What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-10-29 · 128 added, 215 removed, 213 unchanged (62% of the section changed)

7 unchanged sentences

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 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.

We conduct our operations to qualify as a REIT.

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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.

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.

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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

Significant Developments During the First Quarter of 2022

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;

● We raised $139.1 million from the issuance of 6.25% Series E preferred stock.

● 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;

● Unwound CLO 10, redeeming $441.0 million of outstanding notes, which were repaid from refinancing the remaining assets within CLO 18 and cash held by CLO 10;

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

● Raised $214.7 million of capital from the issuances of common stock through a public offering and our “At-The-Market” equity offering sales agreement and an additional issuance of our Series F preferred stock;

● Increased our Structured Business warehouse capacity by $400.0 million.

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;

● We recorded income of $5.4 million and received a $4.7 million cash distribution from our residential mortgage business joint venture.

● Grew our structured loan and investment portfolio 17% to $14.17 billion on loan originations totaling $2.83 billion, partially offset by loan runoff totaling $666.6 million;

● Recorded income of $5.0 million and received a $7.5 million cash distribution from our residential mortgage business joint venture and received a $2.6 million equity participation interest from a preferred equity loan that previously paid-off.

Agency Business Activity.

● Loan originations and sales totaled $1.80 billion and $1.01 billion, respectively;

● Our fee-based servicing portfolio grew to $26.21 billion.

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;

● 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.

● Loan originations and sales totaled $838.5 million and $1.59 billion, respectively;

● Our fee-based servicing portfolio remained flat at $26.96 billion, as loan originations and loans from the Private Label securitization were offset by loan maturities and prepayments.

We raised our quarterly common dividend to $0.38 per share, our 8th consecutive quarterly increase.

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.

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, 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.

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.

The Federal Reserve has started raising interest rates in 2022 to combat inflation and restore price stability and it is expected that rates will continue to rise throughout the remainder of 2022.

Currently, rising interest rates will positively impact our net interest income since our structured loan portfolio exceeds our corresponding debt balances and the vast majority of our loan portfolio is floating-rate based on LIBOR or SOFR.

Additionally, a greater portion of our debt is fixed-rate, as compared to our structured loan portfolio, and will not reset as interest rates rise.

Therefore, increases in interest income due to rising interest rates is likely to be greater than the corresponding increase in interest expense on our variable rate debt.

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

Conversely, rising interest rates could negatively impact real estate values and limit a borrower’s ability to make debt service payments, which may limit new mortgage loan originations and increase the likelihood of incurring losses from defaulted loans if the reduction in the collateral value is insufficient to repay their loans in full.

We have been very successful in raising capital through various vehicles to grow our business.

The anticipated continual rise in interest rates and unpredictable geopolitical landscape may cause a further dislocation in the capital markets resulting in a general reduction of available liquidity and an increase in borrowing costs.

Since our Structured Business is more reliant on the capital markets to grow, a lack of liquidity for a prolonged period of time could limit our ability to grow this business.

However, 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 a lack of liquidity should not impact our ability to grow this business.

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”).

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 is an increase from its 2021 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.

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.

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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.

Assets — Comparison of balances at March 31, 2022 to December 31, 2021:

Our Structured loan and investment portfolio balance was $14.17 billion and $12.16 billion at March 31, 2022 and December 31, 2021, respectively.

This increase was primarily due to loan originations exceeding loan payoffs and paydowns by $2.16 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.

Our portfolio had a weighted average current interest pay rate of 4.38% and 4.26% at March 31, 2022 and December 31, 2021, respectively.

Including certain fees earned and costs associated with the structured portfolio, the weighted average current interest rate was 4.74% and 4.62% at March 31, 2022 and December 31, 2021, respectively.

Our debt that finances our loans and investment portfolio totaled $12.86 billion and $11.17 billion at March 31, 2022 and December 31, 2021, respectively, with a weighted average

funding cost of 2.57% and 2.33%, respectively, which excludes financing costs.

Including financing costs, the weighted average funding rate was 2.81% and 2.61% at March 31, 2022 and December 31, 2021, respectively.

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

Three Months Ended

Nine Months Ended

September 30, 2021

March 31, 2022

Loans originated (1)

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Weighted average interest rate

(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.

(1) We committed to fund SFR loans totaling $83.3 million.

Loans paid-off / paid-down

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Number of loans

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.

Loans held-for-sale from the Agency Business decreased $756.7 million, primarily from loan sales exceeding originations by $748.2 million as noted in the following table (in thousands).

Loan sales includes $489.3 million of Private Label loans which were sold in a Private Label loan securitization in the first quarter of 2022.

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):

Three Months Ended

Nine Months Ended

September 30, 2021

March 31, 2022

Private Label

SFR - Fixed Rate

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.

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.

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.

Securities held-to-maturity increased $21.2 million, primarily due to the purchase, at a discount, of APL certificates in connection with a Private Label securitization, partially offset by principal payments received from underlying loan payoffs from our B Piece bonds.

Investments in equity affiliates increased $7.2 million, primarily due to additional fundings totaling $9.7 million on our AMAC III and Fifth Wall equity investments, along with $5.0 million of income from our investment in a residential mortgage banking business, partially offset by $7.5 million in cash distributions received from the same investment.

Other assets increased $21.9 million, primarily due to increases in unsecured loan fundings and interest receivables from portfolio growth.

Liabilities – Comparison of balances at March 31, 2022 to December 31, 2021:

Collateralized loan obligations increased $1.21 billion, primarily due to the issuance of a new CLO, where we issued $1.65 billion of notes to third party investors, partially offset by the unwind of a CLO totaling $441.0 million.

Other liabilities decreased $14.9 million primarily due to the payment of incentive compensation during the first quarter of 2022, related to 2021 performance.

During the first quarter of 2022, we completed a public offering of an additional 3,292,000 shares of our Series F preferred stock generating net proceeds of $77.1 million.

During the first quarter of 2022, we sold 8,225,750 shares of our common stock through a public offering and our “At-The-Market” equity agreement, raising net proceeds totaling $137.8 million.

See Note 15 for the details of our dividends declared and our deferred compensation transactions during the three months ended March 31, 2022.

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

March 31, 2022

Delinquencies

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Private Label

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

SFR - Fixed Rate

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

See Note 5 for details.

(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.

At March 31, 2022 and December 31, 2021, delinquent loans totaled $55.6 million and $77.6 million, respectively, of which $9.8 million were in the foreclosure process for both periods.

No loans were in bankruptcy at March 31, 2022 and December 31, 2021.

Our Agency Business servicing portfolio represents commercial real estate loans, 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.

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)

Interest income

Interest expense

Net interest income

Other revenue:

Gain on sales, including fee-based services, net

Mortgage servicing rights

Servicing revenue, net

Property operating income

Loss on derivative instruments, net

Other income, net

Total other revenue

Other expenses:

Employee compensation and benefits

Selling and administrative

Property operating expenses

Depreciation and amortization

Provision for loss sharing (net of recoveries)

Provision for credit losses (net of recoveries)

Total other expenses

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

Loss on sale of real estate

Income from equity affiliates

Provision for income taxes

Preferred stock dividends

Net income attributable to noncontrolling interest

Net income attributable to common stockholders

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

Three Months Ended September 30,

Structured Business interest-earning assets:

Preferred equity investments

Mezzanine / junior participation loans

Core interest-earning assets

Cash equivalents

Total interest-earning assets

Structured Business interest-bearing liabilities:

Warehouse lines

Unsecured debt

Trust preferred

Total interest-bearing liabilities

Net interest income

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

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

Net Interest Income

The increase in interest income was 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%.

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.

Comparison of Results of Operations for the Nine Months Ended September 30, 2021 and 2020

Comparison of Results of Operations for the Three Months Ended March 31, 2022 and 2021

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

Nine Months Ended September 30,

Three Months Ended March 31,

Increase / (Decrease)

7 unchanged sentences

Property operating income

Loss on derivative instruments, net

Gain (loss) on derivative instruments, net

Other income, net

8 unchanged sentences

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 on real estate,

income from equity affiliates and income taxes

Loss on extinguishment of debt

Gain (loss) on sale of real estate

Gain on real estate

Income from equity affiliates

5 unchanged sentences

Nine Months Ended September 30,

Three Months Ended March 31,

Structured Business interest-earning assets:

Preferred equity investments

Mezzanine / junior participation loans

Preferred equity investments

Core interest-earning assets

2 unchanged sentences

Structured Business interest-bearing liabilities:

Warehouse lines

Credit and repurchase facilities

Unsecured debt

6 unchanged sentences

The increase in interest income was mainly due to a $73.1 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 due to lower rates on originations as compared to loan runoff and a decrease in the average LIBOR.

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 $40.0 million increase from our Structured Business, primarily due to an increase in the average balance of our interest-bearing liabilities, due to growth in our loan portfolio and the issuance of additional unsecured debt.

This was partially offset by a decrease in the average cost of our interest-bearing liabilities, mainly from more favorable terms on credit and repurchase facilities and CLOs.

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 gain on sales, including fee-based services, net was primarily due to a 38% decrease ($681.1 million) in GSE loan sales volume , along with a 25% decrease in the sales margin from 1.57% to 1.18%.

The decrease in the sales margin was primarily due to lower margins received on our Private Label loan sales.

The decrease in income from MSRs was primarily due to a 38% decrease in the MSR rate from 2.53% to 1.57% and a 33% decrease ($485.0 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.

The increase in servicing revenue, net was primarily due to the growth in our servicing portfolio.

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.

The increase in servicing revenue, net was primarily due to an increase in prepayment penalties received the first quarter of 2022 and growth in our servicing portfolio.

The gains and losses on derivative instruments in 2022 and 2021, respectively, were primarily related to changes in the fair value of our Swaps held by our Agency Business in connection with our Private Label loans.

The increase in other income, net was primarily due to higher loan origination volume in our Structured Business.

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.

The decrease in employee compensation and benefits expense was primarily due to a decrease in commissions from lower GSE/Agency loan sales volume, substantially offset by an increase in headcount as a result of the portfolio growth in both business segments.

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

Administrative expenses were also higher in 2022 as a result of increases in travel and events as travel restrictions subside from the COVID-19 pandemic.

The net increase in our CECL reserves of $1.1 million was primarily due to the growth in our structured portfolio and the impact of rising interest rates in our CECL models for our Structured Business, which predominantly consists of variable rate loans.

This was partially offset by improvements in general market conditions and expected future forecasts in our CECL models for both business segments, including lower unemployment rates and increased property values.

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.

The loss on extinguishment of debt in both periods was deferred financing fees recognized in connection with the unwind of CLOs.

Gain on Real Estate

The gain recorded in the first quarter of 2021 was from the sale of a repurchased Fannie Mae loan.

Income from Equity Affiliates

Income from equity affiliates in 2021 and 2020 primarily reflects income from our investment in a residential mortgage banking business of $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.

Income from equity affiliates in the first quarter of 2022 and 2021 primarily reflects income from our investment in a residential mortgage banking business of $5.0 million and $22.5 million, respectively, as well as $2.6 million in 2022 from an equity participation interest on a property that was sold.

The income from our investment in a residential mortgage banking business 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.

In the three months ended March 31, 2022, we recorded a tax provision of $8.2 million, which consisted of a current tax provision of $9.9 million and a deferred tax benefit of $1.7 million.

In the three months ended March 31, 2021, we recorded a tax provision of $12.5 million, which consisted of current and deferred tax provisions of $8.0 million and $4.5 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, 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.

There were 16,325,095 OP Units and 17,560,633 OP Units outstanding as of March 31, 2022 and 2021, respectively, which represented 9.2% and 11.6% of our outstanding stock at March 31, 2022 and 2021, respectively.

Liquidity and Capital Resources

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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 $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.

We had $12.86 billion in total structured debt outstanding at March 31, 2022.

Of this total, $8.85 billion, or 69%, 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 $4.01 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 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.

In addition to our ability to extend our credit and repurchase facilities and raise funds from equity and debt offerings, we have approximately $800 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 $120 million per year in recurring cash flow.

At March 31, 2022, we had $52.3 million of securities financed with $29.6 million of debt that was subject to margin calls related to changes in interest spreads.

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

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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 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.

Cash flows provided by operating activities totaled $836.8 million during the three months ended March 31, 2022 and consisted primarily of net cash inflows of $741.1 million as a result of loan sales exceeding loan originations in our Agency Business and net income of $79.9 million, as well as certain other non-cash net income adjustments.

Cash flows used in investing activities totaled $2.02 billion during the three months ended March 31, 2022.

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.

Loan originations from our Structured Business totaling $2.66 billion, net of payoffs and paydowns of $668.4 million, resulted in net cash outflows of $1.99 billion.

Cash flows provided by financing activities totaled $1.16 billion during the three months ended March 31, 2022 and consisted primarily of net proceeds of $1.21 billion from CLO activity and $215.4 million of proceeds from the issuance of common and preferred stock, partially offset by net cash outflows of $178.3 million from debt facility activities (facility paydowns were greater than financed loan originations) and $72.1 million of distributions to our stockholders and OP Unit holders.

Agency Business Requirements.

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

Our adjusted net worth and operational liquidity exceeded the agencies' requirements as of September 30, 2021.

Our adjusted net worth and operational liquidity exceeded the agencies' requirements at March 31, 2022.

Our restricted liquidity and purchase and loss obligations were satisfied with letters of credit totaling $50.0 million and $18.7 million of cash collateral.

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

September 30, 2021

March 31, 2022

Debt Instruments

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(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.

(3) Maturity dates represent the weighted average remaining maturity based on the underlying collateral at March 31, 2022.

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

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Quarter Ended

September 30, 2021

June 30, 2021

March 31, 2022

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September 30, 2021

June 30, 2021

March 31, 2021

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.

At March 31, 2022, we had no off-balance sheet arrangements.

The Federal Reserve has started raising interest rates in 2022 to combat inflation and restore price stability and it is expected that rates will continue to rise throughout the remainder of 2022.

Currently, rising interest rates will positively impact our net interest

income since our structured loan portfolio exceeds our corresponding debt balances and the vast majority of our loan portfolio is floating-rate based on LIBOR or SOFR.

Additionally, a greater portion of our debt is fixed-rate, as compared to our structured loan portfolio, and will not reset as interest rates rise.

Therefore, increases in interest income due to rising interest rates is likely to be greater than the corresponding increase in interest expense on our variable rate debt.

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

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;

During the three months ended March 31, 2022, the following significant changes were made to our contractual obligations disclosed in our 2021 Annual Report:

(1) closed a CLO issuing $1.65 billion of investment grade notes and unwound a CLO redeeming $441.0 million of outstanding notes;

(2) closed a Private Label securitization totaling $489.3 million;

and (3) 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.

Refer to Note 13 for a description of our debt maturities by year and unfunded commitments at March 31, 2022.

Derivative Financial Instruments

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Please refer to Note 2 of the Notes to Consolidated Financial Statements in our 2021 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.

During the three months ended March 31, 2022, there were no material changes to these policies, except for the adoption of ASU 2020-06 described in Note 2.

Non-GAAP Financial Measures

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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 provision (benefit), CECL provisions for credit losses (adjusted for realized losses as described below) and amortization of the convertible senior notes conversion option.

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 (in comparative periods prior to 2022) and 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.

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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.

(1) 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 (2) 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):

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Net income attributable to common stockholders

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Income from mortgage servicing rights

Deferred tax provision (benefit)

Deferred tax (benefit) provision

Amortization and write-offs of MSRs

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Provision for credit losses, net

Loss on derivative instruments, net

(Gain) loss on derivative instruments, net

Stock-based compensation

Loss on redemption of preferred stock

Distributable earnings (1)

Diluted weighted average shares outstanding - GAAP (1)

Convertible notes dilution (2)

Diluted weighted average shares outstanding - distributable earnings (1)

Diluted distributable earnings per share (1)

Diluted weighted average shares outstanding (1)

(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.

(2) Beginning in the first quarter of 2022, the diluted weighted average shares outstanding were adjusted to exclude the potential shares issuable upon conversion and settlement of our convertible senior notes principal balance.

Excluding the effect of a potential conversion in shares until a conversion occurs is consistent with past treatment and other unrealized adjustments to distributable earnings.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis