What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-10-30 compared with 2020-07-31 · 139 added, 122 removed, 302 unchanged (46% of the section changed)

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Through our Structured Business, we invest in a diversified portfolio of structured finance assets in the multifamily, single-family rental and commercial real estate markets, primarily consisting of bridge and mezzanine loans, including junior participating interests in first mortgages, preferred and direct equity.

We may also directly acquire real property and invest in real estate-related notes and certain mortgage-related securities.

We also invest in real estate-related joint ventures and may also directly acquire real property and invest in real estate-related notes and certain mortgage-related securities.

Through our Agency Business, we originate, sell and service a range of multifamily finance products through Fannie Mae and Freddie Mac, Ginnie Mae, FHA and HUD.

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COVID-19 Impact.

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"

The global outbreak of COVID-19 that began in early 2020, 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 Second Quarter of 2020

Significant Developments During the Third Quarter of 2020

Capital Markets Activity.

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 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.

● We filed a shelf registration statement as a "well-known seasoned issuer,"

which registered an unlimited and indeterminate amount of debt or equity securities for future issuance and sale.

The shelf registration statement was declared effective upon filing;

● We amended the equity distribution agreement with JMP under which we may offer and sell up to 10,000,000 common shares in "At-The-Market"

equity offerings.

We sold 3,579,266 shares under this agreement and received net proceeds of $40.5 million, which a portion of the proceeds was used to redeem 2,736,894 OP Units totaling $29.7 million.

Agency Business Activity.

Loan originations and sales totaled $1.48 billion and $1.22 billion, respectively, and our fee-based servicing portfolio grew 5% to $22.56 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 3% to $5.10 billion on loan originations totaling $291.8 million, partially offset by loan runoff of $206.0 million;

● 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.

● We recorded income of $32.3 million and received a $15.0 million cash distribution from our residential mortgage business joint venture;

● We sold our hotel property and recognized a $1.9 million loss.

We also recorded a $2.5 million charge for a litigation settlement, which is included in selling and administrative expenses.

We raised our quarterly common dividend to $0.32 per share, our second quarterly increase, reflecting a 7% year-to-date increase, which is payable on November 30, 2020 to common stockholders of record as of the close of business on November 16, 2020

Current Market Conditions, Risks and Recent Trends

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COVID-19 could have a continued and prolonged adverse impact on economic and market conditions and could trigger a period of global economic slowdown.

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.

Adverse economic conditions have and may continue to 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.

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.

Despite this reduction in liquidity, during the second and third quarters of 2020 we raised $130.5 million through two private placement debt offerings and sales of our common stock through our “At-The-Market” equity offering sales agreements.

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 Agency Business, we have received requests for forbearances related to approximately 0.3% of our $16.46 billion Fannie Mae DUS portfolio and approximately 5.9% of our $4.69 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.

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

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Changes in Financial Condition

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.

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

Our Structured loan and investment portfolio balance was $5.10 billion and $4.29 billion at September 30, 2020 and December 31, 2019, respectively.

This increase was primarily due to loan originations exceeding loan payoffs and paydowns by $808.0 million.

See below for details.

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):

Our portfolio had a weighted average current interest pay rate of 5.39% and 5.98% at September 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 5.93% and 6.68% at September 30, 2020 and December 31, 2019, respectively.

Advances on our financing facilities totaled $4.52 billion and $3.93 billion at September 30, 2020 and December 31, 2019, respectively, with a weighted average funding cost of 2.66% and 3.82%, respectively, which excludes financing costs.

Including financing costs, the weighted average funding rate was 3.09% and 4.35% at September 30, 2020 and December 31, 2019, respectively.

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

Three Months Ended

Six Months Ended

June 30, 2020

Nine Months Ended

September 30, 2020

Loans originated (1)

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Weighted average interest rate

(1) We committed to fund two SFR build-to-rent bridge loans totaling $75.3 million in the third quarter of 2020.

Loan paid-off / paid-down

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Three Months Ended

Six Months Ended

June 30, 2020

Nine Months Ended

September 30, 2020

Private Label

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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.

At September 30, 2020, the weighted average estimated life remaining of our MSRs was 8.3 years.

Securities held-to-maturity increased $29.6 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:

Investments in equity affiliates increased $40.5 million, primarily due to income from our investment in a residential mortgage banking business of $56.1 million, partially offset by a $15.0 million cash distribution received from the same investment.

Real estate owned decreased $10.3 million as a result of the sale of our hotel property in the third quarter of 2020.

