Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the unaudited consolidated interim financial statements, and related notes and the section entitled “Forward-Looking Statements” included herein.
Overview
Through our Structured Business, we invest in a diversified portfolio of structured finance assets in the multifamily, SFR and commercial real estate markets, primarily consisting of bridge and mezzanine loans, including junior participating interests in first mortgages and preferred and direct equity. We also invest in real estate-related joint ventures and may directly acquire real property and invest in real estate-related notes and certain mortgage-related securities.
Through our Agency Business, we originate, sell and service a range of multifamily finance products through Fannie Mae and Freddie Mac, Ginnie Mae, FHA and HUD. We retain the servicing rights and asset management responsibilities on substantially all loans we originate and sell under the GSE and HUD programs. We are an approved Fannie Mae DUS lender nationally, a Freddie Mac Multifamily Conventional Loan lender, seller/servicer, in New York, New Jersey and Connecticut, a Freddie Mac affordable, manufactured housing, senior housing and SBL lender, seller/servicer, nationally and a HUD MAP and LEAN senior housing/healthcare lender nationally. We also originate and service permanent financing loans underwritten using the guidelines of our existing agency loans sold to the GSEs, which we refer to as “Private Label” loans and originate and sell finance products through CMBS programs. We pool and securitize the Private Label loans and sell certificates in the securitizations to third-party investors, while retaining the servicing rights and APL certificates.
We conduct our operations to qualify as a REIT. A REIT is generally not subject to federal income tax on its REIT—taxable income that is distributed to its stockholders, provided that at least 90% of its REIT—taxable income is distributed and provided that certain other requirements are met.
Our operating performance is primarily driven by the following factors:
Net interest income earned on our investments. Net interest income represents the amount by which the interest income earned on our assets exceeds the interest expense incurred on our borrowings. If the yield on our assets increases or the cost of borrowings decreases, this will have a positive impact on earnings. However, if the yield earned on our assets decreases or the cost of borrowings increases, this will have a negative impact on earnings. Net interest income is also directly impacted by the size and performance of our asset portfolio. We recognize the bulk of our net interest income from our Structured Business. Additionally, we recognize net interest income from loans originated through our Agency Business, which are generally sold within 60 days of origination.
Fees and other revenues recognized from originating, selling and servicing mortgage loans through the GSE and HUD programs. Revenue recognized from the origination and sale of mortgage loans consists of gains on sale of loans (net of any direct loan origination costs incurred), commitment fees, broker fees, loan assumption fees and loan origination fees. These gains and fees are collectively referred to as gain on sales, including fee-based services, net. We record income from MSRs at the time of commitment to the borrower, which represents the fair value of the expected net future cash flows associated with the rights to service mortgage loans that we originate, with the recognition of a corresponding asset upon sale. We also record servicing revenue which consists of fees received for servicing mortgage loans, net of amortization on the MSR assets recorded. Although we have long-established relationships with the GSE and HUD agencies, our operating performance would be negatively impacted if our business relationships with these agencies deteriorate. Additionally, we also recognize revenue from originating, selling and servicing our Private Label loans.
Income earned from our structured transactions. Our structured transactions are primarily comprised of investments in equity affiliates, which represent unconsolidated joint venture investments formed to acquire, develop and/or sell real estate-related assets. Operating results from these investments can be difficult to predict and can vary significantly period-to-period. If interest rates were to rise, it is likely that income from these investments would be significantly and negatively impacted, particularly from our investment in a residential mortgage banking business, since rising interest rates generally decrease the demand for residential real estate loans and the number of loan originations. In addition, we periodically receive distributions from our equity investments. It is difficult to forecast the timing of such payments, which can be substantial in any given quarter. We account for structured transactions within our Structured Business.
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Credit quality of our loans and investments, including our servicing portfolio. Effective portfolio management is essential to maximize the performance and value of our loan and investment and servicing portfolios. Maintaining the credit quality of the loans in our portfolios is of critical importance. Loans that do not perform in accordance with their terms may have a negative impact on earnings and liquidity.
COVID-19 Impact. The global outbreak of COVID-19, has forced many countries, including the U.S., to declare national emergencies, to institute “stay-at-home” orders, to close financial markets and to restrict operations of non-essential businesses. Such actions have created significant disruptions in global supply chains, and adversely impacted many industries. COVID-19 could have a continued and prolonged adverse impact on economic and market conditions, which could continue a period of global economic slowdown. Although we have not been significantly impacted by COVID-19 to-date, the impact of COVID-19 on companies continues to evolve, and the extent and duration of the economic fallout from this pandemic, both globally and to our business, remain unclear and present risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions.
Significant Developments During the First Quarter of 2022
Financing and Capital Markets Activity.
● 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; and
● Increased our Structured Business warehouse capacity by $400.0 million.
Structured Business Activity.
● 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; and
● 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 $838.5 million and $1.59 billion, respectively; and
● 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.
Dividend. We raised our quarterly common dividend to $0.38 per share, our 8th consecutive quarterly increase.
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Current Market Conditions, Risks and Recent Trends
As discussed throughout this report, the COVID-19 pandemic continues to impact the global economy in unprecedented ways, swiftly halting activity across many industries, and continuing to cause significant disruption and liquidity constraints in many market segments, including the financial services, real estate and credit markets. The impact of COVID-19 on companies continues to evolve, 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.
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 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. Therefore, a decline in our GSE originations could negatively impact our financial results. We are unsure whether the FHFA will impose stricter limitations on GSE multifamily production volume in the future.
Changes in Financial Condition
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 4.38% 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 $11.17 billion at March 31, 2022 and December 31, 2021, respectively, with a weighted average
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funding cost of 2.57% and 2.33%, respectively, which excludes financing costs. Including financing costs, the weighted average funding rate was 2.81% and 2.61% at March 31, 2022 and December 31, 2021, respectively.
Activity from our Structured Business portfolio is comprised of the following ($ in thousands):
Three Months Ended
March 31, 2022
Loans originated (1)
$
2,828,855
Number of loans
125
Weighted average interest rate
4.46
%
(1) We committed to fund SFR loans totaling $83.3 million.
Loans paid-off / paid-down
$
666,551
Number of loans
36
Weighted average interest rate
5.86
%
Loans extended
$
421,072
Number of loans
11
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
March 31, 2022
Loan
Originations
Loan Sales
Fannie Mae
$
449,680
$
666,544
Freddie Mac
299,072
359,086
Private Label
72,896
489,269
FHA
11,990
71,816
SFR - Fixed Rate
4,871
—
Total
$
838,509
$
1,586,715
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.
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Equity
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):
March 31, 2022
Wtd. Avg.
Wtd. Avg.
Annualized
Servicing
Age of
Portfolio
Prepayments
Delinquencies
Portfolio
Loan
Portfolio
Maturity
Interest Rate Type
Wtd. Avg.
as a Percentage
as a Percentage
Product
UPB
Count
(years)
(years)
Fixed
Adjustable
Note Rate
of Portfolio (1)
of Portfolio (2)
Fannie Mae
$
18,781,611
2,647
3.1
8.7
98
%
2
%
3.97
%
12.58
%
0.19
%
Freddie Mac
4,792,764
1,234
2.8
10.7
86
%
14
%
3.80
%
34.22
%
0.42
%
Private Label
2,200,206
132
1.2
8.5
100
%
—
%
3.61
%
—
%
—
%
FHA
999,446
89
2.2
33.7
100
%
—
%
3.01
%
0.42
%
—
%
SFR - Fixed Rate
190,590
45
1.1
6.5
100
%
—
%
4.53
%
—
%
—
%
Total
$
26,964,617
4,147
2.8
9.9
96
%
4
%
3.88
%
12.50
%
0.21
%
December 31, 2021
Fannie Mae
$
19,127,397
2,710
3.0
8.8
98
%
2
%
3.99
%
12.00
%
0.20
%
Freddie Mac
4,943,905
1,317
2.8
10.9
86
%
14
%
3.82
%
17.01
%
0.79
%
Private Label
1,711,326
102
1.2
8.6
100
%
—
%
3.64
%
—
%
—
%
FHA
985,063
90
2.0
33.9
100
%
—
%
3.01
%
23.69
%
—
%
SFR - Fixed Rate
191,698
45
0.9
6.7
100
%
—
%
4.54
%
—
%
—
%
Total
$
26,959,389
4,264
2.8
10.1
96
%
4
%
3.90
%
12.50
%
0.29
%
(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. At March 31, 2022 and December 31, 2021, delinquent loans totaled $55.6 million and $77.6 million, respectively, of which $9.8 million were in the foreclosure process for both periods. No loans were in bankruptcy at March 31, 2022 and December 31, 2021.
Our Agency Business servicing portfolio represents commercial real estate loans, which are generally transferred or sold within 60 days from the date the loan is funded. Primarily all of the loans in our servicing portfolio are collateralized by multifamily properties. In addition, we are generally required to share in the risk of any losses associated with loans sold under the Fannie Mae DUS program, see Note 10.
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Comparison of Results of Operations for the Three Months Ended March 31, 2022 and 2021
The following table provides our consolidated operating results ($ in thousands):
Three Months Ended March 31,
Increase / (Decrease)
2022
2021
Amount
Percent
Interest income
$
166,698
$
91,144
$
75,554
83
%
Interest expense
82,559
42,184
40,375
96
%
Net interest income
84,139
48,960
35,179
72
%
Other revenue:
Gain on sales, including fee-based services, net
1,656
28,867
(27,211)
(94)
%
Mortgage servicing rights
15,312
36,936
(21,624)
(59)
%
Servicing revenue, net
21,054
15,536
5,518
36
%
Property operating income
295
—
295
nm
%
Gain (loss) on derivative instruments, net
17,386
(3,220)
20,606
nm
%
Other income, net
3,200
681
2,519
nm
%
Total other revenue
58,903
78,800
(19,897)
(25)
%
Other expenses:
Employee compensation and benefits
42,025
42,974
(949)
(2)
%
Selling and administrative
14,548
10,818
3,730
34
%
Property operating expenses
535
143
392
nm
%
Depreciation and amortization
1,983
1,755
228
13
%
Provision for loss sharing (net of recoveries)
(662)
1,652
(2,314)
nm
%
Provision for credit losses (net of recoveries)
2,358
(1,075)
3,433
nm
%
Total other expenses
60,787
56,267
4,520
8
%
Income before extinguishment of debt, gain on real estate,
income from equity affiliates and income taxes
82,255
71,493
10,762
15
%
Loss on extinguishment of debt
(1,350)
(1,370)
20
(1)
%
Gain on real estate
—
1,228
(1,228)
nm
%
Income from equity affiliates
7,212
22,251
(15,039)
(68)
%
Provision for income taxes
(8,188)
(12,492)
4,304
(34)
%
Net income
79,929
81,110
(1,181)
(1)
%
Preferred stock dividends
9,056
1,888
7,168
nm
%
Net income attributable to noncontrolling interest
6,816
9,743
(2,927)
(30)
%
Net income attributable to common stockholders
$
64,057
$
69,479
$
(5,422)
(8)
%
nm — not meaningful
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The following table presents the average balance of our Structured Business interest-earning assets and interest-bearing liabilities, associated interest income (expense) and the corresponding weighted average yields ($ in thousands):
Three Months Ended March 31,
2022
2021
Average
Interest
W/A Yield /
Average
Interest
W/A Yield /
Carrying
Income /
Financing
Carrying
Income /
Financing
Value (1)
Expense
Cost (2)
Value (1)
Expense
Cost (2)
Structured Business interest-earning assets:
Bridge loans
$
12,506,401
$
143,483
4.65
%
$
5,472,765
$
73,643
5.46
%
Mezzanine / junior participation loans
222,758
5,078
9.25
%
166,517
3,533
8.60
%
Preferred equity investments
152,761
2,660
7.06
%
224,898
5,563
10.03
%
Other
140,666
4,926
14.20
%
28,216
322
4.63
%
Core interest-earning assets
13,022,586
156,147
4.86
%
5,892,397
83,061
5.72
%
Cash equivalents
758,362
113
0.06
%
283,653
149
0.21
%
Total interest-earning assets
$
13,780,948
$
156,260
4.60
%
$
6,176,050
$
83,210
5.46
%
Structured Business interest-bearing liabilities:
CLO
$
6,604,069
$
31,723
1.95
%
$
2,598,470
$
12,135
1.89
%
Credit and repurchase facilities
3,668,456
24,121
2.67
%
1,479,612
10,677
2.93
%
Unsecured debt
1,559,751
21,153
5.50
%
949,050
14,220
6.08
%
Trust preferred
154,336
1,205
3.17
%
154,336
1,192
3.13
%
Total interest-bearing liabilities
$
11,986,612
78,202
2.65
%
$
5,181,467
38,224
2.99
%
Net interest income
$
78,058
$
44,986
(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 $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, 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 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 an increase in prepayment penalties received the first quarter of 2022 and growth in our servicing portfolio.
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Other Income
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 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.
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 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 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.
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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
Sources of Liquidity. Liquidity is a measure of our ability to meet our potential cash requirements, including ongoing commitments to repay borrowings, satisfaction of collateral requirements under the Fannie Mae DUS risk-sharing agreement and, as an approved designated seller/servicer of Freddie Mac's SBL program, operational liquidity requirements of the GSE agencies, fund new loans and investments, fund operating costs and distributions to our stockholders, as well as other general business needs. Our primary sources of funds for liquidity consist of proceeds from equity and debt offerings, proceeds from CLOs and securitizations, debt facilities and cash flows from operations. We closely monitor our liquidity position and believe our existing sources of funds and access to additional liquidity will be adequate to meet our liquidity needs.
We are monitoring the COVID-19 pandemic and its impact on our financing sources, borrowers and their tenants, and the economy as a whole. The magnitude and duration of the pandemic, and its impact on our operations and liquidity, are uncertain and continue to evolve. To the extent that our financing sources, borrowers and their tenants continue to be impacted by the pandemic, or by the other risks disclosed in our filings with the SEC, it would have a material adverse effect on our liquidity and capital resources.
We had $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 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. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations. However, we believe that our capital resources and access to financing will provide us with financial flexibility and market responsiveness at levels sufficient to meet current and anticipated capital and liquidity requirements.
Cash Flows. Cash flows provided by operating activities totaled $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 $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.
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Agency Business Requirements. The Agency Business is subject to supervision by certain regulatory agencies. Among other things, these agencies require us to meet certain minimum net worth, operational liquidity and restricted liquidity collateral requirements, purchase and loss obligations and compliance with reporting requirements. Our adjusted net worth and operational liquidity exceeded the agencies' requirements 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. See Note 13 for details about our performance regarding these requirements.
We also enter into contractual commitments with borrowers providing rate lock commitments while simultaneously entering into forward sale commitments with investors. These commitments are outstanding for short periods of time (generally less than 60 days) and are described in Note 11.
Debt Facilities. We maintain various forms of short-term and long-term financing arrangements. Borrowings underlying these arrangements are primarily secured by a significant amount of our loans and investments and substantially all of our loans held-for-sale. The following is a summary of our debt facilities (in thousands):
March 31, 2022
Maturity
Debt Instruments
Commitment
UPB (1)
Available
Dates (2)
Structured Business
Credit and repurchase facilities
$
5,313,186
$
4,010,071
$
1,303,115
2022 - 2024
Collateralized loan obligations (3)
7,136,517
7,136,517
—
2022 - 2027
Senior unsecured notes
1,295,750
1,295,750
—
2023 - 2028
Convertible senior unsecured notes
264,000
264,000
—
2022
Junior subordinated notes
154,336
154,336
—
2034 - 2037
Structured Business total
14,163,789
12,860,674
1,303,115
Agency Business
Credit and repurchase facilities (4)
2,150,844
305,317
1,845,527
2022 - 2024
Consolidated total
$
16,314,633
$
13,165,991
$
3,148,642
(1) Excludes the impact of deferred financing costs.
(2) See Note 13 for a breakdown of debt maturities by year.
(3) Maturity dates represent the weighted average remaining maturity based on the underlying collateral at March 31, 2022.
(4) The ASAP agreement we have with Fannie Mae has no expiration date.
We utilize our credit and repurchase facilities primarily to finance our loan originations on a short-term basis prior to loan securitizations, including through CLOs. The timing, size and frequency of our securitizations impact the balances of these borrowings and produce some fluctuations. The following table provides additional information regarding the balances of our borrowings (in thousands):
Quarterly
Maximum
Average
End of Period
UPB at Any
Quarter Ended
UPB
UPB
Month-End
March 31, 2022
$
4,224,503
$
4,315,388
$
4,842,785
December 31, 2021
3,771,684
4,493,699
4,493,699
September 30, 2021
3,191,129
3,409,598
3,409,598
June 30, 2021
2,327,114
2,021,412
2,588,456
March 31, 2021
2,177,350
2,220,307
2,262,160
Our debt facilities, including their restrictive covenants, are described in Note 9.
Off-Balance Sheet Arrangements. At March 31, 2022, we had no off-balance sheet arrangements.
Inflation. 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
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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 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 at March 31, 2022.
Derivative Financial Instruments
We enter into derivative financial instruments in the normal course of business to manage the potential loss exposure caused by fluctuations of interest rates. See Note 11 for details.
Critical Accounting Policies
Please refer to Note 2 of the Notes to Consolidated Financial Statements in our 2021 Annual Report for a discussion of our critical accounting 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
Distributable Earnings. We are presenting distributable earnings because we believe it is an important supplemental measure of our operating performance and is useful to investors, analysts and other parties in the evaluation of REITs and their ability to provide dividends to stockholders. Dividends are one of the principal reasons investors invest in REITs. To maintain REIT status, REITs are required to distribute at least 90% of their REIT-taxable income. We consider distributable earnings in determining our quarterly dividend and believe that, over time, distributable earnings 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.
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: (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 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.
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Distributable earnings is as follows ($ in thousands, except share and per share data):
Three Months Ended March 31,
2022
2021
Net income attributable to common stockholders
$
64,057
$
69,479
Adjustments:
Net income attributable to noncontrolling interest
6,816
9,743
Income from mortgage servicing rights
(15,312)
(36,936)
Deferred tax (benefit) provision
(1,720)
4,486
Amortization and write-offs of MSRs
27,669
18,032
Depreciation and amortization
2,569
2,700
Loss on extinguishment of debt
1,350
1,370
Provision for credit losses, net
1,696
(277)
(Gain) loss on derivative instruments, net
(298)
3,220
Stock-based compensation
6,092
3,330
Distributable earnings (1)
$
92,919
$
75,147
Diluted weighted average shares outstanding - GAAP (1)
185,431,404
143,958,433
Less: Convertible notes dilution (2)
(15,068,383)
—
Diluted weighted average shares outstanding - distributable earnings (1)
170,363,021
143,958,433
Diluted distributable earnings per share (1)
$
0.55
$
0.52
(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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.