest LIHTC syndicator. We continue to approach the affordable housing space with a combined LIHTC syndication and affordable housing service offering that we believe will generate significant long-term financing, property sales, and syndication opportunities. Additionally, as part of FHFA’s 2024 loan origination caps of $140 billion announced in November 2023, at least 50% of the GSEs’ multifamily business is required to be targeted towards affordable housing. Additionally, in 2023 LIHTC vacancy continued to decline, indicating strong demand for affordable housing. We expect these initiatives coupled with the continued demand will create additional growth opportunities for both WDAE and our debt financing and property sales teams focused on affordable housing, as evidenced by the $688 million of equity syndicated by WDAE for the year ended December 31, 2023, the strongest year of syndicated equity ever for WDAE.

Factors That May Impact Our Operating Results

We believe that our results are affected by a number of factors, including the items discussed below.

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Revenues

Loan Origination and Debt Brokerage Fees, net. Loan origination fee revenue is recognized when we record a derivative asset upon the simultaneous commitments to originate a loan with a borrower and sell to an investor or when a loan that we broker closes with the institutional lender. The commitment asset related to the loan origination fee is recognized at fair value, which reflects the fair value of the contractual loan origination related fees and any sale premiums, net of co-broker fees. Also included in revenues from loan origination activities are changes to the fair value of loan commitments, forward sale commitments, and loans held for sale that occur during their respective holding periods. Upon sale of the loans, no gains or losses are recognized as these loans are recorded at fair value during their holding periods.

Brokered loans tend to have lower origination fees because they often require less time to execute, there is more competition for brokerage assignments, and because the borrower will also have to pay an origination fee to the institutional lender. Loan origination fee revenue for brokered loans is recognized when we have completed the services for the loan to be originated by the institutional lender.

Premiums received on the sale of a loan result when a loan is sold to an investor for more than its face value. There are various reasons investors may pay a premium when purchasing a loan. For example, the fixed rate on the loan may be higher than the rate of return required by an investor or the characteristics of a particular loan may be desirable to an investor. We do not receive premiums on brokered loans, since we do not originate the loan.

Fair Value of Expected Net Cash Flows from Servicing, net. Revenue related to expected net cash flows from servicing is recognized at the loan commitment date, similar to the loan origination fees, as described above. The derivative asset is recognized at fair value, which reflects the estimated fair value of the expected net cash flows associated with the servicing of the loan, reduced by the estimated fair value of any guaranty obligations to be assumed. MSRs and guaranty obligations are recognized as assets and liabilities, respectively, upon the sale of the loans.

MSRs are recorded at fair value upon loan sale. The fair value is based on estimates of expected net cash flows associated with the servicing rights. The estimated net cash flows are discounted at a rate that reflects the credit and liquidity risk of the MSR over the estimated life of the loan.

The “Critical Accounting Estimates” section above and NOTE 2 of the consolidated financial statements provide additional details of the accounting for these revenues.

Servicing Fees.  We service nearly all loans we originate and some loans we broker. We earn servicing fees for performing certain loan servicing functions such as processing loan, tax, and insurance payments and managing escrow balances. Servicing generally also includes asset management functions, such as monitoring the physical condition of the property, analyzing the financial condition and liquidity of the borrower, and performing loss mitigation activities as directed by the Agencies.

Our servicing fees on loans we originate provide a stable revenue stream. They are based on contractual terms, are earned over the life of the loan, and are generally not subject to significant prepayment risk. Our Fannie Mae and Freddie Mac servicing agreements generally provide for prepayment fees in the event of a voluntary prepayment. Accordingly, we currently do not hedge our servicing portfolio for prepayment risk. Any prepayment fees received are included in Other revenues.

HUD has the right to terminate our current servicing engagements for cause. In addition to termination for cause, Fannie Mae and Freddie Mac may terminate our servicing engagements without cause by paying a termination fee. Institutional investors typically may terminate our servicing engagements for brokered loans at any time with or without cause, without paying a termination fee.

Property Sales Broker Fees. We earn property broker sales fee revenue when our investment sales team completes the sale of a multifamily investment property or land real estate. The amount of the property sales brokers fees we earn is based upon a percentage of the final sale price of the investment sold.

Investment Management Fees. We manage invested capital from third-party investors through an investment fund structure. The capital placed into the investment fund is utilized to make investments in multifamily investment opportunities, primarily as equity in market-rate or LIHTC-generating multifamily properties. Additionally, we may utilize the capital to fund debt financing opportunities through certain

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investment funds. We earn an investment management or asset management fee based on a contractual percentage of the invested capital. For market-rate investments, we earn and collect the investment management fees through the returns of the investment funds. For LIHTC investments, we collect the asset management fees (“AMF”) through the combination of current payments and asset dispositions. NOTE 2 of the consolidated financial statements provides additional details of the accounting for AMF revenues.

Net Warehouse Interest Income (Expense)—We earn warehouse interest income net of warehouse interest expense. Warehouse interest income is the interest earned from loans held for sale and loans held for investment. Generally, a substantial portion of our loans is financed with matched borrowings under one of our warehouse facilities. The remaining portion of loans not funded with matched borrowings is financed with our own cash. Occasionally, we also fully fund a small number of loans held for sale or loans held for investment with our own cash. Warehouse interest expense is incurred on borrowings used to fund loans solely while they are held for sale or for investment. Warehouse interest income and expense are earned or incurred on loans held for sale after a loan is closed and before a loan is sold. Warehouse interest income and expense are earned or incurred on loans held for investment after a loan is closed and before a loan is repaid.

Placement Fees and Other Interest Income.  We earn fee income on property-level escrow deposits held on behalf of borrowers in our servicing portfolio, generally based on a fixed or variable placement fee negotiated with the financial institutions that hold the escrow deposits. Placement fees reflect the fees net of interest paid to the borrower, if required. Also included with placement fees and other interest income are interest earnings from our cash and cash equivalents and interest income earned on our pledged securities and other investments.

Other Revenues.  Other revenues are comprised of fees for processing loan assumptions, prepayment fee income, application fees,  appraisal revenues, income from equity-method investments, syndication, and certain other revenues from our LIHTC operations, and other miscellaneous revenues related to our operations.

Costs and Expenses

Personnel.  Personnel expense includes the cost of employee compensation and benefits, which include fixed and discretionary amounts tied to company and individual performance, commissions, severance expense, signing and retention bonuses, and share-based compensation.

