What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-07-31 compared with 2020-05-08 · 186 added, 111 removed, 238 unchanged (56% of the section changed)

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We also originate and sell finance products through CMBS programs and during the second half of 2019, we began to originate and service permanent financing loans underwritten using the guidelines of our existing agency loans sold to the GSEs, which we refer to as "Private Label"

We intend to pool and securitize the Private Label loans and sell certain securities in the securitizations to third-party investors, while retaining the highest risk bottom tranche bond referred to as the "B Piece."

We pool and securitize the Private Label loans and sell certain securities in the securitizations to third-party investors, while retaining the highest risk bottom tranche certificate.

We conduct our operations to qualify as a REIT.

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Although we have long-established relationships with the GSE and HUD agencies, our operating performance would be negatively impacted if our business relationships with these agencies deteriorate.

Additionally, we also recognize revenue from originating, selling and servicing our Private Label loans.

Income earned from our structured transactions.

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COVID-19 Impact.

During the first quarter of 2020, the global outbreak of COVID-19 has forced many countries, including the United States, to declare national emergencies, to institute "stay-at-home"

During the first half of 2020, the global outbreak of COVID-19 has forced many countries, including the United States, to declare national emergencies, to institute "stay-at-home"

orders, to close financial markets and to restrict operations of non-essential businesses.

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We expect the effects of the COVID-19 pandemic to negatively impact our financial performance and operating results for the remainder of 2020.

Significant Developments During the First Quarter of 2020

Significant Developments During the Second Quarter of 2020

Capital Markets Activity.

We raised approximately $295.0 million of capital through the issuance of 4.50% senior unsecured debt and sales of our common stock through an “At-The-Market” equity offering sales agreement.

We used a significant portion of the net proceeds from these capital raises to redeem secured indebtedness, make investments related to our business and for general corporate purposes.

We raised $89.5 million of capital through the issuances of 8.00% senior unsecured debt and sales of our common stock through an “At-The-Market” equity offering sales agreement.

We used the net proceeds from these capital raises to redeem secured indebtedness, make investments related to our business and for general corporate purposes.

Financing Activity.

● We closed our thirteenth collateralized securitization vehicle (CLO XIII) totaling $800.0 million of real estate related assets and cash, of which $668.0 million of investment grade notes were issued to third party investors and $70.0 million of below investment-grade notes and a $62.0 million equity interest in the portfolio were retained by us;

● We completed the unwind of CLO VIII, redeeming $282.9 million of outstanding notes which were repaid primarily from refinancing the remaining assets within our existing financing facilities (including CLO XIII), as well as with cash held by CLO VIII;

● We were required to post $54.7 million of cash collateral in connection with margin calls on our securities repurchase facilities, which were used to reduce the UPB of those facilities in April 2020;

● We increased the capacity of the credit facilities and repurchase agreements in our Structured Business by more than $375.0 million by increasing the capacity of existing facilities.

Share Repurchases.

In March 2020, we implemented a share repurchase program authorizing the repurchase of up to $100.0 million of our outstanding common stock.

As of April 30, 2020, we repurchased 993,106 shares of our common stock under this program at a total cost of $3.9 million and an average cost of $3.98 per share.

Adoption of CECL.

We recorded a $75.9 million credit loss provision in connection with the adoption of CECL.

See Note 2 for details.

● We closed our first Private Label multifamily mortgage loan securitization totaling $727.2 million, of which we retained the most subordinate certificates totaling $63.6 million.

The securitization is backed by a pool of 40 fixed rate, 10-year mortgage loans secured by first priority mortgage liens on 49 multifamily properties;

● We completed the unwind of our $70.0 million Debt Fund and redeemed all the outstanding notes with a portion of the proceeds from our senior unsecured notes issued in March 2020.

Agency Business Activity.

● Loan originations and sales totaled $1.08 billion and $957.1 million, respectively;

● Our fee-based servicing portfolio grew 1% to $20.20 billion;

● We recorded losses on derivative instruments totaling $47.7 million, primarily related to our Swap Futures held to hedge interest rate exposure on our Private Label loans until they are securitized.

● Loan originations and sales totaled $1.40 billion and $1.99 billion, respectively, and our fee-based servicing portfolio grew 7% to $21.58 billion.

Our loan sales and servicing portfolio totals include the Private Label loans sold and securitized in May 2020;

● We recorded losses on derivative instruments totaling $7.1 million related to our derivative instruments used to hedge interest rate exposure.

Structured Business Activity.

● Our Structured loan and investment portfolio grew 4% to $4.98 billion on loan originations totaling $300.5 million, partially offset by loan runoff of $159.2 million;

We declared a cash dividend on common stock of $0.30 per share, which is payable on July 15, 2020 to common stockholders of record on June 30, 2020.

Subsequent Events.

In April 2020, we issued $40.5 million aggregate principal amount of 8.00% senior unsecured notes due in 2023 in a private offering, generating net proceeds of $39.8 million.

A significant portion of the net proceeds were used to repay secured indebtedness that financed our securities with margin call exposure.

In addition, as previously planned, we also completed the unwind of the $70.0 million Debt Fund and redeemed all the outstanding notes with a portion of the proceeds from our senior unsecured notes issued in March 2020.

● We recorded income of $20.9 million from our residential mortgage business joint venture.

We raised our quarterly cash dividend to $0.31 per share, which is payable on August 31, 2020 to common stockholders of record on August 17, 2020.

Current Market Conditions, Risks and Recent Trends

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Adverse economic conditions could result in declining real estate values, increased payment delinquencies and defaults and increased loan modifications and foreclosures, all of which could significantly impact our results of operations, financial condition, business prospects and our ability to make distributions to our stockholders.

Prior to the current market dislocation, we were very active in the capital markets during the first quarter of 2020, closing a new $800.0 million CLO and issuing $275.0 million of senior notes.

As a result of the market dislocation, our Board of Directors authorized a $100.0 million stock repurchase program.

In addition, many commercial mortgage REITs have suffered from reduced available liquidity and, despite a reduction in available liquidity, we closed a $40.5 million private placement debt offering in April 2020.

The pandemic has caused a dislocation in the capital markets resulting in a significant reduction of available liquidity.

Many commercial mortgage REITs are suffering from the reduced available liquidity as access to capital is critical to grow their business.

Despite this reduction in liquidity, during the second quarter of 2020 we raised $70.8 million through two private placement debt offerings and raised an additional $18.7 million from sales of our common stock through our “At-The-Market” equity offering sales agreement.

Our Agency Business requires limited capital to grow, as originations are financed through warehouse facilities for generally up to 60 days before the loans are sold, therefore this lack of liquidity has not and should not, impact our ability to grow this business.

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In our Structured Business, 80% of our portfolio is in multifamily assets with most of these loans containing interest reserves and/or replenishment obligations by our borrowers.

In our Agency Business, we have received requests for forbearances related to April 2020 payments totaling approximately 0.5% of our $14.95 billion Fannie Mae DUS portfolio and 4.0% of our $4.57 billion Freddie Mac portfolio.

With respect to our outlook for May and June 2020 payments, we think there will be additional economic stress, which we will closely monitor and manage.

In our Agency Business, we have received requests for forbearances related to approximately 0.4% of our $15.67 billion Fannie Mae DUS portfolio and approximately 6.1% of our $4.56 billion Freddie Mac portfolio.

We are closely monitoring and managing the requests for forbearances and there could potentially be additional economic stress in the third quarter.

The federal government, Fannie Mae and Freddie Mac have made certain forbearance and non-eviction programs available to borrowers and tenants should they need to counteract any short-term pressure on their properties from COVID-19 and its impact on the economy.

For borrowers, in order to qualify for a forbearance, they need to demonstrate they have been adversely affected by the pandemic and their ability to make their loan payments has been

For borrowers, in order to qualify for a forbearance, they need to demonstrate they have been adversely affected by the pandemic and their ability to make their loan payments has been impacted.

All loan and rent payments that are suspended remain the obligations of the borrowers and tenants and we are offering tenants of our borrowers impacted by the COVID-19 pandemic financial assistance through a $2.0 million rental assistance program that we launched in April 2020.

Interest rates have trended downward over the past several quarters and are currently at relatively low levels.

Interest rates have trended downward over the past several quarters and are currently at historically low levels.

While lower interest rates generally have a positive impact on origination volume as borrowers look to refinance loans to take advantage of lower rates, our net interest income may be negatively impacted as higher yielding loans are paid off and replaced with lower yielding loans.

We are somewhat insulated from decreasing interest rates, since a large portion of our structured loan portfolio has LIBOR floors, which could increase our net interest income in the future if rates continue to decline.

We are a national originator with Fannie Mae and Freddie Mac, and the GSEs remain the most significant providers of capital to the multifamily market.

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Changes in Financial Condition

Assets — Comparison of balances at March 31, 2020 to December 31, 2019:

Our Structured loan and investment portfolio balance was $4.80 billion and $4.29 billion at March 31, 2020 and December 31, 2019, respectively.

Assets — Comparison of balances at June 30, 2020 to December 31, 2019:

Our Structured loan and investment portfolio balance was $4.98 billion and $4.29 billion at June 30, 2020 and December 31, 2019, respectively.

This increase was primarily due to loan originations exceeding loan payoffs and paydowns by $722.2 million.

See below for details.

Our portfolio had a weighted average current interest pay rate of 5.70% and 5.98% at March 31, 2020 and December 31, 2019, respectively.

Including certain fees earned and costs associated with the structured portfolio, the weighted average current interest rate was 6.35% and 6.68% at March 31, 2020 and December 31, 2019, respectively.

Advances on our financing facilities totaled $4.70 billion and $3.93 billion at March 31, 2020 and December 31, 2019, respectively, with a weighted average funding cost of 3.19% and 3.82%, respectively, which excludes financing costs.

Including financing costs, the weighted average funding rate was 3.68% and 4.35% at March 31, 2020 and December 31, 2019, respectively.

Our portfolio had a weighted average current interest pay rate of 5.57% and 5.98% at June 30, 2020 and December 31, 2019, respectively.

Including certain fees earned and costs associated with the structured portfolio, the weighted average current interest rate was 6.10% and 6.68% at June 30, 2020 and December 31, 2019, respectively.

Advances on our financing facilities totaled $4.54 billion and $3.93 billion at June 30, 2020 and December 31, 2019, respectively, with a weighted average funding cost of 2.68% and 3.82%, respectively, which excludes financing costs.

Including financing costs, the weighted average funding rate was 3.14% and 4.35% at June 30, 2020 and December 31, 2019, respectively.

Activity from our Structured Business portfolio was comprised of the following ($ in thousands):

Three Months Ended

March 31, 2020

Six Months Ended

June 30, 2020

Loans originated

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Number of loans

(1) The majority of our loan extensions did not include rate concessions and were completed under the normal course of business prior to the COVID-19 pandemic.

Loans held-for-sale from the Agency Business increased $130.3 million, primarily related to $282.3 million of Private Label loan originations, partially offset by Fannie Mae loan sales exceeding originations by $172.1 million as noted in the following table (in thousands).

Loans held-for-sale from the Agency Business decreased $501.0 million, primarily related to loan sales exceeding originations by $467.4 million as noted in the following table (in thousands).

Loan sales includes $727.2 million of Private Label loans which were sold in connection with our first Private Label multifamily mortgage loan securitization in the second quarter of 2020.

Our GSE loans are generally sold within 60 days, while our Private Label loans are generally expected to be sold and securitized within 180 days from the loan origination date.

Three Months Ended

March 31, 2020

Six Months Ended

June 30, 2020

Private Label

Other assets increased $98.2 million, primarily due to $54.7 million of cash collateral we posted related to margin calls on our secured debt, a $23.5 million increase to deferred tax assets and a $22.2 million increase in derivative assets associated with the changes in fair value of our forward sales commitments and cash posted in connection with our Swap Futures.

Liabilities – Comparison of balances at March 31, 2020 to December 31, 2019:

Credit facilities and repurchase agreements increased $168.2 million, primarily due to funding of new structured loan activity and the financing of CLO bonds in connection with the completion of CLO XIII.

Capitalized mortgage servicing rights increased $26.9 million, primarily due to MSRs recorded on new loan originations, partially offset by amortization and write-offs.

Our capitalized mortgage servicing rights represent the estimated value of our rights to service mortgage loans for others.

At June 30, 2020, the weighted average estimated life remaining of our MSRs was 8.2 years.

Securities held-to-maturity increased $30.3 million, primarily due to the purchase, at a discount, of APL certificates in connection with our Private Label securitization totaling $37.9 million, partially offset by principal payments received from underlying loan payoffs in our Freddie Mac SBL B Piece bonds.

Investments in equity affiliates increased $23.2 million, primarily due to income from our investment in a residential mortgage banking business of $23.8 million.

Liabilities – Comparison of balances at June 30, 2020 to December 31, 2019:

Credit facilities and repurchase agreements decreased $442.7 million, primarily due to loan sales exceeding originations by $467.4 million in our Agency Business, as described above.

Collateralized loan obligations increased $384.4 million, primarily due to the issuance of a new CLO, where we issued $668.0 million of notes to third party investors, partially offset by the unwind of a CLO totaling $282.9 million.

Senior unsecured notes increased $272.1 million due to our issuance of $275.0 million of our 4.50% Notes.

Allowance for loss-sharing obligations increased $36.1 million, primarily due to the adoption of ASU 2016-13, which required us to record credit losses based on the CECL methodology.

In April 2020, we completed the unwind of our $70.0 million Debt Fund, as described above.

Senior unsecured notes increased $342.0 million, primarily due to our issuances of $345.8 million of new notes.

Convertible senior unsecured notes decreased $18.9 million, primarily due to partial redemptions of our 5.25% and 5.375% Convertible Notes.

Due to related party was $0.6 million and $13.1 million at June 30, 2020 and December 31, 2019, respectively, and consisted of loan payoffs, holdbacks and escrows to be remitted to our affiliated servicing operations related to real estate transactions.

Allowance for loss-sharing obligations increased $38.6 million, primarily due to the adoption of CECL in the first quarter of 2020.

See Note 2 for details.

During the three months ended March 31, 2020, we sold 1,350,000 shares of our common stock through our “At-The-Market” agreement, raising net proceeds of $19.4 million.

Other liabilities increased $35.7 million, primarily due to $39.8 million of accrued dividends that were paid in July 2020.

During the first half of 2020, we sold 3,308,008 shares of our common stock through our “At-The-Market” agreement, raising net proceeds of $38.0 million.

We also issued 363,013 million shares of our common stock in connection with settlements of our convertible notes.

In February 2020, we used a portion of the net proceeds from our public offering in December 2019 to purchase an aggregate of 747,500 shares of our common stock and OP Units from our chief executive officer and ACM.

In addition, through April 30, 2020, we repurchased 993,106 shares of our common stock under our share repurchase program.

Distributions – Dividends declared (on a per share basis) for the three months ended March 31, 2020 were as follows:

In addition, through June 30, 2020, we repurchased 993,106 shares of our common stock under our share repurchase program.

Distributions – Dividends declared (on a per share basis) for the six months ended June 30, 2020 were as follows:

Preferred Stock

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January 31, 2020

(1) The dividend declared on January 31, 2020 was for December 1, 2019 through February 29, 2020.

Common Stock — On May 6, 2020, the Board of Directors declared a cash dividend of $0.30 per share of common stock.

The dividend is payable on July 15, 2020 to common stockholders of record as of the close of business on June 30, 2020.

Preferred Stock — On May 1, 2020, the Board of Directors declared a cash dividend of $0.515625 per share of 8.25% Series A preferred stock;

(1) The dividend declared on May 1, 2020 was for March 1, 2020 through May 31, 2020 and the dividend declared on January 31, 2020 was for December 1, 2019 through February 29, 2020.

Common Stock — On July 29, 2020, the Board of Directors declared a cash dividend of $0.31 per share of common stock.

The dividend is payable on August 31, 2020 to common stockholders of record as of the close of business on August 17, 2020.

Preferred Stock — On July 29, 2020, the Board of Directors declared a cash dividend of $0.515625 per share of 8.25% Series A preferred stock;

a cash dividend of $0.484375 per share of 7.75% Series B preferred stock;

and a cash dividend of $0.53125 per share of 8.50% Series C preferred stock.

These amounts reflect dividends from March 1, 2020 through May 31, 2020 and are payable on June 1, 2020 to preferred stockholders of record on May 15, 2020.

These amounts reflect dividends from June 1, 2020 through August 31, 2020 and are payable on August 31, 2020 to preferred stockholders of record on August 15, 2020.

Deferred Compensation

We issued 344,919 shares of restricted stock to our employees, including our chief executive officer, 36,396 shares to the independent members of the Board of Directors and up to 275,569 shares of performance-based restricted stock units to our chief executive officer during the three months ended March 31, 2020.

See Note 16 for details.

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The following table sets forth the characteristics of our loan servicing portfolio collateralizing our mortgage servicing rights and servicing revenue ($ in thousands):

March 31, 2020

June 30, 2020

Delinquencies

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of Portfolio (2)

Private Label

December 31, 2019

(1) Prepayments reflect loans repaid prior to nine months from the loan’s maturity.

(1) Prepayments reflect loans repaid prior to six months from the loan’s maturity.

The majority of our loan servicing portfolio has a prepayment protection term and therefore, we may collect a prepayment fee which is included as a component of servicing revenue, net.

(2) Delinquent loans reflect loans that are contractually 60 days or more past due.

As of March 31, 2020 and December 31, 2019, delinquent loans totaled $60.0 million and $59.2 million, respectively, of which $33.3 million and $33.5 million, respectively, were in the foreclosure process.

As of June 30, 2020 and December 31, 2019, delinquent loans totaled $89.7 million and $59.2 million, respectively, of which $7.3 million and $33.5 million, respectively, were in the foreclosure process.

In addition, at December 31, 2019, loans collateralizing our servicing portfolio totaling $3.2 million were in bankruptcy.

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In addition, we are generally required to share in the risk of any losses associated with loans sold under the Fannie Mae DUS program, see Note 11.

Comparison of Results of Operations for the Three Months Ended March 31, 2020 and 2019

Comparison of Results of Operations for the Three Months Ended June 30, 2020 and 2019

The following table provides our consolidated operating results ($ in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

Increase / (Decrease)

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Property operating income

(Loss) gain on derivative instruments, net

Other income, net

Total other revenue

Other expenses:

Employee compensation and benefits

Selling and administrative

Property operating expenses

Depreciation and amortization

Impairment loss on real estate owned

Provision for loss sharing (net of recoveries)

Provision for credit losses (net of recoveries)

Total other expenses

Income before extinguishment of debt, income from equity affiliates and income taxes

Loss on extinguishment of debt

Income from equity affiliates

Provision for income taxes

Preferred stock dividends

Net income attributable to noncontrolling interest

Net income attributable to common stockholders

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The following table presents the average balance of our Structured Business interest-earning assets and interest-bearing liabilities, associated interest income (expense) and the corresponding weighted average yields ($ in thousands):

Three Months Ended June 30,

Structured Business interest-earning assets:

Preferred equity investments

Mezzanine / junior participation loans

Core interest-earning assets

Cash equivalents

Total interest-earning assets

Structured Business interest-bearing liabilities:

Warehouse lines

Unsecured debt

Trust preferred

Total interest-bearing liabilities

Net interest income

(1) Based on UPB for loans, amortized cost for securities and principal amount of debt.

(2) Weighted average yield calculated based on annualized interest income or expense divided by average carrying value.

Net Interest Income

The increase in interest income was due to an increase of $2.8 million, or 46%, from our Agency Business, partially offset by a decrease of $1.8 million, or 2%, from our Structured Business.

The increase from our Agency Business was primarily due to Private Label loan originations over the past several quarters resulting in an increase in the average loans held-for-sale balance prior to securitization in May 2020, partially offset by a decrease in the 10-year treasury note rate in 2020.

The decrease from our Structured Business was primarily due to a 25% decrease in the average yield on core interest-earning assets as a result of lower rates on originations as compared to loan runoff, a decrease in the average LIBOR rate and default interest and fees on a loan that paid off during the second quarter of 2019, substantially offset by an increase in our average core interest-earning assets from loan originations exceeding loan runoff.

The decrease in interest expense was primarily due to a decrease of $8.0 million, or 18%, from our Structured Business.

The decrease in our Structured Business was the result of a 39% decrease in the average cost of our interest-bearing liabilities, mainly from decreases in LIBOR and lower rates on recently issued debt, partially offset by a 35% increase in the average balance of our interest-bearing liabilities, due to growth in our loan portfolio and the issuance of additional unsecured debt.

Agency Business Revenue

The increase in gain on sales, including fee-based services, net was primarily due to a 116% increase ($1.07 billion) in loan sales volume including the $727.2 million Private Label securitization, partially offset by a 14% decrease in the sales margin as a result of lower margins on Fannie Mae and Private Label loan sales.

The increase in income from MSRs was primarily due to an 87% increase in the MSR rate (income from MSRs as a percentage of loan commitment volume) from 1.44% to 2.69%, mainly due to an increase in the average servicing fee on loan commitments, partially offset by a 7% decrease in loan commitment volume.

(Loss) Gain on Derivative Instruments, Net

The loss on derivative instruments in the second quarter of 2020 was primarily due to our Agency Business, which was the result of changes in the fair value of rate lock commitments and losses recognized on our Swap Futures held in connection with our Private Label loans.

See Note 12 for details.

Other Expenses

The increase in employee compensation and benefits expense was primarily due to a $3.0 million increase in commissions in our Agency Business resulting from higher loan sales volume including the $727.2 million Private Label securitization in May 2020 as well as increased headcount in both businesses associated with each business’s portfolio growth.

The decrease in selling and administrative expense was primarily due to a decrease of $1.8 million, or 34%, from our Structured Business, which was mainly due to decreases in professional fees.

Impairment loss on real estate owned was $1.0 million in the three months ended June 30, 2019, which relates to an impairment charge taken on our hotel property.

The increases in our provision for loss sharing and provision for credit losses were primarily due to CECL reserves recorded in connection with the adoption of ASU 2016-13 in 2020.

See Note 2 for details.

Loss on Extinguishment of Debt

The loss on extinguishment of debt of $1.6 million in the second quarter of 2020 relates to the loss recognized in connection with the unwind of the Debt Fund.

Income from Equity Affiliates

Income from equity affiliates in the second quarter of 2020 and 2019 primarily reflects income from our investment in a residential mortgage banking business of $20.9 million and $2.7 million, respectively, and a distribution from an equity investment totaling $0.6 million in the second quarter of 2019.

Provision for Income Taxes

In the three months ended June 30, 2020, we recorded a tax provision of $12.1 million, which consisted of a deferred tax provision of $10.9 million and a current tax provision of $1.2 million.

In the three months ended June 30, 2019, we recorded a tax provision of $4.4 million, which consisted of a current tax provision of $3.5 million and a deferred tax provision of $0.9 million.

Net Income Attributable to Noncontrolling Interest

The noncontrolling interest relates to the outstanding OP Units issued as part of the Acquisition.

There were 20,369,265 OP Units and 20,484,094 OP Units outstanding as of June 30, 2020 and 2019, respectively, which represented 15.4% and 17.9% of our outstanding stock at June 30, 2020 and 2019, respectively.

Comparison of Results of Operations for the Six Months Ended June 30, 2020 and 2019

The following table provides our consolidated operating results ($in thousands):

Six Months Ended June 30,

Increase / (Decrease)

Interest income

Interest expense

Net interest income

Other revenue:

Gain on sales, including fee-based services, net

Mortgage servicing rights

Servicing revenue, net

Property operating income

Loss on derivative instruments, net

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Depreciation and amortization

Impairment loss on real estate owned

Provision for loss sharing (net of recoveries)

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Income from equity affiliates

Benefit from income taxes

Benefit from (provision for) income taxes

Net (loss) income

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Three Months Ended March 31,

Six Months Ended June 30,

Structured Business interest-earning assets:

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The increase in interest income was due to increases of $10.8 million, or 8%, from our Structured Business and $7.3 million, or 64%, from our Agency Business.

The increase from our Structured Business was primarily due to a 37% increase in our average core interest-earning assets, as a result of loan originations exceeding loan runoff, partially offset by an 8% decrease in the average yield on core interest-earning assets.

The decrease in the average yield was largely due to lower rates on originations, as compared to loan runoff, and a decrease in the average LIBOR rate.

The increase from our Agency Business was primarily due to an increase in the average loans held-for-sale, which is primarily due to Private Label loan originations that have not yet been securitized.

The increase in interest expense was due to increases of $5.1 million, or 13%, from our Structured Business and $3.0 million, or 82%, from our Agency Business.

The increase from our Structured Business was primarily due to a 44% increase in the average balance of our interest-bearing liabilities, due to growth in our loan portfolio and the issuance of an additional CLO and unsecured debt, partially offset by a 17% decrease in the average cost of our interest-bearing liabilities.

The decrease in the average cost was primarily due to lower rates on recently issued debt and a decrease in the average LIBOR rate.

The increase from our Agency Business was primarily due to an increase in the average debt balance used to finance the increase in loans held-for-sale.

The increase from our Structured Business was primarily due to a 35% increase in our average core interest-earning assets, as a result of loan originations exceeding loan runoff, partially offset by a 20% decrease in the average yield on core interest-earning assets, largely due to lower rates on originations as compared to loan runoff, a decrease in the average LIBOR rate and default interest and fees on a loan that paid off during the second quarter of 2019.

The increase in interest expense was due to an increase of $4.0 million, or 55%, from our Agency Business, partially offset by a decrease of $2.8 million, or 3%, from our Structured Business.

The increase from our Agency Business was primarily due to a $436.0 million increase in the average debt balance used to finance the increase in the average loans held-for-sale balance, partially offset by a decrease in the average LIBOR rate.

The decrease in our Structured Business was the result of a 31% decrease in the average cost of our interest-bearing liabilities, mainly from decreases in LIBOR and lower rates on recently issued debt, substantially offset by an increase in the average balance of our interest-bearing liabilities, due to growth in our loan portfolio and the recent issuance of additional unsecured debt.

Agency Business Revenue

The decrease in gain on sales, including fee-based services, net was primarily due to a 13% decrease ($144.7 million) in loan sales volume.

The increase in income from MSRs was primarily due to a 50% increase ($420.3 million) in loan commitment volume.

The increase in gain on sales, including fee-based services, net was primarily due to a 46% increase ($925.1 million) in loan sales volume, partially offset by a 9% decrease in the sales margin.

The increase in income from MSRs was primarily due to a 43% increase in the MSR rate from 1.53% to 2.20%, mainly due to an increase in the average servicing fee on loan commitments, along with a 15% increase in loan commitment volume.

Loss on Derivative Instruments, Net

The increase in loss on derivative instruments was primarily due to increases of $45.3 million from our Agency Business and $3.0 million from our Structured Business, which were primarily due to losses recognized on our Swap Futures held in connection with our Private Label and SFR loans, respectively.

The increase in loss on derivative instruments was primarily due to an increase of $53.4 million from our Agency Business, which was primarily due to losses recognized on our Swap Futures held in connection with our Private Label loans.

See Note 12 for details.

Other Expenses

The increase in employee compensation and benefits expense was primarily due to an increase of $2.4 million, or 28%, from our Structured Business, which was mainly due to an increase in headcount associated with portfolio growth.

The increase in selling and administrative expense was primarily due to an increase of $1.3 million, or 24%, from our Agency Business, which was mainly due to increases in professional fees and technology costs.

The increases in our provision for loss sharing and provision for credit losses were primarily due to additional reserves of $75.9 million recorded in connection with the adoption of ASU 2016-13.

The increase in employee compensation and benefits expense was primarily due to an increase in commissions in our Agency Business as described above as well as increased headcount in both businesses associated with each business’s portfolio growth.

Impairment loss on real estate owned was $1.0 million in the six months ended June 30, 2019, which relates to an impairment charge taken on our hotel property in the second quarter of 2019.

The increases in our provision for loss sharing and provision for credit losses were primarily due to CECL reserves recorded in connection with the adoption of ASU 2016-13 in 2020.

See Note 2 for details.

Loss on Extinguishment of Debt

The increase in loss on extinguishment of debt was primarily due to $1.5 million of deferred financing fees recognized in connection with the unwind of CLO VIII.

The loss on extinguishment of debt in 2020 was primarily due to losses recognized in connection with the unwind of both CLO VIII and the Debt Fund as well as the conversion of our 5.375% and 5.25% Convertible Notes.

Income from Equity Affiliates

Income from equity affiliates in the first quarter of 2020 primarily reflects income from our investment in a residential mortgage banking business of $2.9 million and distributions from an equity investment totaling $1.1 million.

Income from equity affiliates in the first quarter of 2019 primarily reflects distributions from an equity investment totaling $1.3 million and $0.8 million of income from our investment in a residential mortgage banking business.

Benefit from Income Taxes

In the three months ended March 31, 2020 and 2019, we recorded a tax benefit of $14.4 million and less than $0.1 million, respectively.

The tax benefit recorded in the three months ended March 31, 2020 consisted of a deferred tax benefit of $19.9 million and a current tax provision of $5.5 million.

The tax benefit recorded in the three months ended March 31, 2019 consisted of a deferred tax benefit of $4.2 million and a current tax provision of $4.2 million.

Income from equity affiliates in the first half of 2020 and 2019 primarily reflects income from our investment in a residential mortgage banking business of $23.8 million and $3.5 million, respectively, and distributions from an equity investment totaling $1.1 million and $1.9 million, respectively.

Benefit from (Provision for) Income Taxes

In the six months ended June 30, 2020, we recorded a tax benefit of $2.3 million, which consisted of a deferred tax benefit of $9.0 million and a current tax provision of $6.7 million.

In the six months ended June 30, 2019, we recorded a tax provision of $4.3 million, which consisted of a current tax provision of $7.6 million and a deferred tax benefit of $3.3 million.

Net Income Attributable to Noncontrolling Interest

The noncontrolling interest relates to the outstanding OP Units issued as part of the Acquisition.

There were 20,369,265 OP Units and 20,487,544 OP Units outstanding as of March 31, 2020 and 2019, respectively, which represented 15.6% and 19.2% of our outstanding stock at March 31, 2020 and 2019, respectively.

Liquidity and Capital Resources

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We are monitoring the COVID-19 pandemic and its impact on our financing sources, borrowers and their tenants, and the economy as a whole.

The magnitude and duration of the pandemic, and its impact on our operations and liquidity, are uncertain and continue to evolve.

The magnitude and duration of the pandemic, and its impact on our operations and liquidity, are uncertain and continue to

To the extent that our financing sources, borrower’s and their tenants continue to be impacted by the pandemic, or by the other risks disclosed in our filings with the SEC, it would have a material adverse effect on our liquidity and capital resources.

We have approximately $4.70 billion in total structured debt outstanding at March 31, 2020.

We had approximately $4.54 billion in total structured debt outstanding at June 30, 2020.

Of this total, approximately $3.64 billion, or 80%, does not contain mark-to-market provisions and is comprised of non-recourse CLO vehicles, senior unsecured debt and junior subordinated notes, the majority of which have maturity dates in 2022, or later.

The remaining $1.06 billion of debt is in warehouse and repurchase facilities with several different banks that we have long-standing relationships with and substantially all of which have maturity extension options.

The remaining $906.2 million of debt is in warehouse and repurchase facilities with several different banks that we have long-standing relationships with and substantially all of which have maturity extension options.

While we expect to extend or renew all of our facilities as they mature, given the current market environment, we believe that the extension terms may be less favorable than the terms of our current facilities.

In addition to our ability to extend our warehouse and repurchase facilities, we have approximately $450 million in cash and available liquidity as well as other liquidity sources, including our $21.58 billion agency servicing portfolio, which is mostly prepayment protected and generates approximately $95 million a year in recurring cash flow.

During the first quarter of 2020, we had $350.0 million of securities financed with $235.0 million of debt that was subject to margin calls related to changes in interest spreads.

We have significantly reduced this exposure to currently about $40.0 million through margin call payments, restructuring a portion of the debt and paying down a portion of the debt with the majority of our senior notes issued in April 2020.

At June 30, 2020, we had $138.2 million of securities financed with $57.0 million of debt that was subject to margin calls related to changes in interest spreads.

During the six months ended June 30, 2020, we significantly reduced the UPB of this debt by $160.1 million through a debt restructuring and the use of proceeds from our senior notes issued in the second quarter of 2020 and have further reduced this debt to currently approximately $42.0 million.

To maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT-taxable income.

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However, we believe that our capital resources and access to financing will provide us with financial flexibility and market responsiveness at levels sufficient to meet current and anticipated capital requirements.

Cash flows used in operating activities totaled $233.2 million during the three months ended March 31, 2020 and consisted primarily of net cash outflows of $131.6 million as a result of loan originations exceeding loan sales in our Agency Business, a net loss of $68.4 million and $54.7 million of cash collateral posted in connection with margin calls on our secured debt.

Cash flows used in investing activities totaled $510.8 million during the three months ended March 31, 2020.

Cash flows provided by operating activities totaled $533.7 million during the six months ended June 30, 2020 and consisted primarily of net cash inflows of $497.2 million as a result of loan sales exceeding loan originations in our Agency Business.

Cash flows used in investing activities totaled $727.9 million during the six months ended June 30, 2020.

Loan and investment activity (originations and payoffs/paydowns) comprise the bulk of our investing activities.

Loan originations from our Structured Business totaling $815.5 million, net of payoffs and paydowns of $298.7 million, resulted in net cash outflows of $516.8 million.

Cash flows provided by financing activities totaled $759.8 million during the three months ended March 31, 2020, and consisted primarily of net proceeds of $385.1 million from CLO activity, $275.0 million received from the issuance of senior unsecured notes and net cash inflows of $170.6 million from debt facility activities (funded loan originations were

greater than facility paydowns).

These cash inflows were partially offset by $41.3 million of distributions to our stockholders and OP Unit holders.

Loan originations from our Structured Business totaling $1.12 billion, net of payoffs and paydowns of $459.5 million, resulted in net cash outflows of $657.5 million.

Cash outflows also included $37.9 million to purchase APL certificates.

Cash flows provided by financing activities totaled $162.7 million during the six months ended June 30, 2020 and consisted primarily of net proceeds of $385.1 million from CLO activity and $345.8 million received from the issuances of senior unsecured notes, partially offset by net cash outflows of $440.2 million from debt facility activities (facility paydowns were greater than funded loan originations), $70.0 million for the unwind of the Debt Fund and $43.1 million of distributions to our stockholders and OP Unit holders.

Agency Business Requirements.

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Among other things, these agencies require us to meet certain minimum net worth, operational liquidity and restricted liquidity collateral requirements, purchase and loss obligations and compliance with reporting requirements.

Our adjusted net worth and operational liquidity exceeded the agencies’ requirements as of March 31, 2020.

Our adjusted net worth and operational liquidity exceeded the agencies' requirements as of June 30, 2020.

Our restricted liquidity and purchase and loss obligations were satisfied with letters of credit totaling $50.0 million and $4.4 million of cash collateral.

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The following is a summary of our debt facilities ($ in thousands):

March 31, 2020

June 30, 2020

Debt Instruments

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Collateralized loan obligations (4)

Debt fund (4)

Senior unsecured notes

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Consolidated total

(1) Includes temporary increases to committed amounts which have not expired as of March 31, 2020.

(1) Includes temporary increases to committed amounts which have not expired as of June 30, 2020.

(2) Excludes the impact of deferred financing costs.

(3) See Note 14 for a breakdown of debt maturities by year.

(4) Maturity dates represent the weighted average remaining maturity based on the underlying collateral as of March 31, 2020.

(4) The ASAP agreement we have with Fannie Mae has no expiration date.

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Contractual Obligations.

During the three months ended March 31, 2020, the following significant changes were made to our contractual obligations disclosed in our 2019 Annual Report;

During the six months ended June 30, 2020, the following significant changes were made to our contractual obligations disclosed in our 2019 Annual Report;

(1) closed CLO XIII issuing $668.0 million of investment grade notes to third party investors;

(2) unwound CLO VIII redeeming $282.9 million of outstanding notes;

(3) issued $275.0 million of our 4.50% Notes;

(3) unwound the Debt Fund and redeemed all of its outstanding notes;

(4) issued a total of $345.8 million of senior unsecured notes;

and (5) modified existing credit facilities.

In addition, as previously planned, in April 2020 we completed the unwind of the Debt Fund and redeemed all the outstanding notes with a portion of the proceeds from our senior unsecured notes issued in March 2020.

See Note 10 for details and refer to Note 14 for a description of our debt maturities by year and unfunded commitments as of March 31, 2020.

See Note 10 for details and refer to Note 14 for a description of our debt maturities by year and unfunded commitments as of June 30, 2020.

Off-Balance Sheet Arrangements.

At March 31, 2020, we had no off-balance sheet arrangements.

At June 30, 2020, we had no off-balance sheet arrangements.

Derivative Financial Instruments

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Please refer to Note 2 of the Notes to Consolidated Financial Statements in our 2019 Annual Report for a discussion of our critical accounting policies.

During the three months ended March 31, 2020, there were no material changes to these policies, except for the credit loss policy established in connection with the adoption of ASU 2016-13.

During the six months ended June 30, 2020, there were no material changes to these policies, except for the credit loss policy established in connection with the adoption of ASU 2016-13.

See Note 2 for details.

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Prior period amounts presented below have been conformed to reflect this change.

We define core earnings as net income (loss) attributable to common stockholders (computed in accordance with GAAP) adjusted for accounting items such as depreciation and amortization (adjusted for unconsolidated joint ventures), non-cash stock-based compensation expense, income from MSRs, amortization and write-offs of MSRs, gains and losses on derivative instruments primarily associated with Private Label loans that have not yet been sold and securitized, the cumulative gains or losses on derivative instruments associated with Private Label loans that were sold during the periods presented, changes in fair value of GSE-related derivatives that temporarily flow through earnings, deferred tax (benefit) provision, provisions for credit losses (including CECL) and the amortization of the convertible senior notes conversion option.

We define core earnings as net income (loss) attributable to common stockholders (computed in accordance with GAAP) adjusted for accounting items such as depreciation and amortization (adjusted for unconsolidated joint ventures), non-cash stock-based compensation expense, income from MSRs, amortization and write-offs of MSRs, gains and losses on derivative instruments primarily associated with Private Label loans that have not yet been sold and securitized, the tax impact on cumulative gains or losses on derivative instruments associated with Private Label loans that were sold during the periods presented, changes in fair value of GSE-related derivatives that temporarily flow through earnings, deferred tax (benefit) provision, provisions for credit losses (including CECL) and the amortization of the convertible senior notes conversion option.

We also add back one-time charges such as acquisition costs and one-time gains or losses on the early extinguishment of debt.

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Core earnings is as follows ($ in thousands, except share and per share data):

Three Months Ended March 31,

Net (loss) income attributable to common stockholders

Net (loss) income attributable to noncontrolling interest

Three Months Ended June 30,

Six Months Ended June 30,

Net income (loss) attributable to common stockholders

Net income (loss) attributable to noncontrolling interest

Income from mortgage servicing rights

Deferred taxbenefit

Deferred tax provision (benefit)

Amortization and write-offs of MSRs

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Provision for credit losses

Loss on derivative instruments, net

(Gain) loss on derivative instruments, net

Stock-based compensation

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis