Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the unaudited consolidated interim financial statements, and related notes and the section entitled “Forward-Looking Statements” included herein.
Overview
Through our Structured Business, we invest in a diversified portfolio of structured finance assets in the multifamily, SFR and commercial real estate markets, primarily consisting of bridge and mezzanine loans, including junior participating interests in first mortgages and preferred and direct equity. We also invest in real estate-related joint ventures and may 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. We retain the servicing rights and asset management responsibilities on substantially all loans we originate and sell under the GSE and HUD programs. We are an approved Fannie Mae DUS lender nationally, a Freddie Mac Multifamily Conventional Loan lender, seller/servicer, in New York, New Jersey and Connecticut, a Freddie Mac affordable, manufactured housing, senior housing and SBL lender, seller/servicer, nationally and a HUD MAP and LEAN senior housing/healthcare lender nationally. We also 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” loans and originate and sell finance products through CMBS programs. We pool and securitize the Private Label loans and sell certificates in the securitizations to third-party investors, while retaining the servicing rights and APL certificates of the securitization.
We conduct our operations to qualify as a REIT. A REIT is generally not subject to federal income tax on its REIT—taxable income that is distributed to its stockholders, provided that at least 90% of its REIT—taxable income is distributed and provided that certain other requirements are met.
Our operating performance is primarily driven by the following factors:
Net interest income earned on our investments. Net interest income represents the amount by which the interest income earned on our assets exceeds the interest expense incurred on our borrowings. If the yield on our assets increases or the cost of borrowings decreases, this will have a positive impact on earnings. However, if the yield earned on our assets decreases or the cost of borrowings increases, this will have a negative impact on earnings. Net interest income is also directly impacted by the size and performance of our asset portfolio. We recognize the bulk of our net interest income from our Structured Business. Additionally, we recognize net interest income from loans originated through our Agency Business, which are generally sold within 60 days of origination.
Fees and other revenues recognized from originating, selling and servicing mortgage loans through the GSE and HUD programs. Revenue recognized from the origination and sale of mortgage loans consists of gains on sale of loans (net of any direct loan origination costs incurred), commitment fees, broker fees, loan assumption fees and loan origination fees. These gains and fees are collectively referred to as gain on sales, including fee-based services, net. We record income from MSRs at the time of commitment to the borrower, which represents the fair value of the expected net future cash flows associated with the rights to service mortgage loans that we originate, with the recognition of a corresponding asset upon sale. We also record servicing revenue which consists of fees received for servicing mortgage loans, net of amortization on the MSR assets recorded. 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. Our structured transactions are primarily comprised of investments in equity affiliates, which represent unconsolidated joint venture investments formed to acquire, develop and/or sell real estate-related assets. Operating results from these investments can be difficult to predict and can vary significantly period-to-period. If interest rates were to rise, it is likely that income from these investments would be significantly and negatively impacted, particularly from our investment in a residential mortgage banking business, since rising interest rates generally decrease the demand for residential real estate loans and the number of loan originations. In addition, we periodically receive distributions from our equity investments. It is difficult to forecast the timing of such payments, which can be substantial in any given quarter. We account for structured transactions within our Structured Business.
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Credit quality of our loans and investments, including our servicing portfolio. Effective portfolio management is essential to maximize the performance and value of our loan and investment and servicing portfolios. Maintaining the credit quality of the loans in our portfolios is of critical importance. Loans that do not perform in accordance with their terms may have a negative impact on earnings and liquidity.
COVID-19 Impact. The global outbreak of COVID-19 that began in early 2020, has forced many countries, including the U.S., to declare national emergencies, to institute “stay-at-home” orders, to close financial markets and to restrict operations of non-essential businesses. Such actions have created significant disruptions in global supply chains, and adversely impacted many industries. COVID-19 could have a continued and prolonged adverse impact on economic and market conditions, which could continue a period of global economic slowdown. Although we have not been significantly impacted by COVID-19 to-date, the impact of COVID-19 on companies continues to evolve, and the extent and duration of the economic fallout from this pandemic, both globally and to our business, remain unclear and present risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions.
Significant Developments During the Second Quarter of 2021
Capital Markets Activity.
● We raised $169.6 million through a public offering of our common stock and an “At-The-Market” equity offering sales agreement and used $32.2 million of the proceeds to purchase common stock and OP Units from ACM and its members; and
● We raised $222.6 million from the issuance of 6.375% Series D cumulative redeemable preferred stock and used $93.3 million of the proceeds to fully redeem our Series A, B and C preferred stock which had a weighted average rate of 8.14%.
Financing Activity.
● We closed a collateralized securitization vehicle (CLO XV) totaling $815.0 million of real estate related assets and cash, of which $674.4 million of investment grade notes were issued to third party investors and $73.4 million of below investment-grade notes and a $67.2 million equity interest in the portfolio were retained by us;
● We closed a Private Label securitization totaling $449.9 million, of which we retained the most subordinate certificates totaling $38.2 million;
● We issued $175.0 million of 5.00% senior unsecured notes due in 2026 in a private offering; and
● We increased the capacity of our existing debt facilities in our Structured Business by $1.27 billion.
Agency Business Activity.
● Loan originations and sales totaled $1.31 billion and $1.48 billion, respectively; and
● Our fee-based servicing portfolio grew 2.3% to $26.04 billion.
Structured Business Activity.
● Our Structured loan and investment portfolio grew 17.9% to $7.39 billion on loan originations totaling $1.84 billion, partially offset by loan runoff of $662.9 million;
● We successfully worked out an $89.3 million loan with the borrower on a hotel property classified as a troubled debt restructuring freeing up capital for other investments, and which resulted in the reversal of a $7.5 million provision for credit loss and recognition of $3.5 million in interest income; and
● We recorded income of $4.8 million and received a $5.6 million cash distribution from our residential mortgage business joint venture.
Dividend. We raised our quarterly common dividend to $0.35 per share, our fifth consecutive quarterly increase.
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Current Market Conditions, Risks and Recent Trends
As discussed throughout this report, the COVID-19 pandemic continues to impact the global economy in unprecedented ways, swiftly halting activity across many industries, and continuing to cause significant disruption and liquidity constraints in many market segments, including the financial services, real estate and credit markets. The impact of COVID-19 on companies continues to evolve, and the extent and duration of the economic fallout from this pandemic remains unclear. COVID-19 could have a continued and prolonged adverse impact on economic and market conditions, which could continue a period of global economic slowdown. Although we have not been significantly impacted by COVID-19 to-date, adverse economic conditions have resulted, 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 have a significant impact on our future 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 reduction of available liquidity. Many commercial mortgage REITs have suffered, and continue to suffer, from the reduction in available liquidity since access to capital is critical to grow their business. Despite this reduction in liquidity, we continue to raise capital through various vehicles to grow our business.
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. However, our Structured Business is more reliant on the capital markets to grow, and therefore, a lack of liquidity for a prolonged period of time could limit our ability to grow this business. In our Structured Business, 87% of our portfolio is in multifamily assets with most of these loans containing interest reserves and/or replenishment obligations by our borrowers.
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 impacted. All loan and rent payments that are suspended remain the obligations of the borrowers and tenants.
Currently, our Agency Business had approved forbearances related to approximately 0.3% of our Fannie Mae DUS portfolio and approximately 2.4% of our Freddie Mac portfolio. We are closely monitoring and managing the requests for forbearances and there could potentially be additional economic stress during the remainder of 2021.
Interest rates continue to remain 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. However, 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 remain at these historically low levels. Conversely, if interest rates were to rise, it could negatively impact our net interest income. An increase in rates would cause an increase in interest expense as most of our debt is variable. However, since a large portion of our structured loan portfolio has LIBOR floors that are in the money, any increase in interest income due to rising interest rates is not likely to be as substantial as the corresponding increase in interest expense.
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. In November 2020, the Federal Housing Finance Agency (“FHFA”) released the 2020 Scorecard which established Fannie Mae’s and Freddie Mac’s loan origination caps at $70 billion each, for a combined total opportunity of $140 billion, and will run for a four-quarter period through the end of 2021. The new caps apply to all multifamily business, have no exclusions and mandate that 50% be directed towards mission driven, affordable housing. Our originations with the GSEs are highly profitable executions as they provide significant gains from the sale of our loans, non-cash gains related to MSRs and servicing revenues. Therefore, a decline in our GSE originations could negatively impact our financial results. We are unsure whether the FHFA will impose stricter limitations on GSE multifamily production volume in the future.
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Changes in Financial Condition
Assets — Comparison of balances at June 30, 2021 to December 31, 2020:
Our Structured loan and investment portfolio balance was $7.39 billion and $5.48 billion at June 30, 2021 and December 31, 2020, respectively. This increase was primarily due to loan originations exceeding loan payoffs and paydowns by $2.03 billion. See below for details.
Our portfolio had a weighted average current interest pay rate of 4.85% and 5.23% at June 30, 2021 and December 31, 2020, respectively. Including certain fees earned and costs associated with the structured portfolio, the weighted average current interest rate was 5.33% and 5.80% at June 30, 2021 and December 31, 2020, respectively. Advances on our financing facilities totaled $6.41 billion and $4.92 billion at June 30, 2021 and December 31, 2020, respectively, with a weighted average funding cost of 2.44% and 2.64%, respectively, which excludes financing costs. Including financing costs, the weighted average funding rate was 2.79% and 3.03% at June 30, 2021 and December 31, 2020, respectively.
Activity from our Structured Business portfolio is comprised of the following ($ in thousands):
Three Months Ended
Six Months Ended
June 30, 2021
June 30, 2021
Loans originated (1)
$
1,838,945
$
2,926,871
Number of loans
93
148
Weighted average interest rate
4.41
%
4.56
%
(1) During the three and six months ended June 30, 2021, we committed to fund one and four SFR build-to-rent bridge loans totaling $40.0 million and $138.4 million, respectively.
Loans paid-off / paid-down
$
662,940
$
895,968
Number of loans
38
57
Weighted average interest rate
6.69
%
6.57
%
Loans extended
$
275,642
$
500,315
Number of loans
18
36
Loans held-for-sale from the Agency Business decreased $529.3 million, primarily from loan sales exceeding originations by $613.0 million as noted in the following table (in thousands). Loan sales includes $75.3 million of fixed rate SFR permanent loans that are now recorded through the Agency Business beginning in the first quarter of 2021, see Note 3 and 4 for details, and $449.9 million of Private Label loans which were sold in connection with a Private Label multifamily mortgage loan securitization in the second quarter of 2021. 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
Six Months Ended
June 30, 2021
June 30, 2021
Loan
Loan
Originations
Loan Sales
Originations
Loan Sales
Fannie Mae
$
637,494
$
722,499
$
1,701,477
$
2,159,865
Private Label
377,184
449,890
529,638
449,890
Freddie Mac
155,914
134,122
270,631
408,946
FHA
130,764
163,602
197,244
230,005
SFR - Fixed Rate
11,996
11,996
11,996
75,294
Total
$
1,313,352
$
1,482,109
$
2,710,986
$
3,324,000
Capitalized mortgage servicing rights increased $38.7 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, 2021, the weighted average estimated life remaining of our MSRs was 8.6 years.
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Securities held-to-maturity increased $19.2 million, primarily due to the purchase, at a discount, of APL certificates in connection with a Private Label securitization.
Investments in equity affiliates increased $12.0 million, primarily due to income from our investment in a residential mortgage banking business of $27.3 million, partially offset by $18.7 million in cash distributions received from the same investment.
Liabilities – Comparison of balances at June 30, 2021 to December 31, 2020:
Credit and repurchase facilities decreased $219.7 million, primarily due to loan sales exceeding originations in our Agency Business as described above, partially offset by funding of new structured loan activity.
Collateralized loan obligations increased $966.8 million, primarily due to the issuances of two new CLOs, where we issued $1.33 billion of notes to third party investors, partially offset by the unwind of a CLO totaling $356.2 million.
Senior unsecured notes increased $173.2 million, primarily due to our issuance of $175.0 million of 5.00% notes.
Due to borrowers decreased $20.9 million, primarily due to the release of unfunded loan originations in our Structured Business, partially offset by funds held on new originations.
Equity
In June 2021, we completed a public offering of 9,200,000 shares of 6.375% Series D cumulative redeemable preferred stock with a liquidation preference of $25.00 per share, generating net proceeds of $222.6 million after deducting the underwriting discount and other offering expenses. We used $93.3 million of the proceeds to fully redeem our Series A, B and C preferred stock.
During the first half of 2021, we sold 19,422,879 shares of our common stock through two public offerings and our “At-The-Market” agreement, raising net proceeds totaling $328.0 million. We used $44.6 million of the net proceeds to purchase a total of 2,608,400 of common stock and OP Units from certain executive officers of ours, ACM and its members and an estate planning family vehicle established by our chief executive officer.
Distributions – Dividends declared (on a per share basis) for the six months ended June 30, 2021 are as follows:
Common Stock
Preferred Stock
Dividend (1)
Declaration Date
Dividend
Declaration Date
Series A
Series B
Series C
Series D
February 17, 2021
$
0.33
February 1, 2021
$
0.515625
$
0.484375
$
0.53125
N/A
May 5, 2021
$
0.34
April 30, 2021
$
0.515625
$
0.484375
$
0.53125
N/A
(1) The dividend declared on April 30, 2021 was for March 1, 2021 through May 31, 2021 and the dividend declared on February 1, 2021 was for December 1, 2020 through February 28, 2021. As mentioned above, we used a portion of the proceeds from our Series D preferred stock to fully redeem our Series A, B and C preferred stock in June 2021.
Common Stock – On July 28, 2021, the Board of Directors declared a cash dividend of $0.35 per share of common stock. The dividend is payable on August 31, 2021 to common stockholders of record as of the close of business on August 16, 2021.
Preferred Stock – On July 2, 2021, the Board of Directors declared a cash dividend of $0.256771 per share of 6.375% Series D preferred stock, which reflects dividends from June 2, 2021 through July 29, 2021 and are payable on July 30, 2021 to preferred stockholders of record on July 15, 2021.
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Deferred Compensation
During the first quarter of 2021, we issued 257,726 shares of restricted common stock to our employees and 27,864 shares of common stock to the independent members of the Board of Directors. We also withheld 140,744 shares of restricted common stock from employees to net settle and pay withholding taxes on shares that vested. Additionally, 448,980 shares of performance-based restricted stock units previously granted to our chief executive officer fully vested and were net settled for 229,083 common shares. See Note 15 for details.
Agency Servicing Portfolio
The following table sets forth the characteristics of our loan servicing portfolio collateralizing our mortgage servicing rights and servicing revenue ($ in thousands):
June 30, 2021
Wtd. Avg.
Wtd. Avg.
Annualized
Servicing
Age of
Portfolio
Prepayments
Delinquencies
Portfolio
Loan
Portfolio
Maturity
Interest Rate Type
Wtd. Avg.
as a Percentage
as a Percentage
Product
UPB
Count
(in years)
(in years)
Fixed
Adjustable
Note Rate
of Portfolio (1)
of Portfolio (2)
Fannie Mae
$
19,191,969
2,808
2.9
8.8
97
%
3
%
4.05
%
6.26
%
0.36
%
Freddie Mac
4,708,457
1,349
2.8
11.3
87
%
13
%
3.95
%
15.69
%
0.67
%
Private Label
1,176,627
72
1.0
9.0
100
%
—
%
3.75
%
—
%
—
%
FHA
882,899
88
2.6
33.4
100
%
—
%
3.19
%
19.86
%
—
%
SFR - Fixed Rate
75,103
23
1.3
5.8
100
%
—
%
4.93
%
—
%
—
%
Total
$
26,035,055
4,340
2.8
10.1
95
%
5
%
3.99
%
8.12
%
0.39
%
December 31, 2020
Fannie Mae
$
18,268,268
2,712
2.8
9.0
97
%
3
%
4.12
%
6.40
%
0.33
%
Freddie Mac
4,881,080
1,413
2.6
11.7
88
%
12
%
3.99
%
11.47
%
0.65
%
FHA
752,116
89
3.0
32.9
100
%
—
%
3.39
%
33.60
%
—
%
Private Label
726,992
40
1.0
9.1
100
%
—
%
3.81
%
—
%
—
%
Total
$
24,628,456
4,254
2.7
10.3
95
%
5
%
4.06
%
8.05
%
0.37
%
(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 June 30, 2021 and December 31, 2020, delinquent loans totaled $100.8 million and $91.3 million, respectively, of which $26.5 million and $19.6 million, respectively, were in the foreclosure process. No loans were in bankruptcy as of June 30, 2021 and December 31, 2020.
Our servicing portfolio represents commercial real estate loans originated in our Agency Business, which are generally transferred or sold within 60 days from the date the loan is funded. Primarily all of the loans in our servicing portfolio are collateralized by multifamily properties. In addition, we are generally required to share in the risk of any losses associated with loans sold under the Fannie Mae DUS program, see Note 10.
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Comparison of Results of Operations for the Three Months Ended June 30, 2021 and 2020
The following table provides our consolidated operating results ($ in thousands):
Three Months Ended June 30,
Increase / (Decrease)
2021
2020
Amount
Percent
Interest income
$
105,148
$
83,080
$
22,068
27
%
Interest expense
46,378
41,302
5,076
12
%
Net interest income
58,770
41,778
16,992
41
%
Other revenue:
Gain on sales, including fee-based services, net
40,901
26,366
14,535
55
%
Mortgage servicing rights
26,299
32,417
(6,118)
(19)
%
Servicing revenue, net
15,315
13,506
1,809
13
%
Property operating income
—
751
(751)
nm
Loss on derivative instruments, net
(2,607)
(7,368)
4,761
(65)
%
Other income, net
1,263
1,049
214
20
%
Total other revenue
81,171
66,721
14,450
22
%
Other expenses:
Employee compensation and benefits
43,700
34,438
9,262
27
%
Selling and administrative
11,133
8,606
2,527
29
%
Property operating expenses
129
1,035
(906)
(88)
%
Depreciation and amortization
1,788
1,961
(173)
(9)
%
Provision for loss sharing (net of recoveries)
549
2,395
(1,846)
(77)
%
Provision for credit losses (net of recoveries)
(7,815)
12,714
(20,529)
nm
Total other expenses
49,484
61,149
(11,665)
(19)
%
Income before extinguishment of debt, income from equity affiliates and income taxes
90,457
47,350
43,107
91
%
Loss on extinguishment of debt
—
(1,592)
1,592
nm
Income from equity affiliates
4,759
20,408
(15,649)
(77)
%
Provision for income taxes
(10,959)
(12,077)
1,118
(9)
%
Net income
84,257
54,089
30,168
56
%
Preferred stock dividends
6,414
1,888
4,526
nm
Net income attributable to noncontrolling interest
8,717
8,110
607
7
%
Net income attributable to common stockholders
$
69,126
$
44,091
$
25,035
57
%
nm — not meaningful
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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,
2021
2020
Average
Interest
W/A Yield /
Average
Interest
W/A Yield /
Carrying
Income /
Financing
Carrying
Income /
Financing
Value (1)
Expense
Cost (2)
Value (1)
Expense
Cost (2)
Structured Business interest-earning assets:
Bridge loans
$
6,153,318
$
86,336
5.63
%
$
4,330,308
$
63,560
5.90
%
Preferred equity investments
224,840
5,627
10.04
%
206,000
5,679
11.09
%
Mezzanine / junior participation loans
203,102
4,059
8.02
%
177,909
3,359
7.59
%
Other
29,410
331
4.51
%
99,793
1,132
4.56
%
Core interest-earning assets
6,610,670
96,353
5.85
%
4,814,010
73,730
6.16
%
Cash equivalents
380,954
145
0.15
%
373,281
565
0.61
%
Total interest-earning assets
$
6,991,624
$
96,498
5.54
%
$
5,187,291
$
74,295
5.76
%
Structured Business interest-bearing liabilities:
CLO
$
2,987,301
$
13,560
1.82
%
$
2,532,593
$
13,941
2.21
%
Warehouse lines
1,727,737
12,198
2.83
%
913,548
7,635
3.36
%
Unsecured debt
1,066,013
15,792
5.94
%
912,118
13,306
5.87
%
Trust preferred
154,336
1,198
3.11
%
154,336
1,551
4.04
%
Debt fund
—
—
—
%
20,000
306
6.15
%
Total interest-bearing liabilities
$
5,935,387
42,748
2.89
%
$
4,532,595
36,739
3.26
%
Net interest income
$
53,750
$
37,556
(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 mainly due to a $22.2 million increase from our Structured Business, primarily due to an increase in our average core interest-earning assets from loan originations exceeding loan runoff, partially 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, largely offset by higher fees on early runoff.
The increase in interest expense was mainly due to a $6.0 million increase from our Structured Business, primarily due to an increase in the average balance of our interest-bearing liabilities, due to growth in our loan portfolio and the issuance of additional unsecured debt. This was partially offset by a decrease in the average cost of our interest-bearing liabilities, mainly from decreases in LIBOR and the recent issuance of CLOs at lower rates.
Agency Business Revenue
The increase in gain on sales, including fee-based services, net was primarily due to a 109% increase in the sales margin (fee-based services as a percentage of loan sales) from 1.32% to 2.76% as a result of higher margins on Private Label loan sales, partially offset by a 26% decrease ($510.8 million) in loan sales volume.
The decrease in income from MSRs was primarily due to an 18% decrease in the MSR rate (income from MSRs as a percentage of loan commitment volume) from 2.69% to 2.20%. The decrease in the MSR rate was primarily due to a lower mix of Fannie Mae loan commitments, which carry a higher servicing fee, in the second quarter of 2021, as compared to the second quarter of 2020.
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Other Revenue
The losses on derivative instruments were primarily from our Agency Business and reflect losses recognized on our Swap Futures held in connection with our Private Label loans.
Other Expenses
The increase in employee compensation and benefits expense was primarily due to increases in headcount and incentive compensation as a result of the portfolio growth in both business segments, as well as commissions in our Agency Business in connection with higher margins on Private Label loan sales.
The increase in selling and administrative expenses was primarily due to an increase in legal costs in our Structured Business and higher rent expense in both business segments.
The decreases in both provision for credit losses and provision for loss sharing were primarily due to the reversal of CECL reserves in our Structured Business and lower CECL reserves in our Agency Business, both in connection with improved market conditions and expected future forecasts.
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 Luxembourg commercial real estate debt fund (“Debt Fund”).
Income from Equity Affiliates
Income from equity affiliates in the second quarter of 2021 and 2020 primarily reflects income from our investment in a residential mortgage banking business of $4.8 million and $20.9 million, respectively. The income from this investment was driven by the strength in the residential housing market during COVID-19.
Provision for Income Taxes
In the three months ended June 30, 2021, we recorded a tax provision of $11.0 million, which consisted of a current tax provision of $11.0 million and a deferred tax benefit of less than $0.1 million. 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.
Preferred Stock Dividends
The increase in preferred stock dividends was due primarily to the recognition of $3.5 million of previously deferred issuance costs in connection with the redemption of our Series A, B and C preferred stock in June 2021 and the issuance in May 2021 of our Series D preferred stock, which included a significantly larger number of shares.
Net Income Attributable to Noncontrolling Interest
The noncontrolling interest relates to the outstanding OP Units issued as part of the Acquisition. There were 16,352,233 OP Units and 20,369,265 OP Units outstanding as of June 30, 2021 and 2020, respectively, which represented 10.3% and 15.4% of our outstanding stock at June 30, 2021 and 2020, respectively.
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Comparison of Results of Operations for the Six Months Ended June 30, 2021 and 2020
The following table provides our consolidated operating results ($ in thousands):
Six Months Ended June 30,
Increase / (Decrease)
2021
2020
Amount
Percent
Interest income
$
196,292
$
171,606
$
24,686
14
%
Interest expense
88,562
91,284
(2,722)
(3)
%
Net interest income
107,730
80,322
27,408
34
%
Other revenue:
Gain on sales, including fee-based services, net
69,768
40,671
29,097
72
%
Mortgage servicing rights
63,235
54,351
8,884
16
%
Servicing revenue, net
30,850
26,809
4,041
15
%
Property operating income
—
2,943
(2,943)
nm
Loss on derivative instruments, net
(5,828)
(58,099)
52,271
(90)
%
Other income, net
1,943
2,351
(408)
(17)
%
Total other revenue
159,968
69,026
90,942
132
%
Other expenses:
Employee compensation and benefits
86,674
68,690
17,984
26
%
Selling and administrative
21,947
19,658
2,289
12
%
Property operating expenses
272
3,478
(3,206)
(92)
%
Depreciation and amortization
3,543
3,908
(365)
(9)
%
Provision for loss sharing (net of recoveries)
2,201
23,932
(21,731)
(91)
%
Provision for credit losses (net of recoveries)
(8,890)
67,096
(75,986)
nm
Total other expenses
105,747
186,762
(81,015)
(43)
%
Income (loss) before extinguishment of debt, sale of real estate, income from equity affiliates and income taxes
161,951
(37,414)
199,365
nm
Loss on extinguishment of debt
(1,370)
(3,546)
2,176
(61)
%
Gain on sale of real estate
1,228
—
1,228
nm
Income from equity affiliates
27,010
24,401
2,609
11
%
(Provision for) benefit from income taxes
(23,451)
2,293
(25,744)
nm
Net income (loss)
165,368
(14,266)
179,634
nm
Preferred stock dividends
8,303
3,777
4,526
120
%
Net income (loss) attributable to noncontrolling interest
18,459
(2,824)
21,283
nm
Net income (loss) attributable to common stockholders
$
138,606
$
(15,219)
$
153,825
nm
nm — not meaningful
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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):
Six Months Ended June 30,
2021
2020
Average
Interest
W/A Yield /
Average
Interest
W/A Yield /
Carrying
Income /
Financing
Carrying
Income /
Financing
Value (1)
Expense
Cost (2)
Value (1)
Expense
Cost (2)
Structured Business interest-earning assets:
Bridge loans
$
5,814,922
$
159,979
5.55
%
$
4,222,173
$
128,022
6.10
%
Preferred equity investments
224,869
11,190
10.03
%
203,987
11,555
11.39
%
Mezzanine / junior participation loans
184,911
7,592
8.28
%
177,219
8,208
9.31
%
Other
28,817
653
4.57
%
92,983
2,999
6.49
%
Core interest-earning assets
6,253,519
179,414
5.79
%
4,696,362
150,784
6.46
%
Cash equivalents
332,572
294
0.18
%
408,153
1,988
0.98
%
Total interest-earning assets
$
6,586,091
$
179,708
5.50
%
$
5,104,515
$
152,772
6.02
%
Structured Business interest-bearing liabilities:
CLO
$
2,793,960
$
25,695
1.85
%
$
2,392,239
$
32,438
2.73
%
Warehouse lines
1,604,360
22,875
2.88
%
994,085
18,737
3.79
%
Unsecured debt
1,007,855
30,012
6.00
%
804,862
23,993
5.99
%
Trust preferred
154,336
2,390
3.12
%
154,336
3,385
4.41
%
Debt fund
—
—
—
%
45,000
1,585
7.08
%
Total interest-bearing liabilities
$
5,560,511
80,972
2.94
%
$
4,390,522
80,138
3.67
%
Net interest income
$
98,736
$
72,634
(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 a $26.9 million increase from our Structured Business, partially offset by a $2.3 million decrease from our Agency Business. The increase from our Structured Business was primarily due to an increase in our average core interest-earning assets from loan originations exceeding loan runoff, partially 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 lower fees on early runoff. The decrease from our Agency Business was primarily due to a decrease in the average loans held-for-sale as a result of loan sales exceeding originations, partially offset by an increase in the 10-year treasury note rate.
The decrease in interest expense was primarily due to a $3.6 million decrease from our Agency Business, primarily due to a lower average balance of our interest-bearing liabilities, due to a decrease in the average loans held-for-sale and the utilization of paydown features in certain credit facilities, and a lower average cost of our interest-bearing liabilities from decreases in LIBOR.
Agency Business Revenue
The increase in gain on sales, including fee-based services, net was primarily due a 52% increase in the sales margin from 1.38% to 2.10% as a result of higher margins on Private Label loan sales and a 13% increase ($374.1 million) in loan sales volume.
The increase in income from MSRs was primarily due to an 8% increase in the MSR rate from 2.20% to 2.38%. The increase in the MSR rate was primarily due to a larger mix of Fannie Mae loan commitments, which carry a higher servicing fee, in 2021, as compared to 2020.
The increase in servicing revenue, net was primarily due to the growth in our servicing portfolio.
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Other Revenue
The losses on derivative instruments in both 2021 and 2020 were primarily from our Agency Business and were predominantly from losses recognized on our Swap Futures held in connection with our Private Label loans.
Other Expenses
The increase in employee compensation and benefits expense was primarily due to increases in headcount and incentive compensation as a result of the portfolio growth in both business segments, as well as commissions in our Agency Business in connection with higher loan sales volume and sales margins.
The increase in selling and administrative expenses was primarily due to an increase in legal costs in our Structured Business and higher rent expense in both business segments.
The decreases in both provision for credit losses and provision for loss sharing were primarily due to the reversal of CECL reserves in our Structured Business and lower CECL reserves in our Agency Business, both in connection with improved market conditions and expected future forecasts.
Loss on Extinguishment of Debt
The loss on extinguishment of debt in both periods was deferred financing fees recognized in connection with the unwind of CLOs, along with a loss recognized in connection with the unwind of the Debt Fund in 2020.
Gain on Sale of Real Estate
The gain recorded in 2021 was from the sale of a repurchased Fannie Mae loan.
Income from Equity Affiliates
Income from equity affiliates in 2021 and 2020 primarily reflects income from our investment in a residential mortgage banking business of $27.3 million and $23.8 million, respectively. The income from this investment was driven by the strength in the residential housing market during COVID-19.
(Provision for) Benefit from Income Taxes
In the six months ended June 30, 2021, we recorded a tax provision of $23.5 million, which consisted of current and deferred tax provisions of $19.0 million and $4.5 million, respectively. 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.
Preferred Stock Dividends
The increase in preferred stock dividends was due primarily to the recognition of $3.5 million of previously deferred issuance costs in connection with the redemption of our Series A, B and C preferred stock in June 2021 and the issuance in May 2021 of our Series D preferred stock, which included a significantly larger number of shares.
Net Income (Loss) Attributable to Noncontrolling Interest
The noncontrolling interest relates to the outstanding OP Units issued as part of the Acquisition. There were 16,352,233 OP Units and 20,369,265 OP Units outstanding as of June 30, 2021 and 2020, respectively, which represented 10.3% and 15.4% of our outstanding stock at June 30, 2021 and 2020, respectively.
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Liquidity and Capital Resources
Sources of Liquidity. Liquidity is a measure of our ability to meet our potential cash requirements, including ongoing commitments to repay borrowings, satisfaction of collateral requirements under the Fannie Mae DUS risk-sharing agreement and, as an approved designated seller/servicer of Freddie Mac's SBL program, operational liquidity requirements of the GSE agencies, fund new loans and investments, fund operating costs and distributions to our stockholders, as well as other general business needs. Our primary sources of funds for liquidity consist of proceeds from equity and debt offerings, proceeds from CLOs and securitizations, debt facilities and cash flows from operations. We closely monitor our liquidity position and believe our existing sources of funds and access to additional liquidity will be adequate to meet our liquidity needs.
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. To the extent that our financing sources, borrowers 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 $6.41 billion in total structured debt outstanding at June 30, 2021. Of this total, approximately $4.78 billion, or 75%, 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 $1.63 billion of debt is in warehouse and repurchase facilities with several different banks that we have long-standing relationships with. 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 could 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 $400 million in cash and available liquidity as well as other liquidity sources, including our $26.04 billion agency servicing portfolio, which is mostly prepayment protected and generates approximately $119.0 million a year in recurring cash flow.
At June 30, 2021, we had $69.1 million of securities financed with $34.6 million of debt that was subject to margin calls related to changes in interest spreads.
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 and liquidity requirements.
Cash Flows. Cash flows provided by operating activities totaled $727.6 million during the six months ended June 30, 2021 and consisted primarily of net cash inflows of $582.5 million as a result of loan sales exceeding loan originations in our Agency Business and net income of $165.4 million.
Cash flows used in investing activities totaled $2.01 billion during the six months ended June 30, 2021. Loan and investment activity (originations and payoffs/paydowns) comprise the majority of our investing activities. Loan originations from our Structured Business totaling $2.81 billion, net of payoffs and paydowns of $773.2 million, resulted in net cash outflows of $2.04 billion.
Cash flows provided by financing activities totaled $1.21 billion during the six months ended June 30, 2021 and consisted primarily of net proceeds of $973.7 million from CLO activity, $725.5 million of proceeds from the issuance of common and preferred stock and senior unsecured notes, partially offset by net cash outflows of $217.3 million from debt facility activities (financed loan originations were greater than facility paydowns), $107.3 million of distributions to our stockholders and OP Unit holders and $89.3 million for the redemption of preferred stock.
Agency Business Requirements. The Agency Business is subject to supervision by certain regulatory agencies. 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, 2021. Our restricted liquidity and purchase and loss obligations were satisfied with letters of credit totaling $50.0 million and $14.6 million of cash collateral. See Note 13 for details about our performance regarding these requirements.
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We also enter into contractual commitments with borrowers providing rate lock commitments while simultaneously entering into forward sale commitments with investors. These commitments are outstanding for short periods of time (generally less than 60 days) and are described in Note 11.
Debt Facilities. We maintain various forms of short-term and long-term financing arrangements. Borrowings underlying these arrangements are primarily secured by a significant amount of our loans and investments and substantially all of our loans held-for-sale. The following is a summary of our debt facilities (in thousands):
June 30, 2021
Maturity
Debt Instruments
Commitment
UPB (1)
Available
Dates (2)
Structured Business
Credit facilities and repurchase agreements
$
3,751,568
$
1,627,398
$
2,124,170
2021 - 2024
Collateralized loan obligations (3)
3,506,080
3,506,080
—
2021 - 2026
Senior unsecured notes
845,750
845,750
—
2023 - 2027
Convertible senior unsecured notes
278,300
278,300
—
2021 - 2022
Junior subordinated notes
154,336
154,336
—
2034 - 2037
Structured Business total
8,536,034
6,411,864
2,124,170
Agency Business
Credit facilities and repurchase agreements (4)
1,801,269
394,014
1,407,255
2021 - 2022
Consolidated total
$
10,337,303
$
6,805,878
$
3,531,425
(1) Excludes the impact of deferred financing costs.
(2) See Note 13 for a breakdown of debt maturities by year.
(3) Maturity dates represent the weighted average remaining maturity based on the underlying collateral as of June 30, 2021.
(4) The ASAP agreement we have with Fannie Mae has no expiration date.
We utilize our credit and repurchase facilities primarily to finance our loan originations on a short-term basis prior to loan securitizations, including through CLOs. The timing, size and frequency of our securitizations impact the balances of these borrowings and produce some fluctuations. The following table provides additional information regarding the balances of our borrowings (in thousands):
Quarterly
Maximum
Average
End of Period
UPB at Any
Quarter Ended
UPB
UPB
Month-End
June 30, 2021
$
2,327,114
$
2,021,412
$
2,588,456
March 31, 2021
2,177,350
2,220,307
2,262,160
December 31, 2020
1,939,759
2,238,722
2,238,722
September 30, 2020
1,406,219
1,454,419
1,454,419
June 30, 2020
1,692,940
1,240,910
2,033,312
Our debt facilities, including their restrictive covenants, are described in Note 9.
Off-Balance Sheet Arrangements. At June 30, 2021, we had no off-balance sheet arrangements.
Contractual Obligations. During the six months ended June 30, 2021, the following significant changes were made to our contractual obligations disclosed in our 2020 Annual Report: (1) closed CLO XV issuing $674.4 million of investment grade notes (2) closed CLO XIV issuing $655.5 million of investment grade notes; (3) unwound CLO IX redeeming $356.2 million of outstanding notes; (4) issued $175.0 million of 5.00% senior unsecured notes; and (5) entered into new and modified existing debt facilities.
Refer to Note 13 for a description of our debt maturities by year and unfunded commitments as of June 30, 2021.
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Derivative Financial Instruments
We enter into derivative financial instruments in the normal course of business to manage the potential loss exposure caused by fluctuations of interest rates. See Note 11 for details.
Critical Accounting Policies
Please refer to Note 2 of the Notes to Consolidated Financial Statements in our 2020 Annual Report for a discussion of our critical accounting policies. During the six months ended June 30, 2021, there were no material changes to these policies.
Non-GAAP Financial Measures
Distributable Earnings. We are presenting distributable earnings because we believe it is an important supplemental measure of our operating performance and is useful to investors, analysts and other parties in the evaluation of REITs and their ability to provide dividends to stockholders. Dividends are one of the principal reasons investors invest in REITs. To maintain REIT status, REITs are required to distribute at least 90% of their REIT-taxable income. We consider distributable earnings in determining our quarterly dividend and believe that, over time, distributable earnings is a useful indicator of our dividends per share.
We define distributable 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/losses on derivative instruments primarily associated with Private Label loans not yet sold and securitized, the tax impact on cumulative gains/losses on derivative instruments associated with Private Label loans sold during the periods presented, changes in fair value of GSE-related derivatives that temporarily flow through earnings, deferred tax provision (benefit), CECL provisions for credit losses (adjusted for realized losses as described below) and amortization of the convertible senior notes conversion option. We also add back one-time charges such as acquisition costs and one-time gains/losses on the early extinguishment of debt and redemption of preferred stock.
We reduce distributable earnings for realized losses in the period we determine that a loan is deemed nonrecoverable in whole or in part. Loans are deemed nonrecoverable upon the earlier of: (i) when the loan receivable is settled (i.e. when the loan is repaid, or in the case of foreclosure, when the underlying asset is sold); or (ii) when we determine that it is nearly certain that all amounts due will not be collected. The realized loss amount is equal to the difference between the cash received, or expected to be received, and the book value of the asset.
Distributable earnings is not intended to be an indication of our cash flows from operating activities (determined in accordance with GAAP) or a measure of our liquidity, nor is it entirely indicative of funding our cash needs, including our ability to make cash distributions. Our calculation of distributable earnings may be different from the calculations used by other companies and, therefore, comparability may be limited.
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Distributable earnings is as follows ($ in thousands, except share and per share data):
Three Months Ended June 30,
Six Months Ended June 30,
2021
2020
2021
2020
Net income (loss) attributable to common stockholders
$
69,126
$
44,091
$
138,606
$
(15,219)
Adjustments:
Net income (loss) attributable to noncontrolling interest
8,717
8,110
18,459
(2,824)
Income from mortgage servicing rights
(26,299)
(32,417)
(63,235)
(54,351)
Deferred tax (benefit) provision
(50)
10,879
4,436
(9,025)
Amortization and write-offs of MSRs
20,299
15,542
38,331
33,283
Depreciation and amortization
2,733
2,906
5,432
5,863
Loss on extinguishment of debt
—
1,592
1,370
3,546
Provision for credit losses, net
(8,065)
14,602
(8,343)
90,281
(Gain) loss on derivative instruments, net
(3,230)
(7,371)
(9)
43,360
Stock-based compensation
2,044
1,915
5,375
5,432
Loss on redemption of preferred stock
3,479
—
3,479
—
Distributable earnings (1)
$
68,754
$
59,849
$
143,901
$
100,346
Diluted distributable earnings per share (1)
$
0.45
$
0.45
$
0.97
$
0.77
Diluted weighted average shares outstanding (1)
153,616,591
131,882,398
148,818,030
131,166,018
(1) Amounts are attributable to common stockholders and OP Unit holders. The OP Units are redeemable for cash, or at our option for shares of our common stock on a one-for-one basis.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.