GOODWILL AND OTHER INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2022

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and Other Intangible Assets

NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and Acquisition Activities

A summary of the Company’s goodwill for the nine months ended September 30, 2022 and 2021 follows:

	For the nine months ended
	September 30,
Roll Forward of Goodwill (in thousands)	2022		2021
Beginning balance	$	698,635	$	248,958
Additions from acquisitions		222,670		84,291
Measurement-period adjustments		26,859		—
Impairment		—		—
Ending balance	$	948,164	$	333,249

The additions to goodwill from acquisitions during 2022 shown in the table above during the nine months ended September 30, 2022 relate to two acquisitions. On February 28, 2022, the Company acquired 100% of the equity interests of GeoPhy B.V. (“GeoPhy”), a Netherlands-based commercial real-estate technology company. As part of the acquisition, the Company also obtained GeoPhy’s 50% interest in the Company’s appraisal joint venture, Apprise. The Company now owns 100% of Apprise and consolidates its balances and its operating results post acquisition. Prior to the acquisition, the Company accounted for its investment in Apprise under the equity method. The fair value of the consideration was $204.6 million and consisted of $82.1 million of cash, $5.5 million of forgiveness of a receivable the Company had with the joint venture (non-cash activity not reflected in the Condensed Consolidated Statements of Cash Flows), and $117.0 million of contingent consideration.

GeoPhy’s data analytics and technology development capabilities are expected to accelerate the growth of the Company’s lending, brokerage, and appraisal operations. The GeoPhy acquisition is also expected to allow the Company to meet its goal of $5 billion of annual small-balance lending volume and appraisal revenue of $75 million by 2025 as part of the Company’s overall growth targets. A significant portion of the value associated with the GeoPhy acquisition was related to the assembled workforces with their combined expertise in information technology, data science, and commercial real estate. The Company believes that the combination of GeoPhy’s personnel, appraisal technology platform, and the future development of technology to accelerate growth in the origination of small-balance commercial loans, along with Walker & Dunlop’s financial resources will (i) drive a significant increase in the identification and retention of borrowers in the small-balance segment of the multifamily market and (ii) continue to drive significant growth in appraisal revenues over the next five years. GeoPhy’s financial results since the acquisition and pro-forma information as if the acquisition occurred January 1, 2021 were immaterial.

The contingent consideration noted above is contingent on achieving certain Apprise revenue and productivity milestones and small-balance loan volume and revenue milestones over a four-year period. The maximum earnout included as part of the GeoPhy acquisition is $205.0 million. The Company estimated that $132.7 million, or 65% of the maximum earnout, was achievable based on management forecasts.

The discounted balance of $117.0 million is 57% of the maximum earnout amount. The Company estimated the fair value of this contingent consideration using a Monte Carlo simulation. The weighted average cost of capital (“WACC”) used for the valuation of the contingent consideration was 17.0% for the Apprise portion of the earnout and 14.5% for the small-balance portion of the earnout. The WACC reflects the additional risk inherent in the Apprise performance estimates as it is still in the startup stage of its development. The estimated achievable earnout amount was discounted using a forward curve for a Company-specific subordinated debt rating.

The calculation of goodwill of $206.4 million included the fair value of the consideration transferred of $204.6 million and the acquisition-date fair value of the Company’s previously held equity-method investment in Apprise of $58.5 million. The book value of the Company’s equity-method investment in Apprise prior to the acquisition date was $18.9 million, resulting in a $39.6 million gain from remeasuring to fair value. The gain is included as a component of Other revenues in the Condensed Consolidated Statements of Income. The Company used a discounted cash flow model to estimate the acquisition-date fair value of Apprise, with the discount rate and management’s forecast of future revenues and cash flows as the most-significant inputs for the estimate. The discount rate used was 17.0%, and a control premium was not included in the estimate.

The goodwill resulting from the GeoPhy acquisition was allocated to the Company’s Capital Markets reportable segment. The other assets primarily consisted of technology intangible assets of $31.0 million and deferred tax assets of $9.4 million. The technology intangible assets will be amortized over a 10-year period. Immaterial liabilities were assumed.

The Company expects a large portion of the goodwill to be tax deductible, with the tax-deductible amount of goodwill related to the contingent consideration to be determined once the cash payments to settle the contingent consideration are made.

The second acquisition occurred during the third quarter of 2022 for consideration of $6.0 million of cash and $3.0 million of contingent consideration and resulted in $8.8 million of goodwill. The Company allocated the goodwill from this acquisition to the Company’s Capital Markets reportable segment. The Company expects all of the goodwill from this acquisition to be tax deductible, with the tax-deductible amount of goodwill related to the contingent consideration to be determined once the cash payments to settle the contingent consideration are made. The financial results since the acquisition and pro-forma financial information as if the acquisition occurred on January 1, 2021 were immaterial.

The measurement-period adjustments above primarily relate to the Company’s acquisition of Alliant Capital Ltd. (“Alliant”), an acquisition completed in December of 2021, as more fully described in the Company’s 2021 Form 10-K. The measurement-period adjustments consist of (i) $29.7 million additional purchase price consideration related to the settlement of working capital adjustments and (ii) immaterial other adjustments as a result of the Company obtaining additional information. The additional consideration was paid during the third quarter of 2022. The Company has substantially completed the purchase accounting for the Alliant acquisition as of September 30, 2022. During the third quarter of 2022, the Company settled working capital adjustments related to the GeoPhy acquisition, resulting in a $5.5 million reduction in purchase price consideration. The settlement of the cash owed to the Company from GeoPhy for working capital adjustments will be a reduction of the cash paid to settle the contingent consideration achieved in the future. The Company has not completed the purchase accounting for the GeoPhy acquisition as it is waiting for the GeoPhy tax returns to be completed.

As discussed in NOTE 11 below, in the first quarter of 2022, the Company began disclosing three reportable segments. The following table shows goodwill by reportable segments as of September 30, 2022. As the Company did not have segment reporting as of December 31, 2021, all of the goodwill balance was allocated to the Company’s one reportable segment as of December 31, 2021.

	As of
Goodwill by Reportable Segment (in thousands)	September 30, 2022
Capital Markets	$	451,345
Servicing & Asset Management		496,819
Corporate		—
Ending balance	$	948,164

Other Intangible Assets

Activity related to other intangible assets for the nine months ended September 30, 2022 and 2021 follows:

	For the nine months ended
	September 30,
Roll Forward of Other Intangible Assets (in thousands)	2022		2021
Beginning balance	$	183,904	$	1,880
Additions from acquisitions		31,000		8,719
Amortization		(12,070)		(2,145)
Ending balance	$	202,834	$	8,454

The following table summarizes the gross value, accumulated amortization, and net carrying value of the Company’s other intangible assets as of September 30, 2022 and December 31, 2021:

Components of Other Intangible Assets (in thousands)	September 30, 2022		December 31, 2021
Gross value	$	220,682	$	189,682
Accumulated amortization		(17,848)		(5,778)
Net carrying value	$	202,834	$	183,904

The expected amortization of other intangible assets shown in the Condensed Consolidated Balance Sheet as of September 30, 2022 is shown in the table below. Actual amortization may vary from these estimates.

	Expected
(in thousands)	Amortization
Three Months Ending December 31,
2022	$	4,190
Year Ending December 31,
2023	$	17,263
2024		16,206
2025		16,206
2026		16,206
2027		16,206
Thereafter		116,557
Total	$	202,834

Contingent Consideration Liabilities

A summary of the Company’s contingent consideration liabilities, which are included in Other liabilities in the Condensed Consolidated Balance Sheets, as of and for the nine months ended September 30, 2022 and 2021 follows:

	For the nine months ended
	September 30,
Roll Forward of Contingent Consideration Liabilities (in thousands)	2022		2021
Beginning balance	$	125,809	$	28,829
Additions		119,955		7,504
Accretion and revaluation		3,767		1,405
Payments		(28,547)		(6,080)
Ending balance	$	220,984	$	31,658

The contingent consideration liabilities presented in the table above relate to (i) acquisitions of debt brokerage and investment sales brokerage companies completed over the past several years, (ii) the purchase of noncontrolling interests in 2020 that was fully earned as of December 31, 2021 and paid in 2022, (iii) the Alliant acquisition, and (iv) the GeoPhy acquisition. The contingent consideration for each of the

acquisitions may be earned over various lengths of time after each acquisition, with a maximum earn-out period of five years, provided certain revenue targets and other metrics have been met. The last of the earn-out periods related to the contingent consideration ends in the third quarter of 2027. In each case, the Company estimated the initial fair value of the contingent consideration using a Monte Carlo simulation.

The recognition of the contingent consideration liability for the two acquisitions in 2022 is non-cash, and thus not reflected in the amount of cash consideration paid on the Condensed Consolidated Statements of Cash Flows. In addition, $8.8 million of the payments settling contingent consideration liabilities included in the table above for the nine months ended September 30, 2022 were from the issuance of the Company’s common stock, a non-cash transaction.