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 Third Quarter of 2021
Financing and Capital Markets Activity.
● We closed a collateralized securitization vehicle (CLO 16) totaling $1.50 billion of real estate related assets and cash, of which $1.24 billion of investment grade notes were issued to third party investors and $135.0 million of below investment-grade notes and a $127.5 million equity interest in the portfolio were retained by us;
● We issued $270.0 million of 4.50% senior unsecured notes due in 2026 in a private offering; and
● We raised $139.1 million from the issuance of 6.25% Series E preferred stock.
Structured Business Activity.
● Our Structured loan and investment portfolio grew 24.1% to $9.17 billion on loan originations totaling $2.47 billion, partially offset by loan runoff of $567.9 million; and
● We recorded income of $5.4 million and received a $4.7 million cash distribution from our residential mortgage business joint venture.
Agency Business Activity.
● Loan originations and sales totaled $1.80 billion and $1.01 billion, respectively; and
● Our fee-based servicing portfolio grew to $26.21 billion.
Dividend. We raised our quarterly common dividend to $0.36 per share, our sixth consecutive quarterly increase.
Subsequent Events.
● In October 2021, we completed a public offering of 8,050,000 shares of 6.25% Series F preferred stock, generating net proceeds of approximately $194.8 million; and
● In October 2021, we closed a Private Label securitization totaling $535.0 million, of which we retained the most subordinate class of certificates totaling $47.5 million.
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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, 89% 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 0.2% of our Fannie Mae DUS portfolio and approximately 2.8% 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 October 2021, the Federal Housing Finance Agency ("FHFA") announced that its 2022 loan origination caps for Fannie Mae and Freddie Mac will be $78 billion for each enterprise for a total opportunity of $156 billion (the “2022 Caps”), which has increased from its 2021 loan origination caps of $70 billion for each enterprise (the “2021 Caps”). The 2022 Caps will continue to apply to all multifamily business, have no exclusions and mandate that 50% be directed towards mission driven, affordable housing. The FHFA will also require at least 25% be affordable to residents at or below 60% of area median income for 2022, up from 20% in 2021.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 September 30, 2021 to December 31, 2020:
Our Structured loan and investment portfolio balance was $9.17 billion and $5.48 billion at September 30, 2021 and December 31, 2020, respectively. This increase was primarily due to loan originations exceeding loan payoffs and paydowns by $3.94 billion. See below for details.
Our portfolio had a weighted average current interest pay rate of 4.56% and 5.23% at September 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 4.97% and 5.80% at September 30, 2021 and December 31, 2020, respectively. Advances on our financing facilities totaled $8.58 billion and $4.92 billion at September 30, 2021 and December 31, 2020, respectively, with a weighted average funding cost of 2.32% and 2.64%, respectively, which excludes financing costs. Including financing costs, the weighted average funding rate was 2.64% and 3.03% at September 30, 2021 and December 31, 2020, respectively.
Activity from our Structured Business portfolio is comprised of the following ($ in thousands):
Three Months Ended
Nine Months Ended
September 30, 2021
September 30, 2021
Loans originated (1)
$
2,474,653
$
5,401,524
Number of loans
118
266
Weighted average interest rate
4.28
%
4.44
%
(1) During the three and nine months ended September 30, 2021, we committed to fund one and five SFR build-to-rent bridge loans totaling $17.6 million and $156.0 million, respectively.
Loans paid-off / paid-down
$
567,858
$
1,463,826
Number of loans
54
111
Weighted average interest rate
6.81
%
6.66
%
Loans extended
$
439,479
$
939,794
Number of loans
22
58
Loans held-for-sale from the Agency Business increased $287.3 million, primarily from loan originations exceeding sales by $184.3 million as noted in the following table (in thousands). Loan sales includes $104.5 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
Nine Months Ended
September 30, 2021
September 30, 2021
Loan
Loan
Originations
Loan Sales
Originations
Loan Sales
Fannie Mae
$
719,730
$
660,693
$
2,421,206
$
2,820,558
Private Label
625,176
—
1,154,814
449,890
Freddie Mac
307,664
238,880
578,295
647,827
FHA
84,430
78,188
281,674
308,193
SFR - Fixed Rate
67,227
29,197
79,223
104,491
Total
$
1,804,227
$
1,006,958
$
4,515,212
$
4,330,959
Capitalized mortgage servicing rights increased $37.3 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 September 30, 2021, the weighted average estimated life remaining of our MSRs was 8.5 years.
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Securities held-to-maturity increased $17.2 million, primarily due to the purchase, at a discount, of APL certificates in connection with a Private Label securitization.
Investments in equity affiliates increased $17.6 million, primarily due to income from our investment in a residential mortgage banking business of $32.7 million, partially offset by $23.4 million in cash distributions received from the same investment. In addition, we entered into two new equity investments during the third quarter of 2021 totaling $6.4 million. See Note 8 for details.
Other assets increased $30.9 million, primarily due to increases in current tax assets, interest receivables from portfolio growth and the fair value of our Swaps.
Liabilities – Comparison of balances at September 30, 2021 to December 31, 2020:
Credit and repurchase facilities increased $1.16 billion, primarily due to funding of new structured loan activity.
Collateralized loan obligations increased $2.20 billion, primarily due to the issuances of three new CLOs, where we issued $2.57 billion of notes to third party investors, partially offset by the unwind of a CLO totaling $356.2 million.
Senior unsecured notes increased $439.7 million, primarily due to our issuances of $270.0 million of 4.50% notes and $175.0 million of 5.00% notes.
Other liabilities increased $57.5 million, primarily due to increases in accrued compensation, deferred tax liabilities, good faith deposits on new loan originations and the fair value of our rate lock and forward sale commitments.
Equity
In August 2021, we completed a public offering of 5,750,000 shares of 6.25% Series E cumulative redeemable preferred stock with a liquidation preference of $25.00 per share, generating net proceeds of approximately $139.1 million after deducting the underwriting discount and other offering expenses.
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 nine months ended September 30, 2021, we sold 20,222,879 shares of our common stock through two public offerings and our “At-The-Market” agreement, raising net proceeds totaling $342.6 million. We used $44.6 million of the net proceeds to purchase a total of 2,608,400 of common stock and OP Units from certain executive officers of ours, ACM and its members and an estate planning family vehicle established by our chief executive officer.
See Note 15 for the details of our dividends declared and our deferred compensation transactions during the nine months ended September 30, 2021.
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Agency Servicing Portfolio
The following table sets forth the characteristics of our loan servicing portfolio collateralizing our mortgage servicing rights and servicing revenue ($ in thousands):
September 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
$
19,271,527
2,763
3.0
8.8
97
%
3
%
4.01
%
9.39
%
0.29
%
Freddie Mac
4,726,587
1,330
2.8
11.2
88
%
12
%
3.90
%
17.96
%
0.63
%
Private Label
1,176,391
72
1.3
8.7
100
%
—
%
3.75
%
—
%
—
%
FHA
933,519
90
2.5
33.6
100
%
—
%
3.11
%
18.96
%
—
%
SFR - Fixed Rate
104,094
27
1.2
5.6
100
%
—
%
4.70
%
—
%
—
%
Total
$
26,212,118
4,282
2.9
10.1
96
%
4
%
3.95
%
10.82
%
0.33
%
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 September 30, 2021 and December 31, 2020, delinquent loans totaled $86.1 million and $91.3 million, respectively, of which $36.3 million and $19.6 million, respectively, were in the foreclosure process. No loans were in bankruptcy as of September 30, 2021 and December 31, 2020.
Our servicing portfolio represents commercial real estate loans originated in our Agency Business, which are generally transferred or sold within 60 days from the date the loan is funded. Primarily all of the loans in our servicing portfolio are collateralized by multifamily properties. In addition, we are generally required to share in the risk of any losses associated with loans sold under the Fannie Mae DUS program, see Note 10.
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Comparison of Results of Operations for the Three Months Ended September 30, 2021 and 2020
The following table provides our consolidated operating results ($ in thousands):
Three Months Ended September 30,
Increase / (Decrease)
2021
2020
Amount
Percent
Interest income
$
125,480
$
81,701
$
43,779
54
%
Interest expense
55,560
37,888
17,672
47
%
Net interest income
69,920
43,813
26,107
60
%
Other revenue:
Gain on sales, including fee-based services, net
16,334
19,895
(3,561)
(18)
%
Mortgage servicing rights
32,453
42,357
(9,904)
(23)
%
Servicing revenue, net
20,088
13,348
6,740
50
%
Property operating income
—
1,033
(1,033)
nm
Loss on derivative instruments, net
(1,492)
(753)
(739)
98
%
Other income, net
2,195
1,050
1,145
109
%
Total other revenue
69,578
76,930
(7,352)
(10)
%
Other expenses:
Employee compensation and benefits
41,973
32,962
9,011
27
%
Selling and administrative
11,757
9,356
2,401
26
%
Property operating expenses
149
1,300
(1,151)
(89)
%
Depreciation and amortization
1,807
1,922
(115)
(6)
%
Provision for loss sharing (net of recoveries)
(3,272)
(2,227)
(1,045)
47
%
Provision for credit losses (net of recoveries)
(3,799)
(7,586)
3,787
(50)
%
Total other expenses
48,615
35,727
12,888
36
%
Income before sale of real estate, income from equity affiliates and income taxes
90,883
85,016
5,867
7
%
Loss on sale of real estate
—
(1,868)
1,868
nm
Income from equity affiliates
5,086
32,358
(27,272)
(84)
%
Provision for income taxes
(9,905)
(17,785)
7,880
(44)
Net income
86,064
97,721
(11,657)
(12)
%
Preferred stock dividends
4,913
1,888
3,025
160
%
Net income attributable to noncontrolling interest
8,347
13,836
(5,489)
(40)
%
Net income attributable to common stockholders
$
72,804
$
81,997
$
(9,193)
(11)
%
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 September 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
$
7,653,224
$
101,189
5.25
%
$
4,522,755
$
64,838
5.70
%
Preferred equity investments
228,799
6,994
12.13
%
209,106
5,539
10.54
%
Mezzanine / junior participation loans
268,509
6,030
8.91
%
176,238
3,617
8.16
%
Other
32,026
311
3.85
%
76,710
943
4.89
%
Core interest-earning assets
8,182,558
114,524
5.55
%
4,984,809
74,937
5.98
%
Cash equivalents
391,352
186
0.19
%
346,140
534
0.61
%
Total interest-earning assets
$
8,573,910
$
114,710
5.31
%
$
5,330,949
$
75,471
5.63
%
Structured Business interest-bearing liabilities:
CLO
$
3,532,982
$
16,137
1.81
%
$
2,532,593
$
12,284
1.93
%
Warehouse lines
2,427,386
16,056
2.62
%
951,678
7,478
3.13
%
Unsecured debt
1,199,407
17,436
5.77
%
949,240
14,182
5.94
%
Trust preferred
154,336
1,194
3.07
%
154,336
1,308
3.37
%
Total interest-bearing liabilities
$
7,314,111
50,823
2.76
%
$
4,587,847
35,252
3.06
%
Net interest income
$
63,887
$
40,219
(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 $39.2 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 $15.6 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, the recent issuance of CLOs at lower rates and more favorable terms on warehouse debt.
Agency Business Revenue
The decrease in gain on sales, including fee-based services, net was primarily due to a 17% decrease ($212.5 million) in loan sales volume. The sales margin (fee-based services as a percentage of loan sales) of 1.62% this quarter was consistent with the prior year period sales margin of 1.63%.
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The decrease in income from MSRs was primarily due to a 37% decrease in the MSR rate (income from MSRs as a percentage of loan commitment volume) from 2.77% to 1.75%, partially offset by a 21% increase ($327.9 million) in loan commitment volume. The decrease in the MSR rate was primarily due to lower Fannie Mae loan commitments, which carry a higher servicing fee, and a decrease in the average servicing fee on FHA loan commitments.
The increase in servicing revenue, net was primarily due to the growth in our servicing portfolio.
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.
The increase in selling and administrative expenses was primarily due to higher rent expense, consulting fees and travel expenses in both business segments, partially offset by a decrease in legal costs in our Structured Business as a result of a $2.5 million litigation settlement related to a hotel property that we sold in the third quarter of 2020.
We recorded net reversals this quarter in both our provision for loss sharing and provision for credit losses primarily due to improved market conditions and expected future forecasts in our CECL models for both business segments.
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 third quarter of 2021 and 2020 primarily reflects income from our investment in a residential mortgage banking business of $5.4 million and $32.3 million, respectively. The income from this investment was driven by the historically low interest rates and strength in the residential housing market during COVID-19.
Provision for Income Taxes
In the three months ended September 30, 2021, we recorded a tax provision of $9.9 million, which consisted of current and deferred tax provisions of $3.6 million and $6.3 million, respectively. 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 $3.9 million, respectively. The decrease in the tax provision was primarily due to lower income generated from our investment in a residential banking business and a decrease in the pre-tax income from our Agency Business.
Preferred Stock Dividends
The increase in preferred stock dividends was due to the issuances of our Series D and E preferred stock, which included a significantly larger number of shares than our Series A, B and C preferred stock that were redeemed in the second quarter of 2021.
Net Income Attributable to Noncontrolling Interest
The noncontrolling interest relates to the outstanding OP Units issued as part of the Acquisition. There were 16,325,095 OP Units and 17,632,371 OP Units outstanding as of September 30, 2021 and 2020, respectively, which represented 10.2% and 13.2% of our outstanding stock at September 30, 2021 and 2020, respectively.
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Comparison of Results of Operations for the Nine Months Ended September 30, 2021 and 2020
The following table provides our consolidated operating results ($ in thousands):
Nine Months Ended September 30,
Increase / (Decrease)
2021
2020
Amount
Percent
Interest income
$
321,772
$
253,307
$
68,465
27
%
Interest expense
144,122
129,172
14,950
12
%
Net interest income
177,650
124,135
53,515
43
%
Other revenue:
Gain on sales, including fee-based services, net
86,102
60,566
25,536
42
%
Mortgage servicing rights
95,688
96,708
(1,020)
(1)
%
Servicing revenue, net
50,939
40,156
10,783
27
%
Property operating income
—
3,976
(3,976)
nm
Loss on derivative instruments, net
(7,320)
(58,852)
51,532
(88)
%
Other income, net
4,140
3,404
736
22
%
Total other revenue
229,549
145,958
83,591
57
%
Other expenses:
Employee compensation and benefits
128,647
101,652
26,995
27
%
Selling and administrative
33,707
29,013
4,694
16
%
Property operating expenses
421
4,778
(4,357)
(91)
%
Depreciation and amortization
5,349
5,830
(481)
(8)
%
Provision for loss sharing (net of recoveries)
(1,070)
21,706
(22,776)
nm
Provision for credit losses (net of recoveries)
(12,689)
59,510
(72,199)
nm
Total other expenses
154,365
222,489
(68,124)
(31)
%
Income before extinguishment of debt, sale of real estate, income from equity affiliates and income taxes
252,834
47,604
205,230
nm
Loss on extinguishment of debt
(1,370)
(3,546)
2,176
(61)
%
Gain (loss) on sale of real estate
1,228
(1,868)
3,096
nm
Income from equity affiliates
32,095
56,758
(24,663)
(43)
%
Provision for income taxes
(33,356)
(15,493)
(17,863)
115
%
Net income
251,431
83,455
167,976
nm
Preferred stock dividends
13,216
5,665
7,551
133
%
Net income attributable to noncontrolling interest
26,806
11,012
15,794
143
%
Net income attributable to common stockholders
$
211,409
$
66,778
$
144,631
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):
Nine Months Ended September 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
$
6,434,423
$
261,168
5.43
%
$
4,323,098
$
192,860
5.96
%
Preferred equity investments
226,193
18,184
10.75
%
205,706
17,094
11.10
%
Mezzanine / junior participation loans
213,083
13,622
8.55
%
176,889
11,825
8.93
%
Other
29,898
964
4.31
%
87,519
3,941
6.01
%
Core interest-earning assets
6,903,597
293,938
5.69
%
4,793,212
225,720
6.29
%
Cash equivalents
352,391
480
0.18
%
387,332
2,523
0.87
%
Total interest-earning assets
$
7,255,988
$
294,418
5.42
%
$
5,180,544
$
228,243
5.89
%
Structured Business interest-bearing liabilities:
CLO
$
3,043,007
$
41,832
1.84
%
$
2,439,365
$
44,722
2.45
%
Warehouse lines
1,881,717
38,931
2.77
%
979,846
26,215
3.57
%
Unsecured debt
1,072,407
47,448
5.92
%
853,339
38,175
5.98
%
Trust preferred
154,336
3,584
3.10
%
154,336
4,693
4.06
%
Debt fund
—
—
—
%
29,891
1,585
7.08
%
Total interest-bearing liabilities
$
6,151,467
131,795
2.86
%
$
4,456,777
115,390
3.46
%
Net interest income
$
162,623
$
112,853
(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 $66.2 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 and a decrease in the average LIBOR.
The increase in interest expense was mainly due to a $16.4 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, the recent issuance of CLOs at lower rates and more favorable terms on warehouse debt.
Agency Business Revenue
The increase in gain on sales, including fee-based services, net was primarily due a 37% increase in the sales margin from 1.45% to 1.99%, as a result of higher margins on Private Label and SFR loan sales, and a 4% increase ($161.5 million) in loan sales volume.
The decrease in income from MSRs was primarily due to a 12% decrease in the MSR rate from 2.42% to 2.12%, largely offset by a 13% increase in loan commitment volume. The decrease in the MSR rate was primarily due to lower Fannie Mae loan commitments, which carry a higher servicing fee.
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 Swaps 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 higher rent expense in both business segments. Administrative expenses were also lower in 2020 as a result of the COVID-19 pandemic due to travel restrictions and fewer events. We also recorded a $2.5 million litigation settlement related to a hotel property that we sold in the third quarter of 2020.
The decreases in both provision for loss sharing and provision for credit losses were primarily due to the reversal of CECL reserves in both business segments 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 Luxembourg commercial real estate debt fund in 2020.
Gain (loss) on Sale of Real Estate
The gain recorded in 2021 was from the sale of a repurchased Fannie Mae loan. The loss recorded in 2020 was from a hotel property we sold in September 2020.
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 $32.7 million and $56.1 million, respectively. The income from this investment was driven by the historically low interest rates and strength in the residential housing market during COVID-19.
Provision for Income Taxes
In the nine months ended September 30, 2021, we recorded a tax provision of $33.4 million, which consisted of current and deferred tax provisions of $22.7 million and $10.7 million, respectively. 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. The increase in the tax provision was primarily due to an increase in pre-tax income from our Agency Business, partially offset by lower income generated from our investment in a residential banking business in 2021, compared to 2020.
Preferred Stock Dividends
The increase in preferred stock dividends was due to the issuances of our Series D and E preferred stock, which included a significantly larger number of shares than our Series A, B and C preferred stock that were redeemed in the second quarter of 2021.
Net Income Attributable to Noncontrolling Interest
The noncontrolling interest relates to the outstanding OP Units issued as part of the Acquisition. There were 16,325,095 OP Units and 17,632,371 OP Units outstanding as of September 30, 2021 and 2020, respectively, which represented 10.2% and 13.2% of our outstanding stock at September 30, 2021 and 2020, respectively.
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Table of Contents
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 $8.58 billion in total structured debt outstanding at September 30, 2021. Of this total, approximately $6.28 billion, or 73%, 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 $2.30 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, we cannot provide assurance that they will be extended or renewed on as favorable terms.
In addition to our ability to extend our warehouse and repurchase facilities, we have approximately $800 million in cash and available liquidity as well as other liquidity sources, including our $26.21 billion agency servicing portfolio, which is mostly prepayment protected and generates approximately $120 million per year in recurring cash flow.
At September 30, 2021, we had $65.1 million of securities financed with $32.2 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 used in operating activities were $0.4 million during the nine months ended September 30, 2021 as net income of $251.4 million was substantially offset by net cash outflows of $227.9 million as a result of loan originations exceeding loan sales in our Agency Business, as well as certain other non-cash net income adjustments.
Cash flows used in investing activities totaled $3.76 billion during the nine months ended September 30, 2021. Loan and investment activity (originations and payoffs/paydowns) comprise the majority of our investing activities. Loan originations from our Structured Business totaling $5.17 billion, net of payoffs and paydowns of $1.35 billion, resulted in net cash outflows of $3.83 billion.
Cash flows provided by financing activities totaled $4.17 billion during the nine months ended September 30, 2021 and consisted primarily of net proceeds of $2.21 billion from CLO activity, net cash inflows of $1.17 billion from debt facility activities (financed loan originations were greater than facility paydowns) and $1.15 billion of proceeds from the issuance of common and preferred stock and senior unsecured notes, partially offset by $161.4 million of distributions to our stockholders and OP Unit holders and $92.8 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 September 30, 2021. Our restricted liquidity and purchase and loss obligations were satisfied with letters of credit totaling $50.0 million and $17.0 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):
September 30, 2021
Maturity
Debt Instruments
Commitment
UPB (1)
Available
Dates (2)
Structured Business
Credit and repurchase facilities
$
3,651,149
$
2,301,103
$
1,350,046
2021 - 2024
Collateralized loan obligations (3)
4,743,580
4,743,580
—
2021 - 2026
Senior unsecured notes
1,115,750
1,115,750
—
2023 - 2027
Convertible senior unsecured notes
264,000
264,000
—
2022
Junior subordinated notes
154,336
154,336
—
2034 - 2037
Structured Business total
9,928,815
8,578,769
1,350,046
Agency Business
Credit and repurchase facilities (4)
2,301,259
1,104,129
1,197,130
2021 - 2022
Consolidated total
$
12,230,074
$
9,682,898
$
2,547,176
(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 September 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
September 30, 2021
$
3,191,129
$
3,409,598
$
3,409,598
June 30, 2021
2,327,114
3,405,232
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
Our debt facilities, including their restrictive covenants, are described in Note 9.
Off-Balance Sheet Arrangements. At September 30, 2021, we had no off-balance sheet arrangements.
Contractual Obligations. During the nine months ended September 30, 2021, the following significant changes were made to our contractual obligations disclosed in our 2020 Annual Report: (1) closed three CLOs issuing $2.57 billion of investment grade notes; (2) unwound a CLO redeeming $356.2 million of outstanding notes; (3) issued $270.0 million of 4.50% senior unsecured 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 September 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 nine months ended September 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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Table of Contents
Distributable earnings is as follows ($ in thousands, except share and per share data):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Net income attributable to common stockholders
$
72,804
$
81,997
$
211,409
$
66,778
Adjustments:
Net income attributable to noncontrolling interest
8,347
13,836
26,806
11,012
Income from mortgage servicing rights
(32,453)
(42,357)
(95,688)
(96,708)
Deferred tax provision (benefit)
6,256
3,853
10,692
(5,172)
Amortization and write-offs of MSRs
23,757
15,456
62,088
48,739
Depreciation and amortization
2,705
2,867
8,137
8,731
Loss on extinguishment of debt
—
—
1,370
3,546
Provision for credit losses, net
(9,867)
(11,137)
(18,210)
79,144
Loss on derivative instruments, net
1,492
753
1,484
44,113
Stock-based compensation
2,612
1,854
7,986
7,286
Loss on redemption of preferred stock
—
—
3,479
—
Distributable earnings (1)
$
75,653
$
67,122
$
219,553
$
167,469
Diluted distributable earnings per share (1)
$
0.47
$
0.50
$
1.44
$
1.26
Diluted weighted average shares outstanding (1)
160,270,905
133,997,087
152,691,461
132,401,315
(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.