Due from related party increased $13.2 million, due to an increase in funds from payoffs to be remitted by our affiliated servicing operations related to real estate transactions at the end of the reporting period.

These amounts were remitted to us in October 2020.

Other assets increased $49.7 million, primarily due to an increase in our operating lease right-of-use assets as a result of an office lease extension.

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

Credit facilities and repurchase agreements decreased $228.3 million, primarily due to loan sales exceeding originations by $211.0 million in our Agency Business, as described above.

Collateralized loan obligations increased $385.9 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.

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.

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

Senior unsecured notes increased $342.5 million, primarily due to our issuances of $275.0 million of 4.50% notes and $70.8 million of 8.00% notes.

Convertible senior unsecured notes decreased $17.4 million, primarily due to partial redemption of our 5.25% Convertible Notes.

Allowance for loss-sharing obligations increased $36.5 million, primarily due to the adoption of CECL in the first quarter of 2020.

See Note 2 for details.

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.

Other liabilities increased $47.0 million, primarily due to an increase in our operating lease liabilities as a result of an office lease extension.

During the nine months ended September 30, 2020, we sold 6,887,274 shares of our common stock through our “At-The-Market” agreement, raising net proceeds of $78.5 million and we used a portion of such proceeds to redeem 2,736,894 OP Units for cash totaling $29.7 million.

We also issued 363,013 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 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:

In addition, through September 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 nine months ended September 30, 2020 are as follows:

Preferred Stock

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January 31, 2020

(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;

July 29, 2020

(1) The dividend declared on July 29, 2020 was for June 1, 2020 through August 31, 2020, 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 October 28, 2020, the Board of Directors declared a cash dividend of $0.32 per share of common stock.

The dividend is payable on November 30, 2020 to common stockholders of record as of the close of business on November 16, 2020.

Preferred Stock — On October 28, 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 June 1, 2020 through August 31, 2020 and are payable on August 31, 2020 to preferred stockholders of record on August 15, 2020.

These amounts reflect dividends from September 1, 2020 through November 30, 2020 and are payable on November 30, 2020 to preferred stockholders of record on November 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 in the first quarter of 2020.

During the first quarter of 2020, 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.

We also withheld 143,096 shares of restricted common stock from employees to net settle and pay their respective withholding taxes in connection with awards that vested.

During the first quarter of 2020, 421,348 shares of performance-based restricted stock units previously granted to our chief executive officer fully vested and were net settled for 215,014 common shares.

In addition, during the third quarter of 2020, our chief executive officer was granted 313,152 shares of performance-based restricted stock as a result of achieving goals related to the integration of the Acquisition and 357,569 shares of performance-based restricted stock granted in 2017 vested, which were net settled for 182,467 common shares.

See Note 16 for details.

In addition, we also withheld 143,096 shares of restricted common stock from employees to net settle and pay their respective withholding taxes in connection with awards that vested.

Agency Servicing Portfolio

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

June 30, 2020

September 30, 2020

Delinquencies

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

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.

As of September 30, 2020 and December 31, 2019, delinquent loans totaled $91.2 million and $59.2 million, respectively, of which $11.9 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 June 30, 2020 and 2019

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

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

Three Months Ended June 30,

Three Months Ended September 30,

Increase / (Decrease)

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Property operating income

(Loss) gain on derivative instruments, net

Loss on derivative instruments, net

Other income, 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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Total other expenses

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

Loss on extinguishment of debt

Income before sale of real estate, income from equity affiliates and income taxes

Loss on sale of real estate

Income from equity affiliates

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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,

Three Months Ended September 30,

Structured Business interest-earning assets:

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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 increase in interest income was mostly due to a $1.6 million increase in our Structured Business primarily due to an increase in our average core interest-earning assets from loan originations exceeding loan runoff, substantially offset by a decrease in the average yield on core interest-earning assets.

The decrease in the average yield was due to lower rates on originations as compared to loan runoff, a decrease in the average LIBOR and 10-year treasury note rates and lower fees on early runoff, partially offset by the amortization of the discount related to our APL certificates.

The decrease in interest expense was primarily due to decreases of $8.0 million, or 18%, from our Structured Business and $2.2 million, or 46%, from our Agency Business.

The decrease in our Structured Business was the result of a 37% 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 30% increase in the average balance of our interest-bearing liabilities, due to growth in our loan portfolio and the issuance of additional unsecured debt.

The decrease in our Agency Business was primarily due to a 37% decrease in the average cost of our interest-bearing liabilities as a result of decreases in LIBOR.

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.

The decrease in gain on sales, including fee-based services, net was primarily due to an 18% decrease ($269.0 million) in loan sales volume, partially offset by a 14% increase in the sales margin as a result of higher margins on Fannie Mae, Freddie Mac and FHA loan sales.

The increase in income from MSRs was primarily due to a 37% increase in the MSR rate (income from MSRs as a percentage of loan commitment volume) from 2.02% to 2.77%, mainly due to an increase in the average servicing fee on loan commitments, and a 3% increase in loan commitment volume.

Other Revenue

The decreases in both property operating income and expenses were primarily due to lower occupancy at our hotel property as a result of the COVID-19 pandemic and the sale of the hotel in September 2020.

The losses on derivative instruments in both the third quarter of 2020 and 2019 were primarily from our Agency Business and were predominantly from changes in the fair value of our rate lock commitments.

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.

The decrease in selling and administrative expense was primarily due to decreases in general administrative expenses, mainly due to travel restrictions from the COVID-19 pandemic, partially offset by the $2.5 million litigation settlement on the hotel property we sold in the third quarter of 2020.

The decreases in provision for loss sharing and provision for credit losses were primarily due the reversal of CECL reserves in connection with improved market conditions and expected future forecasts.

Loss on Sale of Real Estate

The loss recorded in the third quarter of 2020 was from the hotel property we sold in September 2020.

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.

Income from equity affiliates in the third quarter of 2020 and 2019 primarily reflects income from our investment in a residential mortgage banking business of $32.3 million and $2.6 million, respectively, and a distribution from an equity investment totaling $1.2 million in the third 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.

In the three months ended September 30, 2020, we recorded a tax provision of $17.8 million, which consisted of current and deferred tax provisions of $13.9 million and $3.9 million, respectively.

In the three months ended September 30, 2019, we recorded a tax provision of $6.6 million, which consisted of a current tax provision of $4.4 million and a deferred tax provision of $2.2 million.

The tax provision increase is primarily due to an increase in income generated from our residential mortgage banking business joint venture and growth in our agency business.

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

There were 17,632,371 OP Units and 20,484,094 OP Units outstanding as of September 30, 2020 and 2019, respectively, which represented 13.2% and 17.8% of our outstanding stock at September 30, 2020 and 2019, respectively.

Comparison of Results of Operations for the Nine Months Ended September 30, 2020 and 2019

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

Six Months Ended June 30,

Nine Months Ended September 30,

Increase / (Decrease)

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Total other expenses

(Loss) income before extinguishment of debt, income from equity affiliates and income taxes

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

Loss on extinguishment of debt

Loss on sale of real estate

Income from equity affiliates

Benefit from (provision for) income taxes

Net (loss) income

Provision for income taxes

Preferred stock dividends

Net (loss) income attributable to noncontrolling interest

Net (loss) income attributable to common stockholders

Net income attributable to noncontrolling interest

Net income attributable to common stockholders

nm – not meaningful

Six Months Ended June 30,

Nine Months Ended September 30,

Structured Business interest-earning assets:

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The increase in interest income was due to increases of $12.5 million, or 6%, from our Structured Business and $6.9 million, or 38%, from our Agency Business.

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 from our Structured Business was primarily due to a 32% increase in our average core interest-earning assets, as a result of loan originations exceeding loan runoff, partially offset by a 19% 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 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 decrease in interest expense was due to a decrease of $10.8 million, or 9%, from our Structured Business, partially offset by an increase of $1.8 million, or 15%, from our Agency Business.

The decrease in our Structured Business was the result of a 33% 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 36% 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.

The increase from our Agency Business was primarily due to a $269.5 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 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 gain on sales, including fee-based services, net was primarily due to a 19% increase ($656.2 million) in loan sales volume.

The increase in income from MSRs was primarily due to a 40% increase in the MSR rate from 1.73% to 2.42%, mainly due to an increase in the average servicing fee on loan commitments, along with a 10% increase in loan commitment volume.

Loss on Derivative Instruments, Net

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.

Other Revenue

Property operating income and expenses both decreased in 2020 as a result of lower occupancy and closure of the hotel property for most of the second quarter as a result of the COVID-19 pandemic.

We sold the hotel in September 2020.

The increase in loss on derivative instruments was primarily due to an increase of $49.6 million from our Agency Business, mostly due to losses recognized on 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 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.

The increase in employee compensation and benefits expense was primarily due to increased headcount in both businesses associated with each business’s portfolio growth, including the full period impact in 2020 of new hires in 2019, as well as an increase in commissions in our Agency Business in connection with the Private Label loan sales.

The decrease in selling and administrative expenses was primarily due to a $2.5 million decline in the Structured Business.

Legal and consulting costs were lower as transactions and projects that were terminated or completed in 2019 did not recur in 2020.

Administrative expenses were also lower in 2020 as a result of the COVID-19 pandemic due to travel restrictions and fewer events.

These decreases were partially offset by the $2.5 million litigation settlement we recorded related to the hotel property that we sold in the third quarter of 2020.

The impairment loss on real estate owned of $1.0 million in 2019 reflects an impairment charge taken on our hotel property in the second quarter.

The increases in 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 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.

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 partial conversion of our 5.375% and 5.25% Convertible Notes.

Loss on Sale of Real Estate

The loss recorded in 2020 was from the hotel property we sold in September 2020.

Income from Equity Affiliates

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.

Income from equity affiliates in 2020 and 2019 primarily reflects income from our investment in a residential mortgage banking business of $56.1 million and $6.1 million, respectively, and distributions from an equity investment totaling $1.1 million and $3.0 million, respectively.

Provision for Income Taxes

In the nine months ended September 30, 2020, we recorded a tax provision of $15.5 million, which consisted of a current tax provision of $20.7 million and a deferred tax benefit of $5.2 million.

In the nine months ended September 30, 2019, we recorded a tax provision of $11.0 million, which consisted of a current tax provision of $12.0 million and a deferred tax benefit of $1.0 million.

The tax provision increase is primarily due to an increase in income generated from our residential mortgage banking business joint venture and growth in our agency business.

Net Income Attributable to Noncontrolling Interest

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

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

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

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

We had approximately $4.52 billion in total structured debt outstanding at September 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.

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In addition to our ability to extend our warehouse and repurchase facilities, we have approximately $500 million in cash and available liquidity as well as other liquidity sources, including our $22.56 billion agency servicing portfolio, which is mostly prepayment protected and generates approximately $100 million a year in recurring cash flow.

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.

At September 30, 2020, we had $100.9 million of securities financed with $42.2 million of debt that was subject to margin calls related to changes in interest spreads.

During the nine months ended September 30, 2020, we significantly reduced the UPB of this debt by $175.0 million to $42.2 million through a debt restructuring and the use of proceeds from our senior notes issued in the second quarter of 2020.

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

These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations.

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 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.

Cash flows provided by operating activities totaled $303.7 million during the nine months ended September 30, 2020 and consisted primarily of net cash inflows of $229.1 million as a result of loan sales exceeding loan originations in our Agency Business.

Cash flows used in investing activities totaled $811.7 million during the nine months ended September 30, 2020.

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

Loan originations from our Structured Business totaling $1.43 billion, net of payoffs and paydowns of $674.9 million, resulted in net cash outflows of $750.1 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.

Cash outflows also included $37.9 million to purchase APL certificates in connection with out Private Label securitization in the second quarter of 2020.

Cash flows provided by financing activities totaled $299.9 million during the nine months ended September 30, 2020 and consisted primarily of net proceeds of $385.1 million from CLO activity, $345.8 million received from the issuances of senior unsecured notes and $78.6 million received from common stock issuances, partially offset by net cash outflows of $226.7 million from debt facility

activities (facility paydowns were greater than funded loan originations), $126.1 million of distributions to our stockholders and OP Unit holders, $70.0 million for the unwind of the Debt Fund and $31.3 million for the redemption of OP units.

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 June 30, 2020.

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

Our restricted liquidity and purchase and loss obligations were satisfied with letters of credit totaling $50.0 million and $6.9 million of cash collateral.

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

June 30, 2020

September 30, 2020

Debt Instruments

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Consolidated total

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

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

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

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Contractual Obligations.

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

During the nine months ended September 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;

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and (5) modified existing credit facilities.

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.

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

Off-Balance Sheet Arrangements.

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

At September 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 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.

During the nine months ended September 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 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 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, CECL provisions for credit losses (excluding specifically reserved provisions for loss-sharing) 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 June 30,

Six Months Ended June 30,

Net income (loss) attributable to common stockholders

Net income (loss) attributable to noncontrolling interest

Three Months Ended September 30,

Nine Months Ended September 30,

Net income attributable to common stockholders

Net income attributable to noncontrolling interest

Income from mortgage servicing rights

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Loss on extinguishment of debt

Provision for credit losses

(Gain) loss on derivative instruments, net

Provision for credit losses, net

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