Amortization and Depreciation.  Amortization and depreciation is principally comprised of amortization of our MSRs, net of amortization of our guaranty obligations. The MSRs are amortized using the interest method over the period that servicing income is expected to be received. We amortize the guaranty obligations evenly over their expected lives. When the loan underlying an MSR prepays, we write off the remaining unamortized balance, net of any related guaranty obligation, and record the write off to Amortization and depreciation. Similarly, when the loan underlying an MSR defaults, we write the MSR off to Amortization and depreciation. We depreciate property, plant, and equipment ratably over their estimated useful lives.

Amortization and depreciation also includes the amortization of intangible assets, principally related to the amortization of asset management fee contracts, research subscription contracts, intellectual property, and other intangible assets recognized in connection with acquisitions. For the years presented in the Consolidated Statements of Income, the amortization of intangible assets relates primarily to intangible assets associated with our acquisitions in 2021 and 2022.

Provision (Benefit) for Credit Losses.  The provision (benefit) for credit losses consists primarily of the provision associated with our risk-sharing loans. The provision (benefit) for credit losses associated with risk-sharing loans is estimated on a collective basis when a loan is sold to Fannie Mae and is based on our current expected credit losses on the current portfolio from loan sale to maturity. When a loan is probable of default, the loan is taken out of the collective evaluation and individually evaluated for credit losses. Our estimates of property fair value are based on appraisals, broker opinions of value, or net operating income and market capitalization rates, whichever we believe is the best estimate of the net disposition value.

The “Critical Accounting Estimates” section above and NOTE 2 of the consolidated financial statements provide additional details of the accounting for this expense.

Interest Expense on Corporate Debt.  Interest expense on corporate debt includes interest expense incurred and amortization of debt discount and deferred debt issuance costs primarily related to our term loan and incremental term loan.

Goodwill Impairment. Goodwill impairment is the write-down of our goodwill balance resulting from either our annual impairment testing or our quarterly evaluations of recoverability.

The “Critical Accounting Estimates” section above and NOTE 2 of the consolidated financial statements provide additional details of the accounting for this expense.

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Fair Value Adjustments to Contingent Consideration Liabilities. Fair value adjustments to our contingent consideration liabilities are the adjustments to the estimated fair value of our contingent consideration liabilities remeasured at the end of each reporting period. As noted below, the accretion of contingent consideration liabilities is included in other operating expenses.

The “Critical Accounting Estimates” section above and NOTE 8 of the consolidated financial statements provide additional details of the accounting for this expense.

Other Operating Expenses.  Other operating expenses include facilities costs, travel and entertainment costs, marketing costs, professional fees, losses on debt extinguishment, accretion of contingent consideration liabilities, corporate insurance premiums, software costs, and other general and administrative expenses.

Income Tax Expense.  The Company is a C-corporation subject to federal, state, and international corporate tax. Our estimated combined statutory federal, state, and international tax rate was 26.1%, 26.1%, and 25.7% for the years ended December 31, 2023, 2022, and 2021, respectively. Except for the effects of the Tax Cuts and Jobs Act of 2017 (“Tax Reform”), our combined statutory tax rate has historically not varied significantly as the only material difference in the calculation of the combined statutory tax rate from year to year is the apportionment of our taxable income amongst the various states where we are subject to taxation since our foreign operations are (i) immaterial and (ii) taxed at a rate similar to our blended federal and state tax rate. Absent additional significant legislative changes to statutory tax rates (particularly the federal tax rate), we expect low deviation from the 2023 combined statutory tax rate for future years. However, we do expect some variability in the effective tax rate going forward due to excess tax benefits recognized and limitations on the deductibility of certain book expenses as a result of Tax Reform, primarily related to executive compensation.

Consolidated Results of Operations

The following is a discussion of the comparison of our results of operations for the years ended December 31, 2023 and 2022. The financial results are not necessarily indicative of future results. Our annual results have fluctuated in the past and are expected to fluctuate in the future, reflecting the interest-rate environment, the volume of transactions, business acquisitions, regulatory actions, and general economic conditions. Discussions of our results of operations and comparisons between 2022 and 2021 can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 10-K for the year ended December 31, 2022.

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SUPPLEMENTAL OPERATING DATA

CONSOLIDATED

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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

The following table presents a year-over-year comparison of our financial results for the years ended December 31, 2023 and 2022.

FINANCIAL RESULTS –2023 COMPARED TO

2022 CONSOLIDATED

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Overview

The decrease in revenues was driven by decreases in loan origination and debt brokerage fees, net (“origination fees”), fair value of expected net cash flows from servicing, net (“MSR income”), property sales broker fees, investment management fees, net warehouse interest income (expense), and other revenues, partially offset by increases in servicing fees and placement fees and other interest income. Origination fees and MSR income decreased largely as a result of a 45% decline in overall debt financing volume. Property sales broker fees decreased primarily due to a 55% decline in property sales volume. Investment management fees decreased largely as a result of a decline in AMF revenue from our LIHTC operations due to challenging market conditions. Net warehouse interest income (expense) decreased from a net revenue position in 2022 to a net expense position in 2023 due to the inverted yield curve throughout 2023. Other revenues decreased primarily due to a $39.6 million one-time gain from the revaluation of our previously held equity-method investment in Apprise in the first quarter of 2022, with no comparable activity in 2023. Servicing fees increased largely from an increase in the average servicing portfolio outstanding. Placement fees and other interest income increased primarily as a result of a higher placement fee rate due to higher short-term interest rates.

The decrease in expenses was due to decreases in personnel costs, amortization and depreciation, fair value adjustments to contingent consideration liabilities, and other operating expenses, partially offset by increases in interest expense on corporate debt and goodwill impairment. Personnel costs decreased, largely due to decreases in variable compensation costs for our salespeople as a result of our lower transaction volumes. Amortization and depreciation decreased, largely due to a decline in write-offs of MSRs due to lower prepayments in the servicing portfolio. Fair value adjustments to contingent consideration decreased due to the sustained challenging market conditions that impacted the estimated fair value of future earnout payments. Other operating expenses decreased primarily as a result of the write off of unamortized debt premium as we paid off a note payable at one of our subsidiaries in 2023, and other decreases in general and administrative expenses as a result of our cost-reduction initiatives. Interest expense on corporate debt increased due to increases in (i) the interest rate as our

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corporate debt’s floating rate is tied to short-term interest rates, (ii) the outstanding principal balance of corporate debt, and (iii) the principal balance of our corporate debt subject to floating interest rates, as we replaced the fixed-rate debt at one of our subsidiaries with a floating-rate debt. Goodwill impairment increased due to sustained challenging market conditions leading to lower projected cash flows at two of our reporting units with no comparable activity in 2022.

Income Tax Expense. The decrease in income tax expense primarily relates to a 48% decrease in income from operations, partially offset by a $3.1 million decrease in realizable excess tax benefits and a one-time tax benefit during 2022 totaling $6.3 million resulting from (i) the dissolution of a joint venture that we acquired full ownership of in 2022 and (ii) intellectual property (“IP”) transfer tax related to the IP intangible assets we acquired as part of the 2022 GeoPhy acquisition. There was no comparable one-time tax benefit during 2023.

A discussion of the financial results for our segments is included further below.

Non-GAAP Financial Measures

To supplement our financial statements presented in accordance with GAAP, we use adjusted EBITDA, a non-GAAP financial measure. The presentation of adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. When analyzing our operating performance, readers should use adjusted EBITDA in addition to, and not as an alternative for, net income. Adjusted EBITDA represents net income before income taxes, interest expense on our corporate debt, and amortization and depreciation, adjusted for provision (benefit) for credit losses, net write-offs, stock-based incentive compensation charges, the fair value of expected net cash flows from servicing, net, the write off of unamortized balance of premium associated with the repayment of a portion of our corporate debt, the gain from revaluation of a previously held equity-method investment, goodwill impairment, and contingent consideration liability fair value adjustments when the fair value adjustment is a triggering event for a goodwill impairment assessment. In cases where the fair value adjustment of contingent consideration liabilities is a trigger for goodwill impairment (such as 2023), the goodwill impairment is netted against the fair value adjustment of contingent consideration liabilities and included as a net number. Because not all companies use identical calculations, our presentation of adjusted EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, adjusted EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not reflect certain cash requirements such as tax and debt service payments. The amounts shown for adjusted EBITDA may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges that are used to determine compliance with financial covenants.

We use adjusted EBITDA to evaluate the operating performance of our business, for comparison with forecasts and strategic plans, and for benchmarking performance externally against competitors. We believe that this non-GAAP measure, when read in conjunction with our GAAP financials, provides useful information to investors by offering:

We believe that adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that adjusted EBITDA should only be used to evaluate our results of operations in conjunction with net income.

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Adjusted EBITDA is reconciled to net income as follows:

ADJUSTED FINANCIAL METRIC RECONCILIATION TO GAAP

CONSOLIDATED

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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

The following table presents a year-over-year comparison of the components of our adjusted EBITDA for the year ended December 31, 2023 and 2022:

ADJUSTED EBITDA–2023 COMPARED TO 2022

CONSOLIDATED

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The decrease in origination fees was primarily related to a significant decrease in the overall debt financing volumes year over year. Servicing fees increased mainly due to an increase in the average servicing portfolio. Property sales broker fees decreased largely as a result of a significant decline in property sales volume year over year. Investment management fees decreased primarily due to a decline in asset management fees from our LIHTC operations due to challenging market conditions. Net warehouse interest income (expense) decreased from

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a net revenue position in 2022 to a net expense position in 2023 due to the inverted yield curve throughout 2023. Placement fees and other interest income increased primarily as a result of higher short-term interest rates.

The decrease in personnel costs was largely due to decreases in variable compensation costs for our salespeople as a result of our lower transaction volumes. Net write-offs increased due to a $6.0 million write off of a loan held for investment in 2023 with no comparable activity in 2022. Other operating expenses decreased largely as a result of our cost-reduction initiatives.

Financial Condition

Cash Flows from Operating Activities

Our cash flows from operations are generated from loan sales, servicing fees, placement fees, net warehouse interest income, property sales broker fees, investment management fees, research subscription fees, investment banking advisory fees, and other income, net of loan origination and operating costs. Our cash flows from operations are impacted by the fees generated by our loan originations and property sales, the timing of loan closings, and the period of time loans are held for sale in the warehouse loan facility prior to delivery to the investor.

Cash Flows from Investing Activities

We usually lease facilities and equipment for our operations. Our cash flows from investing activities also include the funding and repayment of loans held for investment, contributions to and distributions from joint ventures, purchases of equity-method investments, and the purchase of available-for-sale (“AFS”) securities pledged to Fannie Mae.

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Cash Flows from Financing Activities

We use our warehouse loan facilities and, when necessary, our corporate cash to fund loan closings, both for loans held for sale and loans held for investment. We also use warehouse facilities to assist in funding investments in tax credit equity before transferring them to a tax credit fund. We believe that our current warehouse loan facilities are adequate to meet our loan origination and tax credit equity syndication needs. Historically, we used a combination of long-term debt and cash flows from operations to fund large acquisitions. Additionally, we repurchase shares, pay cash dividends, make long-term debt principal payments, and repay short-term borrowings on a regular basis. We issue stock primarily in connection with exercise of stock options and for acquisitions (non-cash transactions).

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Years Ended December 31, 2023 Compared to Years Ended December 31, 2022

The following table presents a year-over-year comparison of the significant components of cash flows for the year ended December 31, 2023 and 2022.

SIGNIFICANT COMPONENTS OF CASH FLOWS – 2023 COMPARED TO 2022

CONSOLIDATED

The decrease in net cash used in operating activities was driven primarily by loans originated and sold. Such loans are held for short periods of time, generally less than 60 days, and impact cash flows presented as of a point in time due to the timing difference between the date of origination and date of delivery. The change in cash flows provided by loan origination activities in 2022 to cash flows used for loan origination activities is primarily attributable to originations outpacing sales by $179.6 million in 2023 compared to sales outpacing originations by $1.4 billion in 2022. Overall loan originations and sales activity declined in 2023 compared to 2022, with a larger decline in sales compared to originations resulting in the change to net cash used for originations activity from net cash provided by originations activity. Excluding cash used for the origination and sale of loans, cash flows provided by operating activities were $179.1 million in 2023, down from $210.0 million in 2022. The decrease is primarily the result of a $105.8 million decrease in net income before noncontrolling interests and a $7.9 million decrease in cash provided by other activities and changes in other assets and liabilities, partially offset by a $41.6 million net increase in non-cash adjustments for MSRs and amortization and depreciation and a $39.6 million non-cash adjustment for the gain from the revaluation of a previously held equity-method investment  in 2022 with no comparable activity in 2023.

The change from net cash used in investing activities in 2022 to net cash provided by investing activities in 2023 was due to (i) a decrease in the purchase of AFS securities, which was impacted by limited purchases in 2023 as the market interest rates on pledged securities AFS were not substantially higher (and at certain points in 2023 lower) than the short-term rate earned on uninvested cash due to the inverted yield curve, (ii) a decrease in proceeds from prepayments of pledged AFS securities as prepayments on the securities’ underlying mortgage loans decreased, (iii) a significant reduction in cash used for acquisitions in 2023 compared to 2022, as we had no acquisitions in 2023, (iv) a decrease in capital expenditures due to elevated capital expenditures in 2022 related to the build out of our new headquarters, and (v) an increase in net payoffs of loans held for investment in 2023 due to contractual maturities and the refinancing of these transitional bridge loans to permanent debt structures and no originations in 2023 as we have shifted away from the Interim Loan Program over the past year to invest in other endeavors.

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The change from cash used in financing activities to cash provided by financing activities in 2023 was largely attributable to (a) a change from net warehouse repayments to net borrowings due to the aforementioned decrease in loan origination activity, (b) an increase in borrowings of notes payable, (c) a decrease in repurchases of common stock, partially offset by (i) an increase in net repayments of interim warehouse notes payable due to the aforementioned maturities and refinancings and lack of origination activity in 2023, (ii) an increase in repayments of notes payable, (iii) an increase in the payment of contingent consideration liabilities (“earnouts”), and (iv) an increase in cash dividends paid. The increase in borrowings of notes payable was due to borrowings under our Incremental Term Loan (defined in Liquidity and Capital Resources below), a portion of which was used to repay notes payable at one of our subsidiaries, resulting in an increase in the repayments of notes payable. The decrease in repurchases of common stock was related to a decrease in the number and value of employee stock vesting events related to previously issued equity grants and a reduction in open market share repurchases. The increase in earnout payments was due to a larger payment in 2023 compared to 2022 for one of our acquisitions. The increase in cash dividends paid was due to the 5% increase in our dividend year over year.

Segment Results

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The Company is managed based on our three reportable segments: (i) Capital Markets (“CM”), (ii) Servicing & Asset Management (“SAM”), and (iii) Corporate. The segment results below are intended to present each of the reportable segments on a stand-alone basis.

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Capital Markets

Our CM segment provides a comprehensive range of commercial real estate finance products to our customers, including Agency lending, debt brokerage, property sales, and appraisal and valuation services. The Company’s long-established relationships with the Agencies and institutional investors enable our CM segment to offer a broad range of loan products and services to the Company’s customers, including first mortgage, second trust, supplemental, construction, mezzanine, preferred equity, and small-balance loans. This segment also provides property sales services to owners and developers of multifamily properties and commercial real estate and multifamily property appraisals for various investors. The CM segment also provides real estate-related investment banking and advisory services, including housing market research.

SUPPLEMENTAL OPERATING DATA

CAPITAL MARKETS

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FINANCIAL RESULTS–2023 COMPARED TO 2022

CAPITAL MARKETS

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Revenues

Origination fees and MSR Income. The following tables provide additional information that helps explain changes in origination fees and MSR income year over year:

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The decrease in origination fees were primarily the result of the 45% decrease in debt financing volume, partially offset by a 17-basis-point increase in our origination fee rate. The increase in the origination fee rate was driven by an increase in GSE debt financing volume as a percentage of total debt financing volume as seen above. GSE debt financing volume has higher origination fees than brokered debt financing volume. The increase in the origination fee rate was driven by a $1.9 billion Fannie Mae loan portfolio financed in 2022, for which we received a much lower origination fee than is typical for individual loans. There was no comparable portfolio transaction in 2023.

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The decrease in MSR income was attributable to a 29% decrease in Agency debt financing volume, partially offset by a six-basis point increase in the Agency MSR Rate seen above. The increase in the Agency MSR Rate was primarily the result of an increase in Fannie Mae debt financing volumes as a percentage of total debt financing volumes shown above. Additionally, the $1.9 billion Fannie Mae portfolio financed in 2022 had a very low servicing fee rate that is typical of such a portfolio. There was no comparable portfolio in 2023. Our Fannie Mae loans have higher weighted-average servicing fees (“WASF”) than our other products.

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See the “Overview of Current Business Environment” section above for a detailed discussion of the factors driving the changes in debt financing volumes.

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Property sales broker fees. The decrease in property sales broker fees were driven principally by the 55% decrease in the property sales volumes period over period.

See the “Overview of Current Business Environment” section above for a detailed discussion of the factors driving the change in property sales volume.

Net Warehouse Interest Income (Expense), Loans Held for Sale. The decrease in net warehouse interest income from a net revenue position in 2022 to a net expense position in 2023 was primarily attributable to an inverted yield curve during 2023. Short-term interest rates, upon which we incur interest expense, were higher than long-term mortgage rates, upon which we earn interest income, during 2023. Partially reducing the negative impact of the inverted yield curve and resulting negative net spreads shown below were the lower average balances of loans held for sale outstanding in 2023 compared to 2022, which were driven by reductions in the number of days loans were held before delivery to reduce the impact of the aforementioned negative interest spread coupled with lower Agency debt financing volumes.

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Other Revenues. The increase was principally due to a $13.2 million increase in investment banking revenues. The increase in investment banking revenues was primarily due to the closing of the largest investment banking advisory transaction in Company history and a more active market in 2023.

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Expenses

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Personnel. The decrease was primarily the result of decreases of $96.4 million in commission costs and $4.4 million in other production incentive costs due to lower origination fees and property sales broker fees. Additionally, salaries and benefits costs and subjective bonus expenses decreased by an aggregate $13.0 million as average headcount decreased for the segment from 863 in 2022 to 822 in 2023.

Interest expense on corporate debt. Interest expense on corporate debt is determined at a consolidated corporate level and allocated to each segment proportionally based on each segment’s use of that corporate debt. The discussion of our consolidated results above has additional information related to the increase in interest expense on corporate debt.

Goodwill Impairment. Goodwill impairment increased due to sustained challenging market conditions leading to lower projected cash flows at two of our reporting units in the CM reportable segment with no comparable activity in 2022.

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Fair value adjustments to contingent consideration liabilities. The decrease was driven by an increase in the fair value adjustment to contingent consideration liabilities (“CCL”) of $44.5 million caused by the sustained challenging market conditions. In 2022, the change in fair value of CCLs in the CM segment resulted in a reduction of the CCLs of $18.0 million, compared to a reduction of $62.5 million in 2023.

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Other Operating Expenses. The decrease was primarily a result of cost-reduction initiatives across a variety of cost categories, with the most prominent decreases in professional fees and travel and entertainment costs.

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Income Tax Expense. Income tax expense is determined at a consolidated corporate level and allocated to each segment proportionally based on each segment’s income from operations, except for significant, one-time tax activities, which are allocated entirely to the segment impacted by the tax activity.

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Non-GAAP Financial Measure

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A reconciliation of adjusted EBITDA for our Capital Markets segment is presented below. Our segment level adjusted EBITDA represents the segment portion of consolidated adjusted EBITDA. A detailed description and reconciliation of consolidated adjusted EBITDA is provided above in our Consolidated Results of Operations—Non-GAAP Financial Measure. CM adjusted EBITDA is reconciled to net income as follows:

ADJUSTED FINANCIAL MEASURE RECONCILIATION TO GAAP

CAPITAL MARKETS

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The following table presents a year-over-year comparison of the components of CM adjusted EBITDA for the years ended December 31, 2023 and 2022.

ADJUSTED EBITDA – 2023 COMPARED TO 2022

CAPITAL MARKETS

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Origination fees decreased due to a decrease in our overall debt financing volume, partially offset by an increase in our origination fee rate. Property sales broker fees decreased as a result of the decline in property sales volumes. The decrease in net warehouse interest income from a net revenue position in 2022 to a net expense position in 2023 was primarily attributable to an inverted yield curve during 2023. Other revenues increased largely due to increased investment banking revenues. The decrease in personnel expense was primarily due to decreased commission and other production incentive costs due to the decrease in origination fees and decreases in other personnel costs due to a reduction in headcount. Other operating expenses increased due to a beneficial adjustment to contingent consideration liabilities in 2022, with no directly comparable activity in 2023, partially offset by our cost-reduction initiatives.

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Servicing & Asset Management

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The SAM segment activities include: (i) servicing and asset-managing the portfolio of loans we (a) originate and sell to the Agencies, (b) broker to certain life insurance companies, and (c) originate through our principal lending and investing activities, and (ii) managing third-party capital invested in tax credit equity funds focused on the affordable housing sector and other commercial real estate.

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SUPPLEMENTAL OPERATING DATA

SERVICING & ASSET MANAGEMENT

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FINANCIAL RESULTS – 2023 COMPARED TO 2022

SERVICNG & ASSET MANAGEMENT

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Revenues

Servicing Fees. The increase was primarily attributable to an increase in the average servicing portfolio period over period as shown below, slightly offset by a decline in the average servicing fee rates. The increase in the average servicing portfolio was driven by the $4.5 billion increase in Fannie Mae and the $1.5 billion increase in Freddie Mac loans serviced. The decrease in the average servicing fee rates were the result of decreases in the WASF on our new Fannie Mae debt financing volume over the past year as the volatility in the interest rate environment compressed the spread on our debt financing volume and reduced the servicing fee rates on loans originated in 2023. The WASF on new debt financing volume was lower than the loans paid off in the portfolio over the past year.

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Investment Management Fees. Investment management fees decreased primarily due to a decline in asset management fees and sales fees from our LIHTC operations of $24.4 million due to tightening liquidity and disruptions in the acquisitions market. The disruption in the acquisitions market and tighter liquidity led to a slowdown in disposition activity this year compared to last. As tax credit investments in our managed portfolio mature, they are sold or recapitalized, leading directly to sales fees and allow us to collect accrued asset management fees. NOTE 2 in the consolidated financial statements contains details on the accounting for asset management fees.

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Placement fees and other interest income.  The increase was driven primarily by an increase in our placement fees on escrow deposits of $84.1 million, coupled with increases in interest income from our pledged securities investments of $5.3 million. The placement fee rates on escrow deposits and the interest rate on our variable-rate pledged securities investments increased significantly as a result of the higher short-term interest rate environment in 2023 compared to same period in 2022.

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Other Revenues. The decrease was primarily due to a $22.9 million decline in prepayment fees, partially offset by an increase in syndication fees of $7.9 million. The decrease in prepayment fees was due to the aforementioned reduction in the volume of loans prepaying and the amount of prepayment fees. Syndication fees increased due to the higher volume of capital syndicated into our LIHTC funds.

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Expenses

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Personnel. The increase was primarily the result of increases in salaries and benefits of $1.8 million and commission costs of $3.6 million. The increase in salaries and benefits was due to annual salary increases as SAM average headcount was flat year over year as it was not impacted by the aforementioned workforce reduction. Commission accruals increased primarily due to the aforementioned increase in syndication fees on which commissions are paid to salespeople.

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Amortization and Depreciation. The decrease was primarily due to a $20.7 million reduction in the amortization expense related to write-offs of MSRs due to declines in the prepayment of MSRs, partially offset by an increase of $10.3 million in the amortization expense of existing MSRs.

Interest expense on corporate debt. Interest expense on corporate debt is determined at a consolidated corporate level and allocated to each segment proportionally based on each segment’s use of that corporate debt. The discussion of our consolidated results above has additional information related to the increase in interest expense on corporate debt.

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Fair value adjustments to contingent consideration liabilities. The decrease was driven by the fair value adjustment to CCLs of $4.5 million in 2022 with no comparable activity in 2023. In 2022, the change in fair value of CCLs in the SAM segment resulted in an increase in the fair value of CCLs of $4.5 million, compared to no change in fair value in 2023.

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Other Operating Expenses. The increase was primarily due to a $3.9 million increase in professional fees, primarily the result of increased syndication activity, partially offset by decreases in various expense types. Much of the professional fees incurred from the syndication activity are reimbursable from the LIHTC funds.

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Income Tax Expense. Income tax expense is determined at a consolidated corporate level and allocated to each segment proportionally based on each segment’s income from operations, except for significant, one-time tax activities, which are allocated entirely to the segment impacted by the tax activity.

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Non-GAAP Financial Measure

A reconciliation of adjusted EBITDA for our SAM segment is presented below. Our segment level adjusted EBITDA represents the segment portion of consolidated adjusted EBITDA. A detailed description and reconciliation of consolidated adjusted EBITDA is provided above in our Consolidated Results of Operations—Non-GAAP Financial Measure. SAM adjusted EBITDA is reconciled to net income as follows:

ADJUSTED FINANCIAL MEASURE RECONCILIATION TO GAAP

SERVICING & ASSET MANAGEMENT

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The following table presents a year-over-year comparison of the components of SAM adjusted EBITDA for the years ended December 31, 2023 and 2022.

ADJUSTED EBITDA – 2023 COMPARED TO 2022

SERVICING & ASSET MANAGEMENT

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Servicing fees increased due to growth in the average servicing portfolio period over period as a result of loan originations, partially offset by a decrease in the average servicing fee rate. Investment management fees decreased primarily due to lower AMF revenues from LIHTC dispositions. Placement fees and other interest income increased primarily due to increases in placement fee rates. Other revenues decreased primarily due to a decrease in prepayment fees. Personnel increased primarily due to an increase in commission costs. Net write-offs increased due to the write-off of a loan held for investment during 2023, with no comparable activity in 2022.

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Corporate

The Corporate segment consists primarily of the Company’s treasury operations and other corporate-level activities. Our treasury activities include monitoring and managing liquidity and funding requirements, including corporate debt. Other corporate-level activities include equity-method investments, accounting, information technology, legal, human resources, marketing, internal audit, and various other corporate groups (“support functions”). We do not allocate costs from these support functions to its other segments in presenting segment operating results. We do allocate interest expense and income tax expense. Corporate debt and the related interest expense are allocated first based on specific acquisitions where debt was directly used to fund the acquisition, such as the acquisition of Alliant, and then based on the remaining segment assets. Income tax expense is allocated proportionally based on income from operations at each segment, except for significant, one-time tax activities, which are allocated entirely to the segment impacted by the tax activity.

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FINANCIAL RESULTS – 2023 COMPARED TO 2022

CORPORATE

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Revenues

Other interest income. The increase was due to an increase in the interest rate we earn on our cash deposits held by our corporate segment combined with an increase in the average balance concentrated in interest-earning accounts.

Other Revenues. The decrease was primarily due to a $39.6 million gain from the revaluation of a previously held equity-method investment, which was a one-time transaction recognized in 2022.

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Expenses

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Personnel. The increase was primarily the result of an $11.1 million increase in subjective bonuses, a $3.4 million increase in salaries, and a $4.1 million increase in deferred compensation costs, partially offset by a $4.3 million decrease in stock compensation expense as we are accruing performance-based stock compensation at an overall lower rate this year than last. An increase in the corporate average headcount during 2023 was the primary driver for the increased subjective bonus and salaries and benefits expenses. The corporate average headcount for the year ended December 31, 2023, does not fully reflect the impact of our workforce reduction that we announced in April and that was effective at the beginning of May. Deferred compensation costs are offset by revenues from the assets held in the deferred compensation trust and included in Other revenues.

Interest expense on corporate debt. Interest expense on corporate debt is determined at a consolidated corporate level and allocated to each segment proportionally based on each segment’s use of that corporate debt. The discussion of our consolidated results above has additional information related to the increase in interest expense on corporate debt.

Other Operating Expenses. The decrease was primarily driven by decreases in professional fees, travel and entertainment, marketing, and miscellaneous expense categories, partially offset by an increase in software costs. Professional fees decreased $10.2 million partially due to elevated professional fees in 2022 related to acquisition costs. Travel and entertainment decreased $2.0 million, marketing decreased by $1.7 million, and miscellaneous expenses decreased $5.5 million. The decreases in travel and entertainment, marketing, and miscellaneous expenses were primarily due to our cost-reduction initiatives. Software costs increased $5.7 million due to our automation efforts.

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Income Tax Expense. Income tax expense is determined at a consolidated corporate level and allocated to each segment proportionally based on each segment’s income from operations, except for significant, one-time tax activities, which are allocated entirely to the segment impacted by the tax activity.

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Non-GAAP Financial Measure

A reconciliation of adjusted EBITDA for our Corporate segment is presented below. Our segment level adjusted EBITDA represents the segment portion of consolidated adjusted EBITDA. A detailed description and reconciliation of consolidated adjusted EBITDA is provided above in our Consolidated Results of Operations—Non-GAAP Financial Measure. Corporate adjusted EBITDA is reconciled to net income as follows:

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ADJUSTED FINANCIAL MEASURE RECONCILIATION TO GAAP

CORPORATE

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The following table presents a year-over-year comparison of the components of Corporate adjusted EBITDA for the years ended December 31, 2023 and 2022.

ADJUSTED EBITDA – 2023 COMPARED TO 2022

CORPORATE

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Other interest income increased primarily due to an increase in interest earned on our cash deposits and increased balances. The increase in personnel expense was primarily due to increased performance compensation allocated to this segment and salaries and benefits expense due to an increase in corporate average headcount during 2023. Other operating expenses decreased largely as a result of a decline in professional fees and other operating expenses as a result of cost-reduction initiatives.

Liquidity and Capital Resources

Uses of Liquidity, Cash and Cash Equivalents

Our significant recurring cash flow requirements consist of liquidity to (i) fund loans held for sale; (ii) pay cash dividends; (iii) fund our portion of the equity necessary to support equity-method investments; (iv) fund investments in properties to be syndicated to LIHTC investment funds that we will asset-manage; (v) make payments related to earnouts from acquisitions, (vi) meet working capital needs to support our day-to-day operations, including debt service payments, joint venture development partnership contributions, advances for servicing, loan repurchases, and payments for salaries, commissions, and income taxes, and (vii) meet working capital to satisfy collateral requirements for our Fannie Mae DUS risk-sharing obligations and to meet the operational liquidity requirements of Fannie Mae, Freddie Mac, HUD, Ginnie Mae, and our warehouse facility lenders.

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Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate our servicing authority for all or some of the portfolio if, at any time, it determines that our financial condition is not adequate to support our obligations under the DUS agreement. We are required to maintain acceptable net worth as defined in the standards, and we satisfied the requirements as of December 31, 2023. The net worth requirement is derived primarily from unpaid balances on Fannie Mae loans and the level of risk-sharing.

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As of December 31, 2023, the net worth requirement was $304.8 million, and our net worth was $1.0 billion, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC. As of December 31, 2023, we were required to maintain at least $60.7 million of liquid assets to meet our operational liquidity requirements for Fannie Mae, Freddie Mac, HUD, Ginnie Mae, and our warehouse facility lenders. As of December 31, 2023, we had operational liquidity of $225.0 million, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC.

We paid a cash dividend of $0.63 per share each quarter of 2023, which is 5% higher than the quarterly dividend paid in each quarter of 2022. In February 2024, the Company’s Board of Directors declared a dividend of $0.65 per share for the first quarter of 2024. The dividend will be paid on March 15, 2024 to all holders of record of our restricted and unrestricted common stock as of March 1, 2024.

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Over the past three years, we have returned $240.4 million to investors primarily through cash dividend payments of $229.3 million. Additionally, we have invested $577.2 million in acquisitions, $300.0 million of which was financed by an increase in our Term Loan (as defined below). On occasion, we may use cash to fully fund some loans held for investment or loans held for sale instead of using our warehouse lines. As of December 31, 2023, we did not fully fund any such loans. We continually seek opportunities to complete additional acquisitions if we believe the economics are favorable.

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In February 2023, our Board of Directors approved a stock repurchase program that permitted the repurchase of up to $75.0 million of shares of our common stock over a 12-month period beginning February 23, 2023. Through December 31, 2023 we did not repurchase any shares under the 2023 stock repurchase program and had $75.0 million of remaining capacity under that program. In February 2024, our Board of Directors approved a stock repurchase program that permits the repurchase of up to $75.0 million shares of our common stock over a 12-month period beginning February 23, 2024.

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We have contractual obligations to make future cash payments on lease agreements on our various offices of $101.4 million as of December 31, 2023. NOTE 14 in the consolidated financial statements contains additional details related to future lease payments. We have contractual obligations to repay short-term and long-term debt. The total principal balance for such debt was $1.4 billion as of December 31, 2023, of which $596.4 million will be repaid with the proceeds from the sale of loans held for sale and the repayments of loans held for investment. NOTE 6 in the consolidated financial statements contains additional details related to these future debt payments. The expected interest associated with these debt payments is $70.7 million in 2024, $60.6 million in 2025, $59.9 million in 2026, $59.3 million in 2027, and $58.8 million in 2028. The future interest for long-term debt is based on a variable rate; therefore, the preceding interest payments are calculated based on the effective interest rate as of December 31, 2023.

Historically, our cash flows from operations and warehouse facilities have been sufficient to enable us to meet our short-term liquidity needs and other funding requirements. We believe that cash flows from operations will continue to be sufficient for us to meet our current obligations for the foreseeable future.

Restricted Cash and Pledged Securities

Restricted cash consists primarily of good faith deposits held on behalf of borrowers between the time we enter into a loan commitment with the borrower and the investor purchases the loan. We are generally required to share the risk of any losses associated with loans sold under the Fannie Mae DUS program, our only off-balance sheet arrangement. We are required to secure this obligation by assigning collateral to Fannie Mae. We meet this obligation by assigning pledged securities to Fannie Mae. The amount of collateral required by Fannie Mae is a formulaic calculation at the loan level and considers the balance of the loan, the risk level of the loan, the age of the loan, and the level of risk-sharing. Fannie Mae requires collateral for Tier 2 loans of 75 basis points, which is funded over a 48-month period that begins upon delivery of the loan to Fannie Mae. Collateral held in the form of money market funds holding U.S. Treasuries is discounted 5%, and Agency mortgage-backed securities (“MBS”) are discounted 4% for purposes of calculating compliance with the collateral requirements. As of December 31, 2023, we held substantially all of our restricted liquidity in Agency MBS in the aggregate amount of $142.8 million. Additionally, the majority of the loans for which we have risk-sharing are Tier 2 loans. We fund any growth in our Fannie Mae required operational liquidity and collateral requirements from our working capital.

We are in compliance with the December 31, 2023 collateral requirements as outlined above. As of December 31, 2023, reserve requirements for the December 31, 2023 DUS loan portfolio will require us to fund $77.1 million in additional restricted liquidity over the next 48 months, assuming no further principal paydowns, prepayments, or defaults within our at-risk portfolio. Fannie Mae has assessed the DUS Capital Standards in the past and may make changes to these standards in the future. We generate sufficient cash flows from our operations to meet these capital standards and do not expect any future changes to have a material impact on our future operations; however, any future changes to collateral requirements may adversely impact our available cash.

Under the provisions of the DUS agreement, we must also maintain a certain level of liquid assets referred to as the operational and

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unrestricted portions of the required reserves each year. We satisfied these requirements as of December 31, 2023.

Sources of Liquidity: Warehouse Facilities and Notes Payable

Warehouse Facilities

We utilize a combination of warehouse facilities and notes payable to provide funding for our operations. We utilize warehouse facilities to fund our Agency Lending and Interim Loan Program. Our ability to originate Agency mortgage loans and loans held for investment depends upon our ability to secure and maintain these types of financing agreements on acceptable terms.  For a detailed description of the terms of each warehouse agreement including the affirmative and negative covenants, refer to “Warehouse Facilities” in NOTE 6 of the consolidated financial statements.

Notes Payable

We have a senior secured credit agreement (the “Credit Agreement”) that provides for a $600 million term loan (the “Term Loan”) that bears interest at Adjusted Term Secured Overnight Financing Rate (“SOFR”) plus 225 basis points with a floor of 50 basis points and has a stated maturity date of December 16, 2028 (or, if earlier, the date of acceleration of the Term Loan pursuant to the term of the Credit Agreement). At any time, we may also elect to request one or more incremental term loan commitments not to exceed the lesser of $230 million and 100% of trailing four-quarter Consolidated Adjusted EBITDA, provided that total indebtedness would not cause the leverage ratio to exceed 3.00 to 1.00. As of December 31, 2023, the outstanding principal balance of the Term Loan was $588.0 million, and the effective interest rate was 7.63%. The note payable and the warehouse facilities are senior obligations of the Company. We were in compliance with all covenants related to the Credit Agreement.

On January 12, 2023, we entered into a lender joinder agreement and amendment to the Credit Agreement that provided for an incremental term loan (“Incremental Term Loan”) with a principal amount of $200.0 million, modified the ratio thresholds related to mandatory prepayments, and included a provision that allows additional types of indebtedness. The Incremental Term Loan was issued at a 2.0% discount and contains similar repayment terms as the Term Loan. The Incremental Term Loan bears interest at Adjusted Term SOFR plus 300 basis points and matures on December 16, 2028, and the UPB was $198.5 million and the effective interest rate was 8.38%. We are obligated to make principal payments on the Incremental Term Loan in consecutive quarterly installments equal to 0.25% of the aggregate original principal amount of the Incremental Term Loan on the last business day of each March, June, September, and December, which began on June 30, 2023. We used approximately $115.9 million of the proceeds to pay off the Alliant note payable principal balance and related accrued interest and other fees of a subsidiary. As of December 31, 2023, the aggregate outstanding principal balance of the original Term Loan and Incremental Term Loan (“Corporate Debt”) was $786.5 million.

For a detailed description of the terms of the Credit Agreement, refer to “Notes Payable – Term Loan Note Payable” in NOTE 6 of the consolidated financial statements.

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Credit Quality and Allowance for Risk-Sharing Obligations

The following table sets forth certain information useful in evaluating our credit performance.

For example, a $15 million loan with 50% risk-sharing has the same potential risk exposure as a $7.5 million loan with full DUS risk sharing. Accordingly, if the $15 million loan with 50% risk-sharing were to default, we would view the overall loss as a percentage of the at-risk balance, or $7.5 million, to ensure comparability between all risk-sharing obligations. To date, substantially all of the risk-sharing obligations that we have settled have been from full risk-sharing loans.

Fannie Mae DUS risk-sharing obligations are based on a tiered formula and represent substantially all of our risk-sharing activities. The risk-sharing tiers and the amount of the risk-sharing obligations we absorb under full risk-sharing are provided below. Except as described in

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the following paragraph, the maximum amount of risk-sharing obligations we absorb at the time of default is generally 20% of the origination unpaid principal balance (“UPB”) of the loan.

Fannie Mae can double or triple our risk-sharing obligation if the loan does not meet specific underwriting criteria or if a loan defaults within 12 months of its sale to Fannie Mae. We may request modified risk-sharing at the time of origination, which reduces our potential risk-sharing obligation from the levels described above.

We use several techniques to manage our risk exposure under the Fannie Mae DUS risk-sharing program. These techniques include maintaining a strong underwriting and approval process, evaluating and modifying our underwriting criteria given the underlying multifamily housing market fundamentals, limiting our geographic market and borrower exposures, and electing the modified risk-sharing option under the Fannie Mae DUS program.

The “Business” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains a discussion of the risk-sharing caps we have with Fannie Mae.

We regularly monitor the credit quality of all loans for which we have a risk-sharing obligation. Loans with indicators of underperforming credit are placed on a watch list, assigned a numerical risk rating based on our assessment of the relative credit weakness, and subjected to additional evaluation or loss mitigation. Indicators of underperforming credit include poor financial performance, poor physical condition, poor management, and delinquency. A collateral-based reserve is recorded when it is probable that a risk-sharing loan will foreclose or has foreclosed, and a reserve for estimated credit losses and a guaranty obligation are recorded for all other risk-sharing loans.

The calculated CECL reserve for the Company’s $58.5 billion at-risk Fannie Mae servicing portfolio as of December 31, 2023 was $31.6 million compared to $39.7 million as of December 31, 2022. The significant decrease in the CECL reserve was principally related to a reduction in our historical loss rate factor, which decreased from 1.2 basis points as of December 31, 2022 to 0.6 basis points as of March 31, 2023 (with no change from March 31, 2023 to December 31, 2023), as a year with significant losses in our 10-year lookback period was replaced with a year with significantly fewer losses.

As of December 31, 2023, three at-risk loans were in default with an aggregate UPB of $27.2 million compared to two at-risk loans with an aggregate UPB of $37.0 million were in default as of December 31, 2022. The collateral-based reserve on defaulted loans was $2.8 million and $4.4 million as of December 31, 2023 and December 31, 2022, respectively. We had a benefit for risk-sharing obligations of $10.4 million and $13.9 million for the years ended December 31, 2023 and 2022, respectively.

For the ten-year period from January 1, 2013 through December 31, 2023, we recognized net write-offs of risk-sharing obligations of $15.3 million, or an average of less than one basis point annually of the average at risk Fannie Mae portfolio balance.

We are obligated to repurchase loans that are originated for the Agencies’ programs if certain representations and warranties that we provide in connection with the sale of loans through these programs, are breached. In the first quarter of 2024, we expect to repurchase a Fannie Mae loan with a UPB of $13.5 million. Based on the information available to us at this time, we do not believe we will incur a material loss associated with this loan.

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Additionally, we received a repurchase request from Freddie Mac related to a loan with a UPB of $11.4 million, and we have appealed Freddie Mac's request. In January 2024, Freddie Mac informed us that they were considering requesting that we repurchase a second loan with a UPB of $34.8 million, but we have not received a formal request to repurchase the loan.

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We are currently evaluating our options to resolve both loans with Freddie Mac, and we believe it is likely that we will ultimately repurchase both Freddie Mac loans in 2024 or otherwise indemnify Freddie Mac for any losses it incurs on the loans. With respect to the $11.4 million loan, based on the information available to us at this time, we do not believe we will incur a material loss regardless of the resolution negotiated with Freddie Mac. With respect to the $34.8 million loan, we have not yet been given access to the underlying property for inspection and evaluation such that we can properly estimate the amount of any such loss. Based on the information available to us at this time, we believe that the value of the underlying property is likely less than the UPB of the loan.

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New/Recent Accounting Pronouncements

NOTE 2 in the consolidated financial statements in Item 15 of Part IV in this 10-K contains a description of the accounting pronouncements that the Financial Accounting Standards Board has issued and that have the potential to impact us but have not yet been adopted by us. There were no other accounting pronouncements issued during 2023 that have the potential to impact our consolidated financial statements.