What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-18 compared with 2021-02-19 · 151 added, 163 removed, 219 unchanged (59% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with the sections of this report entitled “Forward-Looking Statements,” “Risk Factors” and “Selected Financial Data,” along with the historical consolidated financial statements including related notes, included in this report.

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

You should read the following discussion in conjunction with the sections of this report entitled “Forward-Looking Statements” and“Risk Factors,” along with the historical consolidated financial statements including related notes, included in this report.

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.

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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 conduit/commercial mortgage-backed securities ("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 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 certificates of the securitization.

We conduct our operations to qualify as a REIT.

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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 or borrowings decreases, this will have a positive impact on earnings.

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.

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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.

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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 are creating significant disruptions in global supply chains, and adversely impacting many industries.

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

The impact of COVID-19 on companies is evolving rapidly, 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.

We expect the effects of the COVID-19 pandemic to continue to negatively impact our financial performance and operating results during 2021.

The global outbreak of COVID-19 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 2021

Capital Markets Activity.

● We raised $524.7 million of capital through issuances of senior unsecured debt and common stock issuances through a public offering and an “At-The-Market” equity offering sales agreement with JMP Securities LLC (“JMP”).

We used a significant portion of the net proceeds to redeem secured indebtedness and make investments and also used $37.7 million to purchase OP Units and common shares;

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

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

The shelf registration statement was declared effective upon filing.

● We raised $1.13 billion of capital through issuances of senior unsecured debt and common stock issuances through public offerings and our “At-The-Market” equity offering sales agreement.

We used $55.5 million of the net proceeds to purchase common stock and operating partnership units (“OP Units”) from our chief executive officer, ACM and certain of its members and certain other executive officers of ours;

● We raised $556.4 million of capital through the issuances of Series D, E and F preferred shares with a weighted average rate of 6.34% and we 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 our thirteenth collateralized securitization vehicle (CLO XIII) totaling $800.0 million of real estate related assets and cash, of which $668.0 million of investment grade notes were issued to third party investors and $70.0 million of below investment-grade notes and a $62.0 million equity interest in the portfolio were retained by us;

● We closed our first Private Label multifamily mortgage loan securitization totaling $727.2 million and retained the APL certificates totaling $63.6 million;

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

● We completed the unwind of our $70.0 million Luxembourg commercial real estate debt fund (“Debt Fund”) and redeemed all the outstanding notes with a portion of the proceeds from our senior unsecured notes issued in March 2020;

● We increased the capacity of our credit facilities and repurchase agreements by approximately $420.0 million primarily by increasing the capacity of existing facilities.

Adoption of Current Expected Credit Losses (“CECL”).

The new CECL guidance, which we adopted on January 1, 2020, requires companies to estimate the expected lifetime credit loss of an asset over its contractual term with quarterly updates.

During 2020, we recorded a $74.6 million net credit loss provision under CECL.

See Note 2 for details.

Agency Business Activity.

● Loan originations and sales totaled $6.71 billion and $6.59 billion, respectively, and our fee-based servicing portfolio grew 23% to $24.63 billion from $20.06 billion at December 31, 2019.

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

● We recorded losses on derivative instruments totaling $58.3 million, primarily related to our over-the-counter interest rate swap futures (“Swap Futures”) held to hedge interest rate exposure on our Private Label loans until they are securitized.

● We closed four collateralized securitization vehicles (CLO 14, 15, 16 and 17) totaling $5.20 billion of real estate related assets and cash, of which $4.28 billion of investment grade notes were issued to third-party investors and $471.3 million of below investment-grade notes and a $447.2 million equity interest in the portfolio were retained by us;

● We closed two Private Label securitizations totaling $985.1 million and retained the most subordinate certificates totaling $85.7 million;

● Completed the unwind of CLO 9 and 11, redeeming $889.2 million of outstanding notes which were repaid from refinancing the remaining assets within our existing financing facilities (including CLO 14 and 17) and cash held by CLO 9 and 11.

Structured Business Activity.

● Our Structured loan and investment portfolio grew 28% to $5.48 billion on loan originations totaling $2.43 billion, partially offset by loan runoff totaling $1.21 billion;

● We recorded income of $75.7 million and received $43.2 million of cash distributions from our residential mortgage business joint venture.

We raised our quarterly common dividend for the past three consecutive quarters to $0.33 per share, a 10% increase over the dividend declared in the fourth quarter of 2019 of $0.30 per share.

● Grew our structured loan and investment portfolio 122% to $12.16 billion on loan originations totaling $9.72 billion, partially offset by loan runoff totaling $2.52 billion;

● Recorded income of $34.6 million and received $28.0 million of cash distributions from our residential mortgage business joint venture.

Agency Business Activity.

● Loan originations and sales totaled $6.41 billion and $6.42 billion, respectively;

● Grew our fee-based servicing portfolio 9% to $26.96 billion.

We raised our quarterly common dividend to $0.37 per share, our seventh consecutive quarterly increase.

Subsequent Events.

During February 2022, we closed the following transactions:

● We closed a collateralized securitization vehicle (CLO 18) totaling $2.05 billion, of which $1.65 billion of investment grade notes were issued to third-party investors and $210.1 million of below investment-grade notes and a $187.1 million equity interest in the portfolio were retained by us;

● We closed a Private Label securitization totaling $489.3 million and retained the most subordinate certificates totaling $43.4 million;

● Raised $72.6 million from the issuance of an additional 3,100,000 shares of our Series F preferred shares.

Current Market Conditions, Risks and Recent Trends

As discussed throughout this report, the COVID-19 pandemic has impacted the global economy in an unprecedented way, swiftly halting activity across many industries, and causing 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 and could trigger a period of global economic slowdown.

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

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

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

Despite this reduction in liquidity, subsequent to the first quarter of 2020 we raised $233.6 million through two private placement debt offerings and common stock issuances through a public offering and our “At-The-Market” equity offering sales agreements.

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, the full extent of which will depend on future developments, including, among other factors, the emergence of new variants in the US and abroad, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions and the effectiveness of vaccination programs.

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 of certain asset classes, 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.

Since the beginning of 2020, the pandemic has caused a dislocation in the capital markets resulting in a reduction of available liquidity, with varying degrees of improvement in 2021.

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 could limit 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, 91% of our portfolio is in multifamily assets with most of these loans containing interest reserves and/or replenishment obligations by our borrowers.

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All loan and rent payments that are suspended remain the obligations of the borrowers and tenants.

As of December 31, 2020, our Agency Business had approved forbearances related to approximately 0.5% of our $18.27 billion Fannie Mae DUS portfolio and approximately 5.2% of our $4.88 billion Freddie Mac portfolio.

We are closely monitoring and managing the requests for forbearances and there could potentially be additional economic stress during 2021.

Interest rates have trended downward during 2020 and remain at historically low levels.

Our Agency Business had approved forbearances related to 0.2% of our Fannie Mae DUS portfolio and 2.6% of our Freddie Mac portfolio as of December 31, 2021.

We are closely monitoring and managing the requests for forbearances and it is likely there will be additional economic stress during 2022.

In December 2021, the federal reserve announced they will likely raise interest rates in 2022 to combat inflation.

However, interest rates currently 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.

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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.

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.

See “Quantitative and Qualitative Disclosures about Market Risk” below for additional details.

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 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 business or affordable housing.

In October 2021, the 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 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.

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Including certain fees earned and costs associated with the structured portfolio, the weighted average current interest rate was 4.62% and 5.80% at December 31, 2021 and 2020, respectively.

Advances on our financing facilities totaled $4.92 billion and $3.93 billion at December 31, 2020 and 2019, respectively, with a weighted average funding cost of 2.64% and 3.82%, respectively, which excludes financing costs.

Our debt that finances our loans and investment portfolio totaled $11.17 billion and $4.92 billion at December 31, 2021 and 2020, respectively, with a weighted average funding cost of 2.33% and 2.64%, respectively, which excludes financing costs.

Including financing costs, the weighted average funding rate was 2.61% and 3.03% at December 31, 2021 and 2020, respectively.

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Weighted average interest rate

(1) We committed to fund six SFR build-to-rent bridge loans totaling $197.8 million in the third and fourth quarters of 2020.

(1) During 2021 and 2020, we committed to fund SFR loans totaling $729.5 million and $261.5 million, respectively.

Loans paid-off / paid-down

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Number of loans

Loans held-for-sale from the Agency Business increased $125.6 million, primarily related to loan originations exceeding sales by $124.2 million as noted in the following table (in thousands).

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

Loans held-for-sale from the Agency Business increased $106.7 million, primarily from an increase in Private Label loan originations.

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.

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

Private Label

SFR – Fixed Rate

Capitalized mortgage servicing rights increased $42.8 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.

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

At December 31, 2021, the weighted average estimated life remaining of our MSRs was 8.5 years.

Investments in equity affiliates increased $32.5 million, due to income from our investment in a residential mortgage banking business of $75.7 million, partially offset by $43.2 million in cash distributions received from the same investment.

Real estate owned decreased $11.7 million, primarily due to the sale of our hotel property.

Other assets increased $56.3 million, primarily due to an increase in our operating lease right-of-use assets as a result of office lease extensions and the reclassification of our SFR bond from securities held-to-maturity.

Securities held-to-maturity increased $45.0 million, primarily due to the purchase, at a discount, of APL certificates in connection with our Private Label securitizations.

Investments in equity affiliates increased $15.4 million, primarily due to income from our investment in a residential mortgage banking business of $34.6 million and contributions totaling $14.0 million made to AMAC III and a new investment in a private equity fund, partially offset by $31.8 million of distributions received from our residential mortgage banking investment and AMAC III.

See Note 8 for details.

Due from related party increased $71.9 million, due to an increase in funds from payoffs to be remitted by our affiliated servicing operations related to real estate transactions at the end of the reporting period.

These amounts were remitted to us in January 2022.

Other assets increased $86.4 million, primarily due to increases in unsecured loan fundings, current tax assets, interest receivables from portfolio growth and the fair value of our interest rate and credit default swaps (“Swaps”).

Liabilities – Comparison of balances at December 31, 2021 to December 31, 2020:

Credit facilities and repurchase agreements increased $556.6 million, primarily due to funding of new structured loan activity and loan originations exceeding sales by $124.2 million in our Agency Business as described above, partially offset by a paydown in our securities repurchase facilities that contained margin call provisions.

Collateralized loan obligations increased $387.2 million, primarily due to the issuance of a new CLO, where we issued $668.0 million of notes to third party investors, partially offset by the unwind of a CLO totaling $282.9 million.

We completed the unwind of our $70.0 million Debt Fund.

Credit and repurchase facilities increased $2.25 billion, primarily due to funding of new structured loan activity.

Collateralized loan obligations increased $3.38 billion, primarily due to the issuances of four new CLOs, where we issued $4.28 billion of notes to third-party investors, partially offset by the unwind of two CLOs totaling $889.2 million.

Senior unsecured notes increased $617.7 million, primarily due to our issuances of $355.0 million of 5.00% notes and $270.0 million of 4.50% notes.

Convertible senior unsecured notes decreased $16.2 million, primarily due to partial redemption of our 5.25% convertible notes.

Allowance for loss-sharing obligations increased $29.7 million, primarily due to the adoption of CECL in the first quarter of 2020.

See Note 2 for details.

Other liabilities increased $63.3 million, primarily due to an increase in our operating lease liabilities as a result of office lease extensions and an increase in accrued compensation.

During 2020, we sold 14,790,121 shares of our common stock through a public offering and our “At-The-Market” agreement and issued 368,498 shares of common stock in connection with settlements of our convertible notes.

We also repurchased 4,184,394 shares of our common stock and OP Units from ACM and certain of its members and repurchased 993,106 shares of our common stock under our share repurchase program.

Distributions

The following table presents dividends declared (on a per share basis) for 2020:

Preferred Stock

Declaration Date

February 13, 2020

January 31, 2020

July 29, 2020

October 28,2020

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

The dividend declared on May 1, 2020 was for March 1, 2020 through May 31, 2020.

The dividend declared on July 29, 2020 was for June 1, 2020 through August 31, 2020.

The dividend declared on October 28, 2020 was for September 1, 2020 through November 30, 2020.

Common Stock – On February 17, 2021, the Board of Directors declared a cash dividend of $0.33 per share of common stock.

The dividend is payable on March 19, 2021 to common stockholders of record as of the close of business on March 3, 2021.

Preferred Stock – On February 1, 2021, the Board of Directors declared a cash dividend of $0.515625 per share of 8.25% Series A preferred stock;

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

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

These amounts reflect dividends from December 1, 2020 through February 28, 2021 and are payable on March 1, 2021 to preferred stockholders of record on February 15, 2021.

Deferred Compensation

During 2020, we issued 360,885 shares of restricted stock to our employees (including our chief executive officer) and 52,735 shares to the independent members of the Board of Directors.

Our chief executive officer was also granted 275,569 shares of performance-based restricted stock units and 313,152 shares of performance-based restricted stock as a result of achieving goals related to the integration of our 2016 acquisition of ACM's agency platform (the “Acquisition”).

Our chief executive officer net settled 421,348 shares of fully vested performance-based restricted stock units for 215,014 common shares and 357,569 shares of fully vested performance-based restricted stock for 182,467 common shares.

We also withheld 158,722 shares of restricted common stock from our employees (including our chief executive officer) to net settle and pay their respective withholding taxes in connection with awards that vested.

See Note 17 for details of our deferred compensation transactions.

Due to related party was $26.6 million and $2.4 million at December 31, 2021 and 2020, respectively, and consisted of loan payoffs, holdbacks and escrows to be remitted to our affiliated servicing operations related to real estate transactions.

Other liabilities increased $90.2 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.

During 2021, we completed public offerings of our Series D, E and F preferred stock totaling 23,000,000 shares with a weighted average rate of 6.34%.

These offerings generated net proceeds of $556.4 million and we 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%.

During 2021, we sold 29,140,369 shares of our common stock through public offerings and our “At-The-Market” agreement, raising net proceeds totaling $514.6 million.

We used $55.5 million of the net proceeds to purchase a total of 3,170,900 of common

stock and OP Units from our chief executive officer, ACM and its members and certain other executive officers of ours.

We also issued 386,459 shares of common stock and cash to fully redeem our remaining 5.25% convertible senior notes (the “5.25% Convertible Notes”).

See Note 16 for the details of our dividends declared and our deferred compensation transactions during 2021.

Agency Servicing Portfolio

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Private Label

SFR - Fixed Rate

December 31, 2020

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

Private Label

(1) Prepayments reflect loans repaid prior to six months from loan 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.

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As of December 31, 2021 and 2020, delinquent loans totaled $77.6 million and $91.3 million, respectively, of which $9.8 million and $19.6 million, respectively, were in the foreclosure process.

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

No loans were in bankruptcy as of December 31, 2021 and 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.

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Depreciation and amortization

Impairment loss on real estate owned

Provision for loss sharing (net of recoveries)

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Total other expenses

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

Income before extinguishment of debt, gain (loss) on real estate, income from equity affiliates and income taxes

Loss on extinguishment of debt

Loss on sale of real estate

Gain (loss) on real estate

Income from equity affiliates

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Structured Business interest-earning assets:

Preferred equity investments

Mezzanine / junior participation loans

Preferred equity investments

Core interest-earning assets

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Net Interest Income

The increase in interest income was due to increases of $16.1 million, or 6%, from our Structured Business and $7.5 million, or 29%, from our Agency Business.

The increase from our Structured Business was primarily due to a 30% increase in our average core interest-earning assets, as a result of loan originations exceeding loan runoff, partially offset by an 18% decrease in the average yield on core interest-earning assets, largely due to lower rates on originations as compared to loan runoff, a decrease in the average LIBOR rate and default interest and fees on a loan that paid off during 2019.

The increase from our Agency Business was primarily due to an increase in the average loans held-for-sale as a result of higher originations, which includes Private Label loan originations prior to securitization in May 2020, partially offset by a decrease in the 10-year treasury note rate in 2020.

The decrease in interest expense was due to a decrease of $18.8 million, or 11%, from our Structured Business, partially offset by an increase of $1.7 million, or 10%, from our Agency Business.

The decrease in our Structured Business was the result of a 33% decrease in the average cost of our interest-bearing liabilities, mainly from decreases in LIBOR and lower rates on recently issued debt, partially offset by a 32% increase in the average balance of our interest-bearing liabilities, due to growth in our loan portfolio and the recent issuance of additional unsecured debt.

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

The increase in interest income was mainly due to a $121.1 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 primarily due to lower rates on originations, as compared to loan runoff.

The increase in interest expense was mainly due to a $43.5 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 issuances of CLOs at lower rates.

Agency Business Revenue

The increase in gain on sales, including fee-based services, net was primarily due to a 50% increase ($2.19 billion) in loan sales volume.

The increase in income from MSRs was primarily due to a 41% increase in loan commitment volume, along with a 29% increase in the MSR rate (income from MSRs as a percentage of loan commitment volume) from 1.88% to 2.43%, mainly due to an increase in the average servicing fee on loan commitments.

The increase in gain on sales, including fee-based services, net was primarily due to a 33% increase in the sales margin from 1.44% to 1.92%, as a result of the increased mix of Private Label , SFR and FHA loan sales, which carry higher sales margins.

The decrease in income from MSRs was primarily due to a 16% decrease in the MSR rate from 2.43% to 2.05% and a 7% decrease 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, as well as an increase in prepayment penalties.

Other Revenue

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

The increase in loss on derivative instruments was primarily due to losses recognized in our Agency Business on Swap Futures held in connection with our Private Label loans.

See Note 13 for details.

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 an increase in commissions in our Agency Business in connection with higher loan sales volume, as well as increased headcount in both businesses associated with each business’s portfolio growth, including the full period impact in 2020 of new hires in 2019.

The decrease in selling and administrative expenses was primarily due to a $2.4 million decline in the Structured Business.

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

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 increased Private Label securitization activity and higher sales margins.

The increase in selling and administrative expenses was primarily due to higher professional fees (legal and consulting) and 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.

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

The increases in provision for loss sharing and provision for credit losses were primarily due to CECL reserves recorded in connection with the adoption of Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) in 2020.

See Note 2 for details.

We also recorded a $2.5 million litigation settlement related to a hotel property that we sold in 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 2020 was primarily due to losses recognized in connection with the unwind of both CLO VIII and the Debt Fund.

The loss on extinguishment of debt in 2019 was primarily due to the exchange transactions of our convertible notes.

See Note 11 for details.

The loss on extinguishment of debt in both years 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 Real Estate

The gain recorded in 2021 was from our acquisition of an office property (for full satisfaction of the underlying debt) with an appraisal value in excess of the outstanding loan and the sale of a repurchased Fannie Mae loan.

The loss recorded in 2020 was from the sale of a hotel property, substantially offset by a gain on the sale of a repurchased Fannie Mae loan.

Income from Equity Affiliates

Income from equity affiliates in 2020 and 2019 primarily reflects income from our investment in a residential mortgage banking business of $75.7 million and $7.2 million, respectively, and distributions from an equity investment totaling $1.1 million and $3.5 million, respectively.

Income from equity affiliates in 2021 and 2020 primarily reflects income from our investment in a residential mortgage banking business of $34.6 million and $75.7 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 2020, we recorded a tax provision of $40.4 million, which consisted of a current tax provision of $35.7 million and a deferred tax provision of $4.7 million.

In 2019, we recorded a tax provision of $15.0 million, which consisted of a current tax provision of $14.9 million and a deferred tax provision of $0.2 million.

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

In 2021, we recorded a tax provision of $46.3 million, which consisted of current and deferred tax provisions of $35.4 million and $10.9 million, respectively.

In 2020, we recorded a tax provision of $40.4 million, which consisted of a current and deferred tax provisions of $35.7 million and $4.7 million, respectively.

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, E and F 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.

The noncontrolling interest relates to the outstanding OP Units issued as part of the 2016 acquisition of ACM’s agency platform (the “Acquisition”).

There were 16,325,095 OP Units and 17,560,633 OP Units outstanding as of December 31, 2021 and 2020, respectively, which represented 9.7% and 12.5% of our outstanding stock at December 31, 2021 and 2020, respectively.

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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 $4.92 billion in total structured debt outstanding at December 31, 2020.

Of this total, approximately $3.64 billion, or 74%, 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 $1.28 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 may be less favorable than the terms of our current facilities.

In addition to our ability to extend our warehouse and repurchase facilities, we have approximately $400 million in cash and available liquidity as well as other liquidity sources, including our $24.63 billion agency servicing portfolio, which is mostly prepayment protected and generates approximately $112.0 million a year in recurring cash flow.

We had $11.17 billion in total structured debt outstanding at December 31, 2021.

Of this total, $7.64 billion, or 68%, 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 2023, or later.

The remaining $3.53 billion of debt is in credit 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 credit and repurchase facilities and raise funds from equity and debt offerings, we have approximately $900 million in cash and available liquidity as well as other liquidity sources, including our $26.96 billion agency servicing portfolio, which is mostly prepayment protected and generates approximately $121 million per year in recurring cash flow.

At December 31, 2021, we had $61.4 million of securities financed with $30.8 million of debt that was subject to margin calls related to changes in interest spreads.

During 2020, we significantly reduced the UPB of this debt by $178.6 million to $38.5 million through a debt restructuring and the use of proceeds from our senior notes issued in the second quarter of 2020.

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

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

Cash flows provided by operating activities totaled $55.2 million during the year ended December 31, 2020 and consisted primarily of net income of $196.2 million, partially offset by net cash outflows of $121.6 million as a result of loan originations exceeding loan sales in our Agency Business.

Cash flows used in investing activities totaled $1.16 billion during the year ended December 31, 2020.

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

Cash flows provided by operating activities were $216.8 million during 2021 as net income of $377.8 million was partially offset by cash outflows due to loan originations exceeding loan sales in our Agency Business, increases in unsecured loan fundings and decreases in the fair value of our Swaps, as well as certain other non-cash net income adjustments (increases in interest receivables from portfolio growth in our Structured Business).

Cash flows used in investing activities totaled $6.75 billion during 2021.

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

Loan originations from our Structured Business totaling $9.21 billion, net of payoffs and paydowns of $2.37 billion, resulted in net cash outflows of $6.84 billion.

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

Cash flows provided by financing activities totaled $1.13 billion during the year ended December 31, 2020 and consisted primarily of net cash inflows of $557.6 million from debt facility activities (financed loan originations were greater than facility paydowns), net proceeds of $384.9 million from CLO activity, $345.8 million received from the issuances of senior unsecured notes

and $183.6 million received from common stock issuances, partially offset by, $173.1 million of distributions to our stockholders and OP Unit holders, $70.0 million for the unwind of the Debt Fund and $32.2 million for the redemption of OP units.

Cash flows provided by financing activities totaled $6.89 billion during 2021 and consisted primarily of net proceeds of $3.39 billion from CLO activity, net cash inflows of $2.25 billion from debt facility activities (financed loan originations were greater than facility paydowns) and $1.70 billion of proceeds from the issuance of common and preferred stock and senior unsecured notes, partially offset by $227.1 million of distributions to our stockholders and OP Unit holders and $92.8 million for the redemption of preferred stock.

Agency Business Requirements.

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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.

Borrowings underlying these arrangements are primarily secured by a significant amount of our loans and investments and substantially all our loans held-for-sale.

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

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Debt Instruments

Commitment (1)

Structured Business

Credit facilities and repurchase agreements

Credit and repurchase facilities

Collateralized loan obligations (3)

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Agency Business

Credit facilities (5)

Credit and repurchase facilities (4)

Consolidated total

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

(1) Excludes the impact of deferred financing costs.

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(3) Maturity dates represent the weighted average remaining maturity based on the underlying collateral as of December 31, 2021.

(5) The Multifamily As Soon as Pooled ® Plus (“ASAP”) agreement we have with Fannie Mae has no expiration date.

These debt facilities, including their restrictive covenants, are described in Note 11.

(4) The $750 million Multifamily As Soon as Pooled ® Plus (“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):

End of Period

Quarter Ended

December 31, 2021

September 30, 2021

June 30, 2021

March 31, 2021

December 31, 2020

September 30, 2020

June 30, 2020

March 31, 2020

December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019

Our debt facilities, including their restrictive covenants, are described in Note 10.

Off-Balance-Sheet Arrangements.

At December 31, 2021, we had no off-balance-sheet arrangements.

Changes in the general level of interest rates prevailing in the economy in response to changes in the rate of inflation generally would not have a significant effect on our income because the majority of our interest-earning assets and interest-bearing liabilities have floating rates of interest.

See “Quantitative and Qualitative Disclosures about Market Risk” below.

In December 2021, the federal reserve announced they will likely raise interest rates in 2022 to combat inflation.

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 above index rates, any increase in interest income due to rising interest rates is not likely to be as substantial as the corresponding increase in interest expense.

See “Quantitative and Qualitative Disclosures about Market Risk” below for additional details.

Derivative Financial Instruments

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Significant Accounting Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with the FASB Accounting Standards Codification™, the authoritative reference for accounting principles generally accepted in the U.S.

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™, the authoritative reference for accounting principles generally accepted in the U.S.

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts in our consolidated financial statements.

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Distributable Earnings.

Beginning in the fourth quarter of 2020, we changed the name of our non-GAAP financial measure from core earnings to distributable earnings.

Although calculated the same way as core earnings, we believe the name change to distributable earnings better reflects what this non-GAAP financial measure presents.

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.

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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 (benefit) provision, 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.

We consider distributable earnings in determining our quarterly dividend and believe that, over time, distributable earnings are 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), amortization of the convertible senior notes conversion option gains/losses on the receipt of real estate from the settlement of loans (prior to the sale of the real estate).

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);

(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.

Distributable earnings are 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.

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

Distributable earnings are as follows ($ in thousands, except share and per share data):

Year Ended December 31,

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Income from mortgage servicing rights

Deferred tax provision (benefit)

Deferred tax provision

Amortization and write-offs of MSRs

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Provision for credit losses, net

Loss (gain) on derivative instruments, net

Loss on derivative instruments, net

Gain on real estate from settlement of loan

Stock-based compensation

Loss on redemption of preferred stock

Distributable earnings (1)

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Diluted weighted average shares outstanding (1)

(1) Amounts are attributable to common stockholders and OP Units holders.

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.

As noted above, we changed the name of our non-GAAP financial measure from core earnings to distributable earnings in the fourth quarter of 2020.

Core earnings was introduced as our non-GAAP performance measure in the first quarter of 2020 as a replacement of adjusted funds from operations (“AFFO”).

Core earnings was comparable to the previous AFFO metric, revised to exclude provisions for credit losses (including CECL) related to our structured loan portfolio, securities held-to maturity and loss-sharing obligations related to the Fannie Mae program.

Prior period amounts presented in the table above have been conformed to reflect these changes.